January 28, 2019

Stocks sank at the open this morning after Nvidia (NVDA) and Caterpillar (CAT) reported quarterly results. The Dow is currently down 340 points and the SPX is down 1%. A number of major market sectors are down more than 1%: tech, communications, industrials, healthcare, and energy. The VIX Index rose back to nearly 20, which shouldn’t cause much panic among traders. After all, we’ve had five consecutive weeks of gains for the stock market, and a pause (or some give-back) should be expected. Commodities are mostly lower today; WTI crude oil is back down around $51.60/barrel. Copper is up about 4% so far this year, which suggests some nascent optimism regarding China’s ability to stabilize their economy with fiscal stimulus. Bonds are trading slightly higher today. The 5-year and 10-year Treasury yields dipped to 2.57% and 2.73%.

Nvidia (NVDA) warned investors that its fiscal fourth quarter results will be weaker than expected. Revenue, previously guided to $2.7bil, will be closer to $2.2bil. The press released said, “Deteriorating macroeconomic conditions, particularly in China, impacted consumer demand for NVIDIA gaming GPUs.” But it’s not just graphics chips; the company noted weaker datacenter revenue as well. In addition, Nvidia apparently is still working through excess inventory of chips as a result of crashing cryptocurrency markets. It’s my sense that Wall Street analysts expect the demand/supply issues to be resolved by mid-year. The stock is down 15% today (and 44% over the last 12 months). But despite that massive correction, the stock is still up 22% over the last two years. That is incredible volatility.

Caterpillar (CAT) reported 11% revenue growth and 18% earnings growth in the fourth quarter of 2018. But while revenue was in line with Wall Street estimates, profits were far below expectations. Profit margins apparently suffered from higher raw materials & transportation costs. Sales in Asia did soften a bit, and the company now expects 2019 China sales to be roughly flat with last year’s level. But that’s not a disaster. Management sees continued strong growth in the US, continued weakness in Latin America, and “steady demand but political and economic uncertainties” in EAME (Europe, Middle East, Africa). The stock is down about 9% today and the first thing that comes to mind is overreaction. But it is true that in the minds of investors, CAT is the quintessential global growth play and it is very vulnerable to the US-China trade war. So the investment community is tuned in to every word from management, hoping to get an all-clear signal on the global economy. Bloomberg ran an article this morning titled, “Caterpillar Isn’t Here to Reassure You the Global Economy is OK.” So the stock’s negative reaction mostly reflects disappointment in the global economy.

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