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Afternoon Note

Pricing Power is Key

By Charles Payne, CEO & Principal Analyst
10/10/2018 2:07 PM
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The market came out the gate with slight weakness associated with the PPI report, as the core (ex- food and energy) was +0.3%.  Transportation for passenger +5.4% after two prior reads of -1.9% and -0.7%.  The news wasn’t jarring but enough to take equity futures from slightly higher to a weak start that only compounded anxieties of the last couple of weeks.

Headlines

Market Watch

The Bond Buyer

FX Street

Analysts at Nomura commented on the PPI numbers that only matched consensus but argued that airline fares may pose upside risk to core PCE inflation.

In the twelve-months ending in September, the PPI index rose 2.6% compared to the same time frame ended in August of 2.8%.  Year-over-year, core PPI rose 2.5% in September versus 2.3% in August.   

The index for final demand less foods, energy, and trade services increased 0.4% in September, the largest rise since a 0.5% increase in January. For the 12 months ended in September, prices for final demand less foods, energy, and trade services advanced 2.9%.

The increase in transportation and warehousing is consistent with rising logistic inflation cited by PPG in its earnings warning.

Source: US Bureau of Labor Statistics

Rising raw materials, a slowdown in China, and the automotive and tire markets where to blame for Trinseo (TSE) issuing an earnings warning.  TSE is a global materials company and manufacturer of plastics and synthetic rubber.  Their warning came on the back of the warning from PPG yesterday.  TSE is trading down 17% and pressuring the plastics/packaging and materials companies.

 

S&P 500 Index

-1.40%

Communication Services (XLC)

-1.70%

Consumer Discretionary (XLY)

-1.46%

Consumer Staples (XLP)

+0.04%

Energy (XLE)

-1.86%

Financials (XLF)

-0.85%

Health Care (XLV)

-0.50%

Industrials (XLI)

-2.30%

Materials (XLB)

-1.49%

Real Estate (XLRE)

-0.25%

Technology (XLK)

-2.59%

Utilities (XLU)

+0.39%

 

Earnings Reactions

Reaction to earnings continues to be sell the news regardless of results.  

Fastenal (FAST) posted respectable results as product mix sent gross markets lower but operating margins improved from a year early.

The impact of tariffs is unclear but not catastrophic, and yet, the stock is the worst performer in the industrial sector, which is the second worst sector after technology.

Technology Getting Hammered

While big tech keeps getting hit, and Amazon is now in correction and Facebook in bear market, other names in the sector are under even more pressure today.  Chips names were already a disaster coming into the session, but Adobe and Microsoft had been big winners for most of the year.  Those names at the top of our buy list are:

China Consumer

Then came a warning from Louis Vuitton of weaker demand from its well-heeled Chinese customers.   The news sent shares of American luxury retailers lower including Tiffany.

Technical Risk

The Dow Jones Industrial Average is the only major equity index that is holding above its 50-day simple moving average, which has been breached but holding.  Because major markets have enjoyed huge moves (the third quarter was best in five years), there is a lot of room between 50 and 200-day moving average, which is an indication of potential risk.

Key Moving Averages

(simple)

Dow Jones Industrial

NASDAQ Composite

S&P 500

50-day

26,000

7,920

2,880

200-day

25,141

7,499

2,765


 

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