Lower oil prices and the resulting discount at the gas pumps were supposed to be a boon for retailers. If you pay less to gas up your car and heat your house, there should be more cash to spend on clothes, shoes, dinners out and entertainment.
But what if consumers choose not to spend that extra cash? That seems to be what happened last month. According to data released Wednesday by the Commerce Department, U.S. sales at retailers and restaurants in December suffered the largest monthly decline since January 2014, falling a seasonally adjusted 0.9% from a month earlier. Excluding gasoline sales, purchases fell 0.4%, while spending declined 1% when removing the volatile autos category.
Economists surveyed by the Wall Street Journal had expected a 0.2% drop.
As the WSJ reports:
Many economists expect falling gasoline prices, steady job growth and relatively strong confidence to support consumer spending heading into 2015. While monthly data can be choppy, the latest figures may suggest that weak income gains and global turmoil could make some shoppers reluctant to spend their gas-pump savings elsewhere.
The data added to an already anxious day for investors as stock markets around the world tumbled amid fears about global economic strength. The Dow industrials fell 178.6 points, or 1.01% to recently trade at 17,434.8.
Big Banks are not starting the day with a big bang. J.P. Morgan & Co. (JPM) and Wells Fargo & Co. (WFC) kicked off what will be a string of earnings reports from large financial institutions by disappointing investors.
J.P. Morgan’s fourth-quarter results missed forecasts thanks to a tumble in markets and trading revenue partially offset by a record quarter for debt underwriting revenues. Profit per share fell to $1.19 from $1.30 a year earlier, missing the $1.31 expected by the Street. Revenue dropped 2.3% to $23.55 billion compared to the $23.64 billion expected by analysts
J.P. Morgan also posted higher-than-expected legal expenses and increased reserves for loans that could sour. The bank is being investigated by the Justice Department over alleged foreign-exchange rigging and is expected to strike a deal on the matter.
Wells Fargo, meanwhile, met expectations thanks to stronger loan growth. Per-share earnings, reflecting the payment of preferred dividends, were $1.02 versus $1 a year earlier as revenue rose 3.8% to $21.44 billion. Still a key measure of lending profitability continued to tick down and the bank showed weaker expense controls, which scared away investors.
After the opening bell, Well Fargo fell 0.5% to $51.58 and J.P. Morgan dropped 3.5% to $56.77.
The pain spread to other banks. Shares of Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS) fell 2.9%, 2.25% and 2% respectively.
The results posted by J.P. Morgan and Wells Fargo in lending, mortgage originations and refinancing, trading and overall investment banking typically provide a window into what investors should expect from industry peers. The likes of Citigroup, Bank of America and Goldman will post financial results in the coming days.
U.S. stocks futures sank on Wednesday as weak December retail sales ignited concerns that that falling oil prices are not providing a boon to consumer spending.
Futures were already moving sharply lower following disappointing results from banking giant J.P. Morgan Chase & Co. (JPM).
Dow Jones Industrial Average futures were down 233 points, or 1.3%, to 17,302. The S&P 500 index was off 25 points, or 1.25%, to 1,991.25. Futures for the Nasdaq-100 index fell 43 points, or 1%, to 4,115.75.
A months-long oil-price decline and uncertainty about stimulus in Europe have made investing stocks a riskier proposition. A volatile session on Tuesday sent the Dow industrials up more than 280 points at one point before the benchmark gave in to falling oil prices and fell to close at 17,613.68.
Crude oil prices continued to fall today
In corporate news: Shares of Telsa Motors (TSLA) took a hit on comments from CEO Elon Musk, and Wells Fargo & Co. (WFC) fell 1.5% despite better-than-expected profits because a key measure of lending profitability continued to tick down and the bank showed weaker expense controls.
Ocwen Financial (OCN) said it is cooperating with California regulators to resolve an issue which has resulted in a threatened suspension of Ocwen’s license in that state. The shares rose 5.5% in pre-market action.
GameStop (GME) urged 10.6% after it reported a rise in December same-store sales, and said consumer demand for videogame sales was strong.
Viacom (VIAB) fell 2.8% after Citi cut its rating to “sell” from “buy,” predicting a 50% chance that the company’s networks will be dropped by Dish Network.
JetBlue Airways (JBLU) fell 2% after the airline said revenue per available seat mile was down six percent in December compared to a year earlier, and that it will come in relatively flat for the fourth quarter. The fourth quarter assessment is an improvement over its prior forecast of a decline of as much as one percent.
Tesla Motors (TSLA) CEO Elon Musk has certainly shaken investors. After falling sharply in after-hours trading Tuesday night on reports of falling sales in China, the luxury electric car maker’s stock price continued to fall in Wednesday’s pre-market action, dropping 8.9% to just under $186.
Fueling the continued fall? Musk told an auto industry gathering Tuesday night that it could be several more years before his company turns a profit.
Today’s drop puts Tesla’s high-flying stock on track to open at an eight-month low. Musk told attendees the annual auto industry gather in Detroit that the electric car maker won’t be profitable on a basis that includes executive compensation and charges until 2020.
Musk also told the WSJ yesterday that fourth-quarter sales fell in China.
Tesla Motors (TSLA) shares have dropped below $200 amid media reports that CEO Elon Musk said sales in China have fallen significantly during the fourth quarter.
Musk spoke at the Detroit Auto Show. Dow Jones Newswires reported Tuesday that he blamed the drop on consumer misperceptions regarding auto charging.
As Business Insider reports:
Musk talked about the past and the future — he noted that an investment by Daimler long before Tesla launched the Model S sedan enabled the company to survive. But he also said that Tesla would be selling “millions” of cars by 2025 and that the company’s goal is to become a volume automaker, not a niche luxury player. Daimler sold off its Tesla stake last year. Toyota also sold off a stake in the electric carmaker.
Tesla reports car deliveries every quarter, not monthly. The company is expected to post fourth-quarter earnings in mid-February, though it has yet to announce an exact date.
Tesla shares ended Tuesday up 1% at $204.25, but fell 5.4% to $192.45 during after-hours trading. The stock price has risen in the past 12 months, but sits below the 52-week high of $291.42 it hit in September.
GameStop (GME) rose more than 8% in after-hours trading after the video game retailer reported strong demand for video games during the holiday season.
Don’t be fooled by same-store sales figures unveiled late Tuesday. Sales at stores open for at least a year fell 3.1% for the nine-week period that ended Jan. 3 as total sales fell 6.7% to more than $2.9 billion. But sales in November 2014 faced a tough comparison to last year when the industry launched the PS4 and Xbox One consoles. Same-store sales in November 2013 rose 12% and climbed 4.4% in December 2014.
Meanwhile, GameSytop expects strong demand for games to continue into the first quarter of 2015.
In November, GameStop issued a downbeat forecast for holiday season, blaming game delays. It predicted per share earnings of $2.08 to $2.24 and a range for same-store sales that stretches from a 5% decline to 2% growth
Right now, the Street expects GameStop to earn $2.16 a share for the quarter and $3.49 a share for the full fiscal year that ends this month.
Will rail road stocks get pain or profit from weak oil prices?
Late Tuesday, CSX announced profit of 49 cents a share in the fourth quarter, up from 42 cents a share last year, which is in-line with consensus estimates. And at $3.19 billion, revenue was also in line with forecasts.
For 2015, the Dow component expects double-digit earnings per share growth, as it progresses toward a mid-60s operating ratio longer term. The Street predicted CSX will earn $2.17 a share this year on revenue of $13.2 billion.
Shares rose 0.33% to $33.66 during after-hours trading after falling just over 1% in regular market action.
The Street’s forecasts for full-year profits in 2014 and 2015 have risen during the past 90 days, as oil prices have fallen. Lower oil prices mean lower costs for all transport companies. But some analysts have been afraid that rail roads will get hurt as oil companies put the brakes on drilling and reduce the amount of crude shipped by rail. These transports had surged thanks to the shale boom, helping offset a slump in coal use, an important freight category for rail roads.
Lower oil prices also mean lower fuel surcharges.
But at the WSJ recently reported:
But CSX is among the least dependent on oil shipments and, in any case, there was no evidence of a slowdown in volume recently. While that may change, the overall freight picture looks strong. Nationally, the Association of American Railroads reported that large carriers shipped a little over 4.1 million carloads in the last three months of 2014, an increase of 5.1% year over year.
Should investors bank on Wells Fargo (WFC) or J.P. Morgan Chase (JPM).
The two banking giant are set to report fourth-quarter financial results early Wednesday, kicking off a week during which many big players in the financial sector, including Bank of America-Merrill Lynch (BAC), Goldman Sachs (GS) and Citigroup (C) — will release quarterly earnings reports.
As Barclays analyst Jason Goldberg and his team writes:
We expect results in 4Q14 to approximate the same trends we have been highlighting over the past year or so including less-than-desired loan growth, net interest margin pressure, varied fee income trends, controlled expenses though regulatory/legal/restructuring-related costs weighing, benign asset quality metrics, moderate share repurchase activity, and increased capital ratios. While revenue trends will likely remain soft, looking out, we continue to believe the group is levered to any acceleration in economic activity (we view loan growth as a lagging economic indicator) and higher short-term interest rates (net interest margins could begin to expand in 2015 for only the 4th year in the past 21), should that backdrop materialize. In the interim, relatively low loan loss provisions (though bound to move higher, with energy/energy issues potentially emerging), expense measures, and share buyback, should all help.
Typically, Wells Fargo and J.P. Morgan kickoff the quarterly earnings season for big financial stocks. Since the start of 2015, both have fallen in value. But Wells Fargo remains just over 11% above where it sat a year ago, while J.P. Morgan has dropped just over 1% during the past 12 months.
Wells Fargo is expected to report profit per share of 1.02 on revenue of $21.2 billion, closing out the 2014 calendar year. Full-year profit per share is expected to climb to $4.10 on revenue of $84.1 billion. And over the next 12 months, the consensus among analysts surveyed by Thomson Reuters is that the stock will climb to $55 in the next 12 months.
J.P. Morgan, meanwhile, is expected to report fourth-quarter profit of $1.35 a share on revenue of more than $24 billion, closing out the 2014 calendar year. Full-year 2014 profit per share is expected to rise to $5.45 on revenue of $97 billion. The Street sees J.P. Morgan rising to almost $68 by this time next year.
Banc of America and Citigroup report on Thursday Goldman follows on Friday.
Conference call industrywide will focus on the 2015 outlook and interest rates. But investors will also be listening for information on t the impact of falling oil prices. As Goldberg and his team writes:
The price of oil dropped 50% from June through December, including a 25% decline in December. It has fallen another 12% year-to-date. This could impact 4Q14 results and will likely have an effect on full-year 2015 results. While the recent drop in oil prices could be positive for certain aspects of the U.S. economy, overly exposed regions could face adverse trends. While Texas has seen above-average loan growth over the past several years, a drop in oil prices could weigh on the economic outlook of this region. Shale plays on Marcellus (west PA, east OH, WV, NY) and Haynesville (LA) also bear watching. These regions have also seen outsized growth. We will be watching relative unemployment trends and housing statistics in these markets. Additionally possible slowdowns in areas like Russia and Venezuela could weigh on global growth. Furthermore, the drop in commodity prices has adversely impacted the high yield bond market as issuance declines, spreads widen and potential default concerns increase. While energy loans is only roughly 2% of the average banks’ loan portfolio (though CMA/ZION closer to 8%), there are knock-on effects that could adversely impact other industries. Still, lower gas prices help free up consumer resources for everything from new purchases to debt repayment. Every one-cent decline in pump prices puts about $1bn back into consumers’ pockets. As such, while loan growth, investment banking revenues and commercial asset quality could be adversely impacted, consumer asset quality may be positively affected.
Triple-digit gains have turned into triple digits losses for the Dow.
With 40 minutes until the closing bell, the Dow industrials fell more than 64 points, or 0.4% to 17,576.14 reversing earlier gains that at one time had the Dow up as much as 282 points amid enthusiasm on earnings from Alcoa (AA) and economic data from China.
Falling oil prices put an end to that. At one point today, the Dow was down more than 180 points.
As for other stock benchmarks, the S&P 500 fell more than 9 points, or 0.4% to 2,019.02 and the Nasdaq dropped 15.5 points, or 0.33% to 4,649.41.
Is the other shoe going to fall? Wolverine World Wide (WWW) extended losses Tuesday as Wall Street reacted to the downbeat profit outlook issued by the shoemaker late Monday.
The maker of Merrell, Hush Puppies, Keds and Stride Rite said 2014 ended strong, projecting full-year earnings will fall at the high-end of its previous guidance of $1.57 to $1.63 a share. But the company sees flat earnings in 2015 as $30 million of brand building investments and foreign currency issues pressure the bottom line.
Wunderlich Securities analyst Danielle McCoy called it “short term gain, long term pain.” Earlier today, she downgraded Wolverine to hold from buy and cut her price target to $28 from $32. As she writes:
We believe WWW is making the necessary changes and investments to the business to support long-term global growth, but expect it to be range-bound for the next 12-18 months as FX headwinds, strategic realignments, and increased pension expense and investments weigh on overall results. Our revised target of $28 translates to 15.5x our 2016 EPS projection, which we view as appropriate for a company working (and spending) to re-position the business. While we remain believers in the WWW story, we believe there are more attractive investment opportunities and prefer to move to the sidelines with a Hold rating.
Shares fell 3.4% to $28.72 in recent market action.
Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.
The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.
Write to Ben at Ben.Levisohn@barrons.com