KB Home - Market's Big Reversal
The reversal in stocks on Thursday is the gut-wrenching action that normally occurs in bear markets and corrections. Just when you’ve given up on stocks, they come roaring back. S&P 500 was down 0.71% in the morning and closed up 1.06%.
Nasdaq rallied 1.72% and the Russell 2000 was up 1.44%. VIX fell 5.98%. The CNN fear and greed index increased from 7 to 11 as it still shows extreme fear. If you’re following this index, it’s still very bullish. If you think a trade deal with China will be made in the next few weeks, you should be long stocks.
KB Home - America & China Are Working On A Deal
The 5 day negative streak in the S&P 500 ended because stocks were oversold and there was positive news on the trade front. President Trump and President Xi Jinping have increased efforts to get a trade deal done. It appears China might be willing to make some concessions.
The Financial Times reported Trade Representative Robert Lighthizer told some industry leaders the next wave of tariffs were on hold. If that were the case, it would mean the trade deal is almost done. When America was negotiating with Canada, similar actions were taken. Unfortunately, that might not have occurred as the spokesperson for the U.S. Trade Representative told CNBC the tariffs introduced on September 21st are still going to be in effect.
KB Home Craters On Weak Guidance
KH Home issued negative guidance which sent the entire home building industry cratering. The ITB home builder ETF fell 2.15%. It’s now at $30.44 which is close to its closing low for the year on October 24th which was $29.65. KB Home’s stock fell 15.36% on the day. It is down 54.5% from its high in January.
The firm cut its Q4 housing revenue guidance from $1.39-$1.45 billion to $1.31-$1.34 billion. The consensus expected $1.42 billion as analysts were caught off guard by this weakness. It’s important to recognize that this is revenues not profits which means the increase in primary metals costs had nothing to do with this weakness. It’s all about trouble in the housing market. Usually in slowdowns analysts are too slow to predict declines.
Q4 average selling prices are expected to be from $395,000-$400,000 instead of $400,000-$405,000. This gives us an early look at what the home price index will show. Gross profit margins are expected to be from 18.3% to 18.6% instead of 18.3% to 18.7%. Q4 operating income margins will be from 9.3% to 9.5% instead of 9.3% to 9.7%.
Finally, 2019 revenue guidance was cut. Revenues will be $4.7 billion to $5.2 billion which is much worse than the prior guidance of $5 billion to $5.3 billion. Operating income is expected to be 7.7% to 8.7% which is much below Q4’s rate. The weakness in housing is still just getting started. If this weakness occurs while consumer confidence is near its cycle high, imagine how weak housing will be when the economy falters.
KB Home - Nvidia Stocks Crashes After Hours On Weak Guidance
Nvidia’s earnings report is similar to many this earnings season which is why S&P 500 estimates for Q4 have fallen from expecting 15.37% growth on October 1st to 12.24% as of November 13th.
The chart below explains why Nvidia fell 16.79% after hours; its stock is priced for perfection as it had a higher price to sales ratio than the peak in the dot com bubble. The firm reported EPS of $1.84 which beat estimates by 13 cents. On a GAAP basis, EPS was $1.97 which beat estimates by 26 cents.
Revenue was $3.18 billion which was a 20.5% increase over last year. It missed estimates by $60 million. The biggest issue was guidance as the firm expects $2.7 billion in revenue in Q4 which is way below the consensus of $3.4 billion.
The semiconductor industry looks to be headed towards a cyclical downturn. Nvidia is also being hurt by the slowing demand for chips used for cryptocurrency mining. All cryptocurrencies have a market cap of $185 billion. They approached $1 trillion earlier this year. It was a classic bubble which popped.
KB Home - Wal-Mart Earnings
Wal-Mart is a great bellwether firm because it is the largest retailer in America and employs the most workers. Last quarter was spectacular as the strong labor market has supported strong consumer spending growth. Q3 showed continued strength. Q3 had EPS of $1.08 which beat estimates for $1.01.
Revenue was $124.89 billion which slightly missed estimates for $125.55 billion. Same store sales growth was 3.4% which beat estimates for 3.1%. Traffic was up 1.2% and average tickets were up 2.2%. Online sales were up 43%.
The firm increased its full year guidance which shows the confidence in continued strength from the consumer. Same store sales growth will be at least 3% instead of about 3%. EPS will be $4.75 to $4.85 instead of $4.60 to $4.80. Wal-Mart stock fell 1.96% on this report probably because it was up in the past quarter.
Now its stock is down 5.7% since November 9th as it’s following the overall market. Some investors might sell this stock because they know 2018’s strength won’t be repeated in 2019.
KB Home - Review Of Treasuries
The 10 year yield is at 3.12% and the 2 year yield is at 2.86% which means the difference between them is 26 basis points. The 2 year yield has been falling because the chances of a hike in December have been falling slightly. They are right near the 70% line which is important.
The Fed hasn’t hiked when the chance is below 70% heading into a meeting. Powell sounded hawkish in his latest statement, so I don’t see how this hike doesn’t occur.
KB Home - Conclusion
The 3 earnings reports I reviewed in this article support the trends I’ve been discussing in the past few weeks. The housing sector continues to weaken. The labor market is strong and retail sales are fantastic. The momentum names with high valuations are being hit hard when they report disappointing guidance.
Mmarket leaders have been taken out as Nvidia and the FAANG names have been underperforming.
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