Forget About Zuckerberg and Cook Bailing Us Out: Taking Stock

(Bloomberg) -- 50 handles here, 85 handles there.

Volatility appears here to stay, from the every-other-minute jolt in the S&P 500 to the VIX brushing up against ~25 for several days on end and the 10-year whipping around 5-10 bps a day like it’s nothing.

And now we get a grab bag of brutal tech earnings that’ll send things spinning again, as corroborated by the near 4 percent drop in the QQQS and the ~2 percent pullback in the SPY.

Everyone is going to talk about the selloff in two FAANG members (Amazon and Alphabet) or the ~$200 billion market cap semiconductor titan Intel, which gave up its entire 6% post-market gain despite a report that was lauded by the bulls ("a rose in a landfill," as Nomura Instinet poetically dubbed it). Or Snap, which continues its downward tailspin with a 13% plunge.

But there were others that got smoked on results, like Western Digital sinking 15% after warning on demand (bad for Seagate holders), smidcap tech hardware name Flex crashing almost 20%, chip stocks Lattice Semi and Power Integrations both looking at a very ugly open, cloud software firm Arlo Tech poised to have one of its worst days since its recent IPO, and cybersecurity companies Proofpoint and Carbon Black crashing by 16% and 9%, respectively.

The immediate takeaway is that no matter if you’re new tech, old tech, communication services-tech, or straight up momentum (see chart below), the current environment is not a pleasant one regardless of what your press release dictates or how your management decides to convey a bright outlook.

Even Netflix, which was held in high regard for assuaging investor concerns after the prior quarter’s flop, can’t find its bearings. Its one-day post-earnings pop last Wednesday fizzled in a flash and the stock has tanked more than 14% since. Who’s to say that Twitter, which exploded higher by more than 15% yesterday after its numbers, won’t succumb to the same fate in the coming days?

What Intel’s Action Suggests

The case of Intel, though, is an interesting one. The world’s second-largest semiconductor was already coming off that miserable reaction to Texas Instruments guidance/commentary, which crushed the SOX by almost 7% on Wednesday (the index’s biggest loss in four years), and a punishing day for its main rival AMD. And it’s not like Intel has been some grandstanding outperformer this year, like some of the aforementioned FAANGs that are still up 50%-60% in 2018 (in fact INTC was down 4% year-to-date going into the print vs AMD up 87%). Plus sentiment in the chip space, from widespread cyclical concerns to the consistent hammering from the sell-side, couldn’t get much worse than it has been of late.

The setup was great, for Intel really had the makings of being a savior for tech if the metrics came in anywhere near above expectations and the commentary was sanguine. Well, that basically happened: Here’s a quote from an interview with the CEO: “After seven years of decline -- and some belief that it was in perpetual decline -- what we’ve seen this year is some stabilization."

So the stock shot up over 6% after the results hit the wire, and then almost immediately lost all of its mojo, giving up everything as the night wore on.

To me, the action in Intel is a very telling sign that people are taking whatever opportunity they can to get out of tech. Because if one of the absolute bellwethers in the space can’t get its proper due off of seemingly great numbers in a poor sentiment environment, how are we supposed to feel ahead of Apple and Facebook next week?

What About the Tech Bulls?

Tech remains extremely crowded and loved by Wall Street, so what do all the tech bulls do at this point? Well, we know what some of the longs are doing this morning and we know what some of the equity research analysts are thinking: A sea of downgrades for Western Digital and several other names that are in full tank mode this morning; although I haven’t seen one cut yet for Amazon or Alphabet, both with ratings that overwhelmingly skewed bullish.

I’d expect some very interesting notes, and perhaps a bit of soul searching, from the equity strategists on Monday, especially the ones who’ve been pounding the table to stay overweight on tech throughout any mini-rout.

So far, it’s quiet on that front, but it’s not a shocker that we are hearing from Lori Calvasina, head of U.S. equity strategy at RBC, who has been bearish on tech for some time now and reiterates her underweight stance. Here are the three issues she is pointing to at the moment:

• 1) The group’s valuation problem hasn’t been fixed yet
• 2) The earnings profile has weakened significantly and suddenly, which is a major change from the past few years when upside revisions were the norm; "importantly, the deterioration in earnings and revenue revisions trends in October was sharper than what we saw in other sectors"
• 3) Suspects many of the post popular names in the group have been caught up in a broader leadership reversal

On Tap for Next Week

Earnings. The second uber-heavy week of them. Apple and Facebook (as mentioned above) alongside Alibaba, Baidu, Starbucks, Coca-Cola, Pfizer, GE, GM, DowDuPont, Exxon are some of the heavyweights on the schedule.

We’ll also get plenty of eco data, including more insights into the "sicklicals" via housing (Case-Shiller) and auto (monthly sales) prints, in addition to the ISMs, the Core PCE, and the all-important week-ending jobs number.

The hedge fund conferences continue to overlap, as this week we had the Capitalize for Kids (see our roundup of the biggest calls) while next week brings Robin Hood, where we’ll hear from big-timers at Starboard, Glenview, Lakewood, Citadel, Bridgewater, Sachem Head and Whale Rock. There’s also Sohn San Francisco with representation from Marcato, Highland and others.

And rumblings over what’ll happen with the midterms prior to the Nov. 6 election will get louder. We heard a bit of prognostication on Thursday that Republicans will sweep (some even giving that theory clout for yesterday’s gargantuan bounce) versus what has appeared to be consensus of Dems taking over the House. PredictIt has ~66% in favor of the latter scenario, but I’m sure that’ll swing a bit, just like Kavanaugh odds did, over the next week and change.

Notes From the Sell Side

JPMorgan moves Snap to an underweight and a price target of $6 on the continued decline in daily active users and the competitive landscape ("it will be challenging for Snap to pull users away from Instagram"). The bank is also one of three removing their buy ratings on Western Digital, citing the significant compression of earnings power and uncertainty around how deep the weakness in flash and capacity optimized HDD segments might be.

Gordon Haskett says underperform-rated GE (price target $11) may end up owing billions of dollars more for its insurance reserves, on top of the $15 billion in cash already committed, due to an accounting change issued by the FASB.

Tick-by-Tick Guide to Today’s Actionable Events

• Today -- SEC hosts roundtable on market data and market access (day two)
• Today -- TTWO releases "Red Dead Redemption 2"
• 7:00am -- CHTR, MCO, WETF, PSX, VTR earnings
• 7:45am -- GT earnings
• 7:55am -- R earnings
• 8:00am -- Fed’s Kaplan on Bloomberg TV
• 8:30am -- Core PCE, 3Q GDP
• 9:30am -- IPOs to start trading after the open: StoneCo (STNE), Gamida Cell (GMDA)
• 10:00am -- University of Michigan Sentiment
• 11:00am -- CL earnings call
• 11:10am -- Health & Human Services Sec. Alex Azar on Bloomberg TV
• 11:40am -- Intel interim CEO Robert Swan on Bloomberg TV
• 8:09pm -- World Series Game 3: Red Sox at Dodgers
• 9:30pm -- China Industrial Profits

To contact the reporter on this story: Arie Shapira in New York at ashapira3@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net, Joanna Ossinger

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