Earnings GOOG and MSFT
The market saw some strength and it seems that we may have broken higher out of the resistance levels and the Dow Jones and S&P 500 jumped to play catch up with the broader-based RUT rally. Bernanke, in possibly his last testimony before the Senate, helped to alleviate any concerns about immediate actions by the Fed to taper, which only helped further the market’s move higher. All was well, but then a couple of big earnings releases sent shock waves through the market and the after-hours futures trading and stock trading came under significant pressure. Will the major indices now fumble this rally and retreat back to the consolidation zone in the resistance area?
Earnings: GOOG and MSFT
Courtesy of Wikipedia
Google (GOOG) is an amazing company in the regard that they had the foresight to realize they were an ad revenue one-trick-pony. Shortly after their IPO and cash windfall, they began their own research park to build and explore anything and everything under the internet technology stars. Many of their projects never panned out, but those that gained traction quickly turned in to monetized technologies. Google is now in to OS (operation system), business software, mobile, transaction, communication, email, etc. They are an internet conglomerate and no longer just a search engine. That shift has helped drive this stock higher as competitors stuck in the now old fashion business of “search engine internet ads” have struggled. The Android operating system has surpassed Apple in the mobile space and they released a netbook computer that is based on Cloud architecture (probably a little too early for mass adoption, but a first generation of what is possibly to come). However, for all that is growing and expanding for Google, they still heavily rely on their initial core business of selling ads on the internet. True their Android and smart-phone business has grown significantly.
Google reported earnings that missed both profit and revenue expectations. Similarly to Yahoo, Google reported a decline in price-per-click that advertisers are willing to spend. While total revenue grew a solid 19% to $14.11 billion, it was still short of analyst’s expectations. The company also reported an increase in quarterly profits of $3.23 billion, up from $2.79 billion. Yet again, this was below expectations. The concern surrounds both the price-per-click advertising and a slowdown in growth in their mobile business. The stock came under huge pressure in after-market trading, initially falling $30 per share to $860. The stock has rebounded slightly, but is still off 2.85% or $25 a share. It looks like there is some strong support in the $860 range, in which the company hit in the over-night session and bounced, a good buy area. However, at the opening we could see an initial sell off again to the $860 range, so expect some volatility in the morning, but expect a bounce. The news also sent the tech heavy NDX index futures down sharply in the late session, so expect to see pressure in that index.
Courtesy of Wikipedia
Microsoft (MSFT) was a bell weather in the computer space for decades; in some respects it stole that roll from IBM in the 1990′s. However, Microsoft has made some historic blunders and has been forced to play catch-up on more than one occasion; perhaps you remember when the company said that the internet was just a Fad and would soon die off. Then, after they saw Mosaic (later Netscape) become a huge application for interfacing with the “WorldWideWeb”, Microsoft had to eat their words and play catch-up with their own Internet Explorer. Microsoft had the money as well dominance to make some huge bumbles and then play catch-up, but the company can’t afford to continue to make those mistakes. We are seeing both Apple and Google moving quickly into the Operation System (OS) space and also the Cloud and mobile market. Microsoft, much like IBM, needs to play catch-up quickly and figure out what kind of company they want to be in the next 10 years because the PC business is slowly dying. No doubt the PC will be around for a long, long time, but their roles will slowly shift. Google introduced their net-book with Cloud Based applications (SaaS). While it is very early and a 1st generation, I believe we will eventually see more services move to the SaaS model. The mobile market is where growth is; tablets, smart phones, and net-books.
Microsoft has tried to enter this market with their Surface product and a shift with Windows 8, but so far that is falling flat. The Surface has some battery problems and so far I have not met a single person that has one, perhaps their marketing isn’t doing it justice. There is no “buzz” around the product. Frankly, I purchased a MacBook Air, erased the Apple OS and installed Windows 8. The MacBook Air is just better hardware, so why would I buy a Surface? Their earnings reflect that so far the Surface has been a flop.
The company reported earnings at $18.1 billion, which was well below the expected $20.7 billion and the $900 million charge (loss) they are taking on the “Surface” isn’t helping. On a per share basis they missed as well; reporting 59 cents a share, well below the 75 cents expectation.
Their new X-Box One looked like it may also be an initial success, but the initial restrictions on the unit (DRM – digital rights management) and price point came in as huge disappointments. Again, Microsoft had to back-track and do a U-turn, stripping the DRM from the unit and revisiting some of the other releases. Perhaps they are starting to listen to their consumers. For now they handed Sony’s PlayStation 4 a big win; just another stumble for Microsoft.
Much like IBM, Microsoft needs to think about how to position themselves in the future. Will they continue to venture into the hardware space with the likes of Surface (razor thin margins and expensive R&D) or will they move to more of a SaaS model? There are some long-term concerns about Microsoft and I am afraid that if they continue to sit-back and expect that Windows OS will continue to drive their ship they could be in for a shocker in the next 5 – 10 years.
The stock is down in the pre-market. There seems to be some support at $32, but below that it looks like $28. The company still has lots of money and revenue coming in from Windows products, but future growth will greatly depend on how they position the company in the future.
Support & Resistance
We broke out of the resistance consolidation level yesterday, in part thanks to Bernanke’s passive testimony before the Senate. However Google and Microsoft earning misses, along with a couple of other big disappointing earnings this morning, have brought some selling pressure to the market. Will we close above or below 15,500? Yesterday’s break-out rally seems to have been a false start.
This index will be down sharply at the opening as Microsoft and Google, over-weights in the index, will bring significant pressure. 3030 is a mini-support just above a huge gap-up from 3000. We could hit 3030 today, but if we don’t hold we could see 3000 quickly.
Yesterday’s break-out looks like a head-fake as the index is under pressure in the pre-market and seems to be pulled back down into the consolidation area that has been the resistance zone. The VIX, which has held up in the 14 range, continues to reflect some concerns about the break-out and today those concerns seem to have held true.
The RUT is down some, but not like the other narrower based indices which are getting rocked by a couple of big name, over weight stocks. I would continue to watch the RUT to see where this market is going.
Yesterday the City of Detroit filed bankruptcy and that is a BIG deal. Remember when Meredith Whitney warned of such events and she was ostracized about her prediction? Well, I think Meredith’s math was correct, but she should have never made a prediction as to WHEN it would happen. Meredith’s prediction did not take “can-kicking” into consideration. Sure, a city or even a state can be mathematically bankrupt, but that doesn’t mean that they will go bankrupt any time soon. They can find ways to buy time and get relief and that is EXACTLY what Detroit and many other cities, counties, and even states have done. Remember, California issued IOU’s for a few months to buy them some time. Regardless, Meredith is right – at the end of the day you just can’t ignore the math.
What amazes me is that Keynesian economic believers don’t see this is real-world proof of Keynesian failure. Austerity is not a choice, it is FORCED upon you when you choose to ignore the math and create more debt and borrow more money. Keynesians ignore the math of debt and believe that a government should spend their way to prosperity. They never ask, “Where does the money come from?” and when push comes to shove, they believe they can just TAX MORE for it. Well the problem for Detroit is that there is no one to tax. The city has lost more than 50% of its residents and the wealthy residents continue to leave. So taxing the rich doesn’t work either.
Socialism goes hand-in-hand with Keynesian economic theory. The mayors and leaders of the city continue to get elected because they promise more pay, more free stuff, more entitlements, more spending. Of course any fool can get elected when you continue to promise to give the people more free stuff.
So what is the difference between Detroit and the Federal government? The Federal government has the Fed to print money to buy government bonds; currently at a rate of $85 billion a month.
What I am afraid of is President Obama and the Federal government coming to the rescue to bailout Detroit. This will set a precedent for other states, cities, and counties that they, too, will be bailed out. Look at what happened with Tarp and GM, we ended up bailing AIG, Freddie, Fannie, GE, Chrysler, and 100′s of other companies and the national debt rocketed by trillions and we are now at a point that the Fed has to print money to continue to fund the spending.
And when the Fed says it will SLOW their money printing and buying bonds, the market crashes and interest rates skyrocket. We have become addicted to government handouts, stimulus, low interest rates, and believe the government will bail us out. It’s the Nanny State!
We should closely watch what happens to Detroit; let’s hope the Federal Government doesn’t step in. This should also give Keynesian Socialist pause and certainly see that long term value in hard assets against the US Dollar (such as gold, silver, and real estate).
NOTE: I will be out of the office the next two weeks, but will pick up the Market Preview on August 5th. I, too, need a vacation once in a while.