Another Rally: Georgia Reopens
The stock market rallied again on Tuesday. It fell from the peak on the day, but it’s still very close to its bear market high. Specifically, the index was up 0.9%, but it fell 1.02% in the last hour of the session. The index is only down 2.42% from its bear market high.
If the market hits a new high, that means it has had 3 straight higher lows and 3 straight higher highs. Disgruntled bears or bulls who missed the bottom claim that this is all a trap. They see the economic weakness and believe the market is ready to fall back to the bear market low.
The market will fall sharply if the economic re-openings don’t go smoothly or if COVID-19 comes back. Reality is COVID-19 hasn’t been contained in America like it has in other countries, but states are going ahead with opening anyway. To be fair, states like Alaska which aren’t populous probably should be open.
New York is going to start reopening on May 15th. The New York economy will start to get back to normal in June with the proper precautions in place obviously.
If you’re curious about the reopening in Georgia, it appears economic activity is rebounding. As you can see from the chart below, barber/beauty spend is above where it was at the start of the year and down about 40% from the peak in March. It’s much higher than the spending in the rest of the country.
To be clear, there is a huge amount of pent up demand as people haven’t gotten haircuts for months. If the economy was back to normal, spending at consumer beauty and barber shops would hit a record high.
Review Of Tuesday’s Rally
Nasdaq was up 1.13% and the Russell 2000 was up 0.75%. VIX was down 2.36 to 33.61. We don’t know if we can call this a bear market anymore if the VIX falls below 30. CNN fear and greed index is at 44 which is the top end of fear. It hasn’t been in greed territory for 2.5 months.
Despite Elon Musk’s best efforts to knock Tesla stock down, he’s in line for a $700 payday via stock options because Tesla’s market cap stayed above $100 billion for 6 months. Model 3 was the top selling car in the U.K. in April. That’s impressive even though there were very few cars sold.
Personally, I’m excited to see how well the Model Y does this year even though I would never own the stock. Norwegian Cruise Line warned investors of a possible bankruptcy which sent the stock down 22.58%. It’s still above its March 18th low though.
Only down sector was the financials which fell 7 basis points. Best were technology and healthcare which rose 1.42% and 2.15%. Tuesday was a weird day for energy because the sector only rose 0.26% even though oil exploded higher. Brent rose 13.9%.
As you can see from the chart below, oil has had its best 10 day rally in history after it had its worst 10 day decline. WTI front month futures are up 150% in 2 weeks after falling to the negatives. Energy stocks haven’t reacted much to the rally probably because they didn’t react much to the decline. Oil is in the same situation as it was in a month ago. Energy companies aren’t exactly doing well because oil is in the low to mid $20s.
We need to see demand pickup so the supply glut can be unwound. Then prices will rise and companies will increase drilling again. This entire cycle will take years to complete, but the energy stocks could rally ahead of that as early as this year.
Shockingly Bad Disney Earnings
Disney reported terrible earnings. As you can see from the table below, its revenues were up 21%, but its income before taxes was down 85% and its free cash flow fell 30%. Disney’s EPS was 60 cents which missed estimates for 89 cents. It had $18.01 billion in revenue which beat estimates for $17.8 billion. These results sent the stock down 2.09% after it already fell 2.05% on the day. Its stock is only up about 16% from the bottom. I
t has underperformed the market probably because it has theme parks and cruise ships. It also owns ESPN which is a dog because there are no sports. NBA and NHL will likely come back this summer which will be good for ESPN. The company suspended its dividend for the first half of the year which will save it $1.6 billion.
Good news is Disney is “seeing encouraging signs of a gradual return to some sense of normalcy in China.” The company is operating at 30% capacity in China because of government mandates. It plans to reopen its Shanghai Disneyland park on Monday.
Let’s look at each segment. Media networks business had a 28% increase in revenues to $7.26 billion. Parks, experiences, and products had revenues of $5.54 billion which was down 10%. Studio entertainment had revenues of $2.54 billion which was up 18%.
Finally, direct to consumer and international revenues were $4.12 billion which was up over 100%. Hulu had 32.1 million subscribers which was up 27% yearly. There are now 54.5 million Disney+ subscribers. This launch has been incredibly successful as there were 50 million in early April and 33.5 million as of last quarter. The firm declined to say when Disney+ will be profitable, but profits don’t matter anyway. What matters is getting Disney+ to the number of subscribers Netflix has which is 182.9 million.
Personally, I won’t buy Disney stock because I don’t want to own the parks business or ESPN. The company should spinoff Disney+. And I would invest in that company alone as it would get a Netflix-like valuation.
Good news is that because Disney is in no danger of bankruptcy because it is diversified, it might end up being one of the only cruise lines left by the time things get back to normal in a few quarters.