The latest release of the series Stranger Things helped Netflix (NFLX) achieve better-than-expected earnings and a sizeable rally. The market’s 17% after-hours surge on the earnings news resembles its hit Stranger Things. NFLX’s financials were better than expected but far from as encouraging as the price gain suggests. For growth companies like NFLX, we prefer to focus on revenue and subscriber growth. As shown below, revenue growth continues to stall, and the growth rate of paid membership is slowing rapidly. Revenues fell slightly from the prior quarter and are only up .9% over the past four quarters. Paid membership grew 4.5% over the last year, which was moderately better than expected. However, it represents a sharp slowdown from 9.4% last year. It is expected to be at 2.6% for the year in Q4.
Netflix’s earnings may be a harbinger of stranger things to come this earnings season. Many stocks are so beaten down that instances of good or better-than-expected results, even if underlying trends remain poor, might cause strong rallies. Even with NFLX’s strong stranger things rally, the stock is down almost twice as much as the S&P 500 this year.
What To Watch Today
- 8:30 a.m. ET: Philadelphia Fed Business Outlook Index, October (-5.0 expected, 9.9 prior)
- 8:30 a.m. ET: Initial jobless claims, week ended Oct. 15 (230,000 expected, 228,000 prior)
- 8:30 a.m. ET: Continuing claims, week ended Oct. 8 (1.380 expected, 1.368 prior)
- 10:00 a.m. ET: Existing Home Sales, September (4.69 million expected, 4.80 million prior)
- 10:00 a.m. ET: Existing Home Sales, month-over-month, September (-2.2% expected, -0.4% prior)
- 10:00 a.m. ET: Leading Index, September (-0.3% expected, -0.3% in prior)
Market Trading Update
As noted yesterday, the pullback to the 20-dma after the recent rally was not surprising., What is important now is that support holds and breaks above 3800 is accomplished to keep the bullish reversal alive. The market is not overbought yet, but the volume and overall commitment remain lacking. The market action may remain sloppy over the next week until the corporate blackout for stock buybacks ends on the 28th.
This still remains a tradeable rally but is prone to failure if it doesn’t rally soon. Much like we saw in late June, the market chopped around for a couple of weeks before finally mustering a rally. We may have a similar setup this time as well.
OECD Leading Indicators Portend Recession
The OECD computes a monthly Leading Indicators index with an excellent track record of forecasting global economic activity six to nine months in advance. As we share in the first Charles Schwab chart, a level of 99 or below has always led to a global recession. The second graph compares the global leading indicators index to the OECD’s U.S. leading indicators index. Not surprisingly, given the size of the United States economy, it strongly correlates with the global index. The simple takeaway is that a recession is very likely in the U.S. and worldwide.
Homebuilding and Leading Indicators
One of the components of the U.S. OECD Leading Indicators series is “work started for dwellings,” i.e., new house construction. Given that homebuilding is an important leading indicator, it’s worth sharing the recent data from the National Association of Home Builders (NAHB) market survey. The NAHB survey of home builders fell to 38, approaching the low of 30 in April 2020. More importantly, the index is plummeting at an extremely sharp pace. The six-month decline in the index is a four-standard deviation event.
Housing starts continue to confirm the bearish outlook of homebuilders. Yesterday housing starts fell 8.1% versus expectations for a 7.2% decline. After setting a record in 2020, starts are back to levels last seen in 2015. As long as mortgage rates remain higher, it will be hard for homebuilders to justify new construction. The Fed wants a slowdown in housing, and the Fed is getting one!
Supply Lines have Normalized
A key factor driving inflation was inventory shortages, partly by supply line problems. With economic lockdowns behind us and demand for goods easing rapidly, supply lines have fallen back to normal. The graph below from Arbor shows that the average of the most-watched supply chain metrics is back to the average run rate for the last ten years.
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