Will X Mark The Spot For Musk As Streaming Wars Heat Up?

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(Friday Market Open) Another day, another round of earnings reports. However, the dark cloud of rising interest rates appears to be hanging over investors as equity index futures point to a lower open. Even the “happiest place on earth” is facing another storm.

Potential Market Movers

Disney (DIS) has lost ground after revelations from Netflix NFLX that its streaming service had lost subscribers and expects to lose many more. Now, the Florida legislature has voted to end Disney’s 50-year-old special self-governing district by June 1, 2023. The self-governing district allowed Disney to collect taxes, provide emergency services, and build new structures without local government approval. However, according to CNBC, the move may result in Florida taxpayers absorbing a $1 billion bond debt. There’s also the question of whether Florida will now be entitled to the additional tax revenue that the special Disney district was collecting as well as building and permit fees. Obviously, there’s a lot more to come on this story and how it will  affect Disney going forward.

While Disney is dealing with its own issues, the rest of the market will likely be undergoing another revaluation. Fed Chair Jerome Powell’s more hawkish tone on Thursday caused stocks to fall and yields to rise. On the bright side, the 10-year Treasury yield (TNX) was down about 16 basis points in premarket trading which may take some of the sting out of valuation calculations.

The dreary outlook is even affecting companies with otherwise positive earnings reports. Verizon VZ reported that it hit analysts’ earnings estimates on the nose and saw better-than-expected revenues, but still fell 1.6% in pre-market trading. VZ issued forward guidance at the lower end of its fiscal 2022 range. The lower guidance came as VZ cut its sales forecast and reported struggles with inflation. One problem Verizon is likely expecting is that budget-conscious consumers will likely be looking for cheaper carrier plans as inflation pushes tighter household purse strings.

American Express AXP was also trading lower despite beating on top and bottom-line numbers. AXP was down about 1% before the market open when the company failed to raise its earnings outlook and only reaffirmed previous guidance.  

Despite higher gold prices, Newmont NEM missed on earnings and revenue estimates due to higher extraction and production costs. The company added an additional 5% for costs in its 2022 outlook. Management effectiveness is key in a time of rising input costs, which means NEM managers need to find a way to cut costs elsewhere if possible. Newmont was down 4.1% in premarket trading, adding to its Thursday loss of 6.7%.

One company that appears to be managing costs while benefiting from higher commodity prices is Schlumberger SL. Not only did the company beat on earnings and revenue, but it also boosted its dividend. Dividends are big in today’s value-focused investing world and raising dividends is bit of a flex on competition that can’t keep up. SLB rose 2.7% in pre-market trading.

After yesterday’s close, Snap SNAP reported a smaller loss than expected but missed on revenue estimates. The company fell 4.36% on the day before the announcement but was slightly higher in extended-hours trading.  

It’s important to be careful with early headlines coming out of earnings season. There’s a lot of earnings reports still to come, and much can change. In fact, only financials have had enough of a sample size to really draw any conclusions. A lot has been made about the “beats rate” which has been above the long-term average. However, the rate is below the average of the previous four quarters.

Reviewing the Market Minutes

After starting Thursday on a positive note, major indexes slid, and Treasury yields jumped as soon as Federal Reserve Chairman Jerome Powell confirmed a half-point rate hike would be “on the table” in May. Mr. Powell simply reiterated what he told Congress earlier this month, but apparently investors didn’t want to be reminded.

The 10-year Treasury yield (TNX) rose 77 basis points to 2.917%, getting ever closer to that 3% mark. The rise in yields took the Nasdaq Composite ($COMP) down more than 2% on the day. However, that doesn’t really tell the whole story. The Nasdaq was up nearly 2% before Powell’s comments, which means the index saw about a 4% swing from gains to losses by the end of the session. The S&P 500 (SPX) did a swing of about 3% from gains to losses and finished 1.48% lower from Wednesday’s close. Even the Dow Jones Industrial Average ($DJI) wasn’t immune from the sudden change in sentiment. It swung a little more than 2% on the day and closed 1.05% lower.

The Cboe Market Volatility Index (VIX) started the day in a bullish position below 20, but closed above 22, as Chairman’s Powell rate reminder obviously shook investor confidence. In fact, every sector finished the day in the red and the NYSE decliners outpaced advancers about 4.3-to-1. The sell-off was so broad that the Russell 2000 (RUT) fell 2.29%, the S&P 500 Pure Growth Index dropped 3.17%, and the S&P 500 Pure Value Index declined 1.43%, putting Wednesday’s breakout in danger.

Some stocks with strong earnings reports were able to hang on to their gains. AT&T T gained 4%, Nucor NUE rallied 3.8%, Tesla TSLA rose 3.2%, and Dow (DOW) climbed 2.9%. Airlines were sustained by earnings reports from United UAL which took off 9.3%, and American AAL soaring 3.8%. The AMEX Airline Index (XAL) had an altitude change, climbing as high as 6% before finishing the day 2.89% higher. 

Three Things to Watch

That Was Quick: On April 4, AT&T (T) spun off WarnerMedia, allowing it to merge and create Warner Bros. Discovery (WBD). However, an abrupt decision came down on Thursday to shut down its weeks-old CNN+ streaming channel on April 30. This is just the latest sign of turbulence in the streaming space. The move comes less than 48 hours after Netflix (NFLX) reported it lost 200,000 subscribers in the previous quarter and expects to lose nearly 2 million more. WBD fell 6.78% on the day, while NFLX fell another 3.52% for a two-day loss of 37.5%.

X Marks the Spot: According to Barron’s, Tesla (TSLA) CEO Elon Musk has created a couple of new holding companies with names that are a variation of “X Holding.” Musk apparently has an affinity for the letter X as the owner of the rocket company SpaceX and manufacturer of a popular Tesla car called the Model X. However, one of these X-marked companies could be meant for Twitter TWTR, as Musk turns his attention to a potentially hostile takeover of the social media site.

News of these X-marked holding companies was contained in an update to Musk’s 13D filing with the Securities and Exchange Commission stating Musk has the funding for his $43 billion Twitter bid.  It disclosed that Musk has put up his Tesla stock and has funding commitment letters from Morgan Stanley MS and others for a total of $46.5 billion.  Musk is putting the pressure on Twitter’s board by saying that he will take the vote directly to Twitter shareholders if they don’t act.

Tobacco Road: Consumer staples are often described as “anything you can eat, drink, or smoke.” While the description may be lacking, that last one in the list is having quietly having a strong month. In today’s ESG world, tobacco companies are low in popularity, but recently investors appear to think otherwise.

The Dow Jones U.S. Tobacco Index rose 2% on Thursday, now up 15.74% from its March low and up over 14.5% over the last year. On Wednesday, Philip Morris (PM), maker of Marlboro cigarettes and other brands, reported better-than-expected earnings with a two-day gain of 2.4%.

Despite the health risks, smoking remains popular in Northern and Eastern Europe, the Mediterranean, and China. According to Our World Data, these places are seeing some decline in tobacco use, but places like Russia and Austria appear to have a consistent number of smokers. In fact, Philip Morris named Russia and Ukraine as areas that could be a problem for them in 2022 if the ongoing war disrupts sales.

As inflation grows, people will stick to their staples. For many, tobacco is one of them.

Notable Calendar Items

April 25: Earnings from Coca-Cola KO, and Activision Blizzard ATVI

April 26: Durable goods orders, CB consumer confidence, new home sales, and earnings from Visa V, PepsiCo PEP, United Parcel Service UPS, and Texas Instruments TXN

April 27: Pending home sales, and earnings from Meta Platforms FB, T-Mobile TMUS and PayPal PYPL

April 28: Gross Domestic Product, and earnings from Apple AAPL, Amazon.com AMZN, Merck MRK, Intel INTC, and McDonald’s MCD

April 29: Earnings from Berkshire Hathaway (NYSE: BRK-A), Exxon XOM, and AbbVie ABBV

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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