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It’s Never Enough For The Market

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Stocks dropped some today and are likely to fall more tomorrow, at least based on after-hours trading, following results from Microsoft (MSFT), Alphabet (GOOGL), and AMD (AMD). Overall results and guidance didn’t seem to cut it, with Google ad revenue missing the mark, AMD guidance coming weaker than expected, and Microsoft guidance being pushed weaker. This has been the story of earnings season, mostly due to how heavily the market has been skewed to more upside.

This goes back to what we have discussed over the past three weeks: the basics of volatility dispersion and the hedging flows. The flows that boosted stocks into January options expiration are gone, and now the volatility dispersion, at least over the short term, is likely to see a bit of an unwind as implied volatility in stocks melts following results, pushing up index-level volatility.

Alphabet missed advertising revenue, coming in at $65.5 billion versus estimates of $65.8 billion. I know it is a small miss, but the company also reported an operating income of $23.7 billion versus estimates of $23.8 billion. But remember, there was a lot of call delta and call gamma above the $150 level, and tomorrow, all of that gamma and delta will burn off as IV values fall, bringing stock for sale, and I think, for the most part, that is what is happening in the after hours, falling 5.5%.

AMD reported inline earnings and just slightly better on revenue. Adjusted gross margins came in at 51% versus estimates of 51.5%. But more important was first-quarter guidance that missed estimates by quite a bit, coming in at $5.4 billion at the midpoint versus estimates of $5.77 billion, which is about 6.1%, and that is just too much to miss guidance by when the stock has surged as much as it has. The stock was priced for perfection, and perfection the guidance was not.

Microsoft reported better-than-expected earnings and revenue, with each segment reporting better results. Azure grew by 30% versus estimates of 28.4% while growing by 28% in constant currency versus estimates of 26.8%. The guidance sounded okay, with intelligent cloud guiding revenue of $26 billion to $26.3 billion versus estimates of $25.85 billion. More Personal Computing guidance was $14.7 billion to $15.1 billion versus estimates of $15.3 billion, and Productivity and Business Processes revenue was $19.3 billion to $19.6 billion versus estimates of $19.6 billion. Meanwhile, Azure growth is expected to remain stable. The stock is flat, but again, this could be a case of good not being good enough.

The fun continues tomorrow with ADP at 8:15 AM, the Treasury quarterly refunding announcement at 8:30 AM, where we find out the distribution of all the debt the government will issue, and is topped with the FOMC and Jay Powell press conference starting at 2 PM. 

Stay tuned…


Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.