DOJ Opens Antitrust Investigation - Another Rally On Trade
DOJ Opens Antitrust Investigation - as the market experiences yet another rally. The perfect scenario is playing out for stocks. Earnings season has been solid. Fed is going to cut rates. And America is working towards a trade deal with China.
On Tuesday, S&P 500 increased 0.68%, Nasdaq increased 0.58%, and Russell 2000 increased 0.66%. Latest news on trade is in person meetings will begin on Monday U.S. negotiators will fly to China. White House officials are looking for a longer time frame for a deal. That makes sense because there is so much to negotiate.
It could take a few more months for a deal to be made.
The market will react positively to any good news on trade
DOJ Opens Antitrust Investigation - It prices in results before they happen. It’s silly to think President Trump will wait until Election Day 2020 to make a deal. He needs to run on a trade deal.
Which means he needs a deal done a few months in advance of the election. If I was him, I would want a deal done by the spring of next year at the latest.
VIX fell 6.8% to 12.61 which is a very low reading. That’s what you’d expect from a market where everything has gone right recently. CNN fear and greed index increased 6 points to 50 which is perfectly neutral.
Every sector rose except the utilities which fell 0.61%. That shows this was a pure ‘risk on’ day. Biggest winners were the industrials and materials which rose 1.24% and 1.99%. Industrials were helped by United Technologies’ post-earnings rally.
DOJ Opens Antitrust Investigation - After-Hours Drops In Big Tech Firms
Big tech firms’ stocks all dropped after-hours because of the U.S. government announced it is investigating market leading online platforms for anti-competitiveness. This can lead to antitrust charges. I expect this investigation to be fruitful the government and harmful to these firms.
Justice Department announced, “The Department’s antitrust division is reviewing whether and how market-leading online platforms have achieved market power and are engaging in practices that have reduced competition, stifled innovation, or otherwise harmed consumers.”
DOJ just stated ‘market leading online platforms’. It didn’t name names. Companies likely involved are Apple, Facebook, Alphabet, Microsoft, and Amazon.
An Apple spokesperson in response to this news referred to a CBS interview where Tim Cook stated, “We are not a monopoly.”
DOJ Opens Antitrust Investigation - Reality is Apple has major control of its ecosystem.
It promotes its own apps and charges 3rd parties a percentage of their revenues. If there is specific wrongdoing at Apple, it’s likely related to this. This investigation is critical because Apple is about to launch new services.
It’s no surprise Yelp was happy about this because Google is a competitor. A senior vice president at Yelp stated, “It’s heartening to see the Department of Justice examine how companies like Google are harming consumers and stifling competition.”
Google promotes its reviews section on the sidebar when you search for restaurants. This could be viewed as anti-competitive.
United Technologies, Coke & Chipotle Earnings
DOJ Opens Antitrust Investigation - Q2 earnings season has been going really well. Out of the first 113 S&P 500 firms to report Q2 earnings, 78% beat EPS estimates and 69% beat sales estimates.
Non-GAAP earnings are up 8.26% & GAAP earnings are up 4.38%. Revenue growth is 3.88%. Biggest earnings reports on Tuesday were United Technologies, Coca-Cola, and Chipotle.
United Technologies and Coca-Cola helped the Dow rally 0.65%. United Technologies reported $2.20 in EPS and $19.63 billion in revenues which beat estimates for $2.05 and $19.55 billion.
Sales were up 17.5% while EPS fell 15 cents from last year. The firm raised its 2019 EPS earnings forecast from $7.80-$8 to $7.90-$8.05. Sales in the firm’s Collins aerospace unit increased 66% to $6.58 billion. The firm is trying to spin off its Otis elevator and Carrier air condition divisions.
And integrate itself with Raytheon. That's the military aircraft and missile equipment company it announced it is merging with in June. United Technologies stock rose 1.47% on this report.
DOJ Opens Antitrust Investigation - Coca-Cola stock had a spectacular day
It rose 6.07% to a new record high because the firm beat EPS and revenue estimates. EPS was 63 cents which beat estimates by 2 cents. Revenues were $10 billion which beat estimates by $10 million. Sales growth was 6%. The firm raised organic revenue growth estimates for the full year from 4% to 5%.
Reformulated beverages were 15% of the business 2 years ago and are now 25% of the business. Coke Zero had double digit volume growth. Coca-Cola Plus Coffee is being rolled out to new markets.
FX has been a big headwind for the firm because of the strong dollar. I expect the dollar index to weaken slightly if the Fed stays dovish. Any growth improvement in American without one from the global economy will help the dollar.
After-hours Chipotle stock rallied 3.37% to a new record high on its earnings report.
DOJ Opens Antitrust Investigation - EPS was $3.99 which beat estimates for $3.76. Revenues were $1.43 billion which beat estimates for $1.41 billion.
As you can see from the chart below, revenue growth was 13.2%. Same store sales growth was a spectacular 10% which beat estimates for 8.33%. Shares are up 71% year to date excluding the after-hours gain. Digital sales were up an amazing 99.1% and are now 18.2% of the business.
The firm’s loyalty program increased from 3 million members to 5 million members. Chipotle has delivery at 95% of its locations. The firm raised its yearly sales guidance from mid to high single digit growth to high single digit growth.
DOJ Opens Antitrust Investigation - Conclusion
Tuesday was the perfect day for stocks outside of the DOJ’s announced investigation into the big tech firms. There was good news on trade. Plus, United Technologies, Coco-Cola, and Chipotle all beat estimates and raised full year guidance.
S&P 500 non-GAAP earnings growth has been a solid 8.26% as 78% of firms have beaten EPS estimates. Many of the tech firms that are likely being investigated are reporting earning soon. So we might hear them comment on the investigation.
They probably won’t say anything other than that they feel they have done nothing wrong and are cooperating with the authorities.