Good morning everybody. Good afternoon to my friends on the East Coast.
Alphabet (GOOGL) and Tesla (TSLA) both beat on revenue Wednesday night. Both stocks got taken apart anyway. Alphabet finished Thursday down almost seven percent, Tesla down 14.
Revenue was never the problem. Both companies posted negative free cash flow.
Free cash flow is the cash a company has left after paying to run the business and maintain its equipment. Profit is an accounting number you can dress up. Free cash flow is what's actually in the checking account once the bills clear.
So despite the "profits," these companies burned cash keeping the lights on. That's also why they keep raising capital while telling you how profitable they are.
The rest of the scoreboard wasn't much prettier. GE Vernova (GEV) dropped roughly $90 Wednesday on an earnings miss, even with record orders and raised guidance. IBM (IBM) barely moved this week, which counts as mercy after its 25 percent one-day collapse on July 14, the worst day in the company's 115-year history.
Thursday's selling shouldn't surprise anybody.
When the Bond Market Votes, Stocks Listen
We'd already seen the market softening for weeks, most noticeably in the QQQ as it broke down out of its trading range.
QQQ now sits on the precipice of breaking below the June 9 lows. That happens and things really snowball.
Then there's the bond market, which keeps sliding. The 30-year yields over five percent and the two-year is over four, so the risk and reward of owning longer dated debt simply isn't there. (When yields climb, the bonds you already own lose value, and right now you're not getting paid enough to take that ride.)
Oil is making it worse. Brent crossed $100 a barrel Thursday after Houthi attacks on Saudi tankers in the Red Sea, dragging the 10-year to its highest level in a year and a half. Traders are now putting better than even odds on a Fed hike in September.
Bad earnings I can trade around. Bad earnings plus triple-digit oil plus a bond market bracing for a hike is a full reset of expectations and a repricing of every asset on the board.
Thursday might have been the start of something bigger than a softening market.
The Only Green on the Screen
The bright spot in earnings was ServiceNow. ServiceNow (NOW) closed up about six percent on a day the S&P 500 lost more than one percent, which takes some doing.
The numbers were great, customer demand was huge, and the company is moving up its timeline on government contracts because of what the Feds need. Management did flag that some of that federal revenue got pulled forward out of the third quarter, so don't expect a repeat.
I still have my doubts about parts of the software space. But NOW might be one of the names that ends up in a better position after AI than it was before.
Memory Is the Last Domino Standing
DRAM has run too far for too long. The rest of the market started rolling over weeks ago and just about everything looks ugly, except memory.
In a real selloff, every stock eventually starts moving together. The winners get sold last, because by then they're the only thing left with a profit to take. Memory may be the last domino, but it's coming.
The question is, will either of these two stocks give us the Ticker Highlight option play of the week?
Tune in Monday to find out.
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Your only option,
Mark Sebastian