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Earnings Set Off a Tech-Nado!

Friday, July 17, 2015
Money and Markets
YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON’T GET FROM WALL STREET
You can also access this issue on our website.
Powerful Earnings Set Off a Tech-Nado!
Market Roundup
Dow -33.80 to 18,086.45
S&P +2.35 to 2,126.64
NASDAQ +46.96 to 5,210.14
10-YR Yield -0.03  to 2.349%
Gold -$11.40 to $1,132.50
Oil -$0.13 to $50.78

By Mike Larson

Forget Sharknado. There’s a Tech-Nado sweeping through Wall Street!

Shares of Google (GOOGL) surged a whopping $100 at one point today, extending its recent gains over the last week to an unbelievable 26%. The move puts them at a fresh all-time high, and it came in the wake of strong quarterly results.

Specifically, Google said it earned $3.9 billion, or $6.43 a share, in the quarter. That compared to $3.4 billion, or $4.88 a share, in the year-earlier period. Adjusted earnings beat estimates by 29 cents a share, while revenue jumped 11% and talk of reining in expenses cheered investors.

Shares of Amazon.com (AMZN) also jumped to as high as $485 today, extending their rally over the past week to more than fifty bucks. In 2015 alone, the stock is now up 56%.

The latest catalyst was the Internet retailer’s “Prime Day,” a one-off, Black Friday-style event where it slashed prices on a host of items to boost sales. Amazon reportedly sold 34.4 million items, besting its one-day sales record from the day after last Thanksgiving.

Investors were flocking to tech stocks today.

Shares of Netflix (NFLX) have been en fuego, too. They jumped 18% yesterday alone, extending their year-to-date gains to a whopping 135%. I explained why yesterday, noting huge subscriber addition figures and optimism about long-term growth, particularly outside the U.S.

Bottom line: It seems like today, investors couldn’t be more in love with tech … but didn’t want much to do with anything else. Energy stocks corrected further, financial stocks lagged after a recent run, retailers pulled back, and industrials faded right out of the gate.

Me? I think that’s a worrying sign of a narrowing market. It’s great news if you own Google, Netflix, or a handful of other winners. But it’s not what you want to see if you’re counting on a broad-based, long-lasting market rally to new highs.

While I’m at it, I’d point out that the yield curve reversed its recent steepening trend. Short-term yields rose, while long-term yields fell, amid tougher talk from central bank officials like Janet Yellen this week. That means the market lost another prop.

Finally, the dollar continued to rally against most foreign currencies – a headwind that more and more companies are blaming for kneecapping their earnings and sales. Take Honeywell (HON), the diversified aerospace and industrial company. Sales fell 1%, rather than rose 4%, all because of the negative impact of the dollar’s move on its top line. Even the almighty Google suffered a $1.1 billion revenue hit because of the buck.

“Enjoy the Tech-Nado if you own those stocks, but consider lightening up elsewhere.”

So sure, enjoy the Tech-Nado if you own those stocks. But consider lightening up elsewhere unless we see other sectors join in the fun … and the interest rate and currency markets start working in the stock market’s favor, too.

Any thoughts on the technology focus here? Is it a sign of health, or a reason to worry? Do you think it makes sense to jump on board what’s working, or dabble in the beaten-down sectors like energy that are ridiculously cheap? What about the dollar? Is it going to keep holding back sales and earnings for multinational corporations? Let me know over at the website.

Our Readers Speak

Banks may be trying to cut costs and physical locations by switching more customers over to online and smartphone-based platforms. But you definitely still appreciate the ability to transact at a local branch. The question is whether we bank customers are fighting a rear-guard action.

Reader H.C.B. said Microsoft’s Bill Gates was on to something when he said in 1995 that “Banking is necessary, banks are not.” His other comments:

“Clearly, Bill Gates saw many changes only now being more widely recognized. Change in finance and banking can only accelerate from here. Say hello to various non-bank financial services from Apple Pay to Google Wallet. Bitcoin and many new ‘crypto-currency’ alternatives are on the way in future years. Digital currency is going to eventually replace physical cash, I am afraid.”

But Reader Delores C. said she still makes several trips to a physical branch, and hopes they aren’t eliminated. Her view: “I live on the North Shore of Oahu, Hawaii, and our household having several bank accounts uses the bank branches here several times a week. I would find it a great inconvenience to have the branches go away here, although some of our sales are on the phone and on the internet.”

Reader Steve added: “I hope they keep accessible branches in all areas. Largely the older generation (my wife and I are over 70) rely on them, plus they are needed for loan closings that require physical presence.

“I am not comfortable using my iPhone for all the transactions like check cashing, and my wife has no smartphone and does not use the computer. She relies on one of the bank employees with whom she has a friendly relationship to give her the account balances and make transfers, etc.”

As for the business implications of moving toward a more branchless model, Reader Brent said: “If the banks were smart, they would be cross-marketing people who come into the branch. Problem is they have centralized so many functions and put people in the branches who have no authority. They must call the same call center and interminably wait, as customers do, for a live body who also has no authority to handle problem resolution.

“Corporate managers responsible for faulty policies and procedures have placed themselves off limits from direct contact with customers when problems surface that no one can solve. The branch personnel have insufficient training and seek better positions as soon as possible. Branch staffing has been significantly cut back in terms of raw numbers, also adding to poor customer service.”

Finally, with regards to the latest news out of Netflix and the “Tech-Nado” response we’re seeing in the markets, Reader Tom offered this perspective:

“As the father of five children, ages 17 to 25, I can tell you this generation is informed, aware and on top of everything. But they don’t read newspapers, watch much news on television, or go to the movies like we used to.

“Today Facebook (FB) is the largest publisher without creating any of its own content. Airbnb is the biggest hotelier without owning any hotel rooms. Uber is the world’s largest transportation company, without owning any vehicles. Are we surprised Netflix is growing by leaps and bounds? The times they are a-changin’!”

I appreciate all the insights, on the evolving banking industry, tech demand among the younger generation, and more. It will be very interesting to see how banks balance demands for a physical presence among a significant chunk of their customer base against demand from shareholders for higher margins and lower expenses.

If you have any other thoughts on these topics, make sure you stop by the website and weigh in.

Other Developments of the Day

BulletGreece’s German financial overlords took the first step toward approving the latest European bailout, with a vote of 439-119 in parliament. There will still need to be a second vote on the $94 billion in aid, but that looks like more of a formality at this point.

BulletExperienced investors know that trading on margin can be dangerous, because borrowing money to buy stocks or other assets increases your potential losses if the market moves against you. But in China, it’s essentially the government doing it!

Chinese stocks surged overnight after news broke that China Securities Finance Corp. will have access to as much as 3 trillion Chinese yuan to buy stocks. That’s roughly equivalent to $483 billion in financial firepower the government-backed organization can borrow from the central bank and commercial banks to buy up the market.

Remember when talk about “Plunge Protection Teams” used to only come from the financial fringe? I sure do. Now, it’s a totally different ball game – with government officials openly admitting they manipulate the market to stem declines. Crazy world.

BulletA naturalized American citizen of Kuwaiti descent shot up a recruiting office and a naval reserve facility in Chattanooga, Tennessee yesterday, killing four U.S. Marines before dying himself. Mohammod Youssuf Abdulazeez had no known terrorist ties, and the FBI is not sure if this was a random event or directed from overseas.

BulletSpeaking of mass shootings, Aurora, Colorado shooter James Holmes was convicted of 165 charges related to the 12 deaths that day three years ago. Jurors rejected his insanity defense, and he will either be sentenced to life in prison or death during the penalty phase of the trial that will unfold in the coming weeks.

Thoughts on the latest shooting massacre? China’s artificial market support? The German vote in favor of Greek aid? Or any other topic I didn’t cover? Then let me hear about it over at the website.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

For more information and archived issues, visit www.moneyandmarkets.com.

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