Microsoft wants to continue to facilitate this wave of digital transformation to deliver an operating system that is meant for cloud-based workflows. Being able to fit into this wave of change is critical for Microsoft not just for Windows but for Office as well. With more enterprises embracing digital transformation, the search for the right partner and the right tools is on. The strength of having been at the center of most workflows in the past might be seen as a limitation, not an advantage, leading some companies to look for partners like Google, the poster child for the future of work.
CHRIS VERSACE: It is a big, big week, so there really is no shortage of it. We have a bunch of energy names later in the week. We'll be focused on them, regarding XLE. We've also got results from Ford, General Motors. What's that looking like? What's the impact on their production from the UAW strike? What do they see on the road ahead for that? But we've also got Intel, so we'll want to hear what they're seeing on the data center market front, what do they think about capital spending. Those comments will flow through to our thoughts on Marvell as well as Applied Materials.
What Microsoft Wants The PC Market To Look Like Microsoft Outlines Its Expectations
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J.D. DURKIN: Good morning, Action Alerts Plus subscribers, we have a lot of earnings to preview but Chris Versace is here with us now to give us a recap of a little bit of last week and also set us on a course for success for the days ahead. Chris, good morning. Thanks for being here. CHRIS VERSACE: Good morning and happy Monday to you. Happy merger Monday to you, J.D. J.D. DURKIN: What is merger Monday for our members who don't know? Let's start there. CHRIS VERSACE: So sometimes we come in from the weekend, we're getting ready for the week ahead, we know we have a slate, in this case, of earnings economic data, and want to watch what's going on in the Middle East. But from time to time on Mondays we come in with, not just one, not just two, but a series of companies announcing M&A transactions, hence, the term merger Monday. And we're seeing that. In fact, we have a note out this morning that talks just about that as it relates to our XLE shares all right perfect timing there you and I talk a lot about the Fed we talked a lot about the Fed last week when Fed officials were making a lot of comments, but now we have entered a Fed blackout period ahead of the upcoming decision. We get that decision on November 1. Chris, what kind of setup did Mr. Jerome Powell and his colleagues exactly leave us with? CHRIS VERSACE: Yeah, so if we take a look at what Powell said last week, last Thursday at the Economic Club of New York, he said that monetary policy doesn't appear to be all that restrictive, signaling that if we continue to see the economy growing, quote unquote, above trend, the Fed may have to do more. And what was really interesting to me was after Powell's comments, Philly Fed President Harker kind of softened his position. Remember, earlier in the week he was saying I don't think the Fed needs to do anything else. I think we're good. And now he's saying if he sees stronger economic data, it means that perhaps, again, more needs to be done. And as a result, we're starting to see the market get nervous again. We're seeing Treasury yields, particularly the 10-year, rebounded last Friday and they're moving higher yet again today, flirting with that 5% level. From my perspective, this means that tomorrow's flash October PMI data is going to be one of the more important pieces of data that we get this week because it's going to give us an anecdotal snapshot, not only on inflation, but it's going to tell us how did the manufacturing economy, how did the services economy fare in October? Did it accelerate? And if the numbers come in better than expected-- again, higher than the market is looking for-- that could be a little problematic for the market. J.D. DURKIN: Chris, no doubt we will talk a lot about the Fed in the weeks ahead, but it's also a very busy week of earnings. Let's go there now with our attention, especially in terms of a few club holdings. Let's start with our tech positions reporting after tomorrow's close, now that Microsoft finally closed the acquisition of Activision Blizzard at long last. Where should we be putting our attention, do you think? CHRIS VERSACE: Well, we're going to want to understand eventually, once that deal formally closes, what are the synergies, the cost savings to be had again between Microsoft and Activision. But remember when Microsoft reported its June quarter results better than expected-- but it surprised people, saying that they're going to have to really invest over the next 12, 18 months in AI to really bring all the applications and growth to market that it sees. So we're going to want to really pay attention to its margins. We're also going to want to get an update on that spending outlook. Behind it all, we're starting to hear that the PC market is firming. That could be a little bit of a bright spot for Microsoft, but we also have to pay attention to what's going on with cloud. So those will be the things that we're looking for later this week. J.D. DURKIN: After the bell tomorrow, we will get Snap, Visa. We mentioned Microsoft. We'll also get Alphabet. Speaking of regulatory concerns, what are your expectations there, Chris? CHRIS VERSACE: Not so much on the regulatory front. These tend to be slow winding developments, we'll continue to pay attention on it. Probably the two big things are going to be, of course, the core business-- search and advertising. With the economy faring better than expected and, excuse me, Google continuing to hold its search engine market share, we could be surprised a little bit to the upside. But we're also going to want to see with its cloud business-- it was no longer the drag that it had been in the June quarter. We want to see more progress on that. That could be another reason that Google delivers a little more to the bottom line. J.D. DURKIN: Over to Amazon as well as Mastercard, Chris, how is the consumer looking to you, especially after what we heard from American Express on Friday? And for our members who don't know, what did we hear from AMEX a few days ago? So American Express surprised to the upside. They reaffirmed that consumers continue to spend on travel, on dining out. That, of course, sets positive notes for our shares of McDonald's as well as Chipotle. But when it comes to the larger consumer, we are seeing some signs of slower spending. Bank of America, hinted to that. And I would say it's not so much that it's slower spending, it's the fact that consumers are really being more selective in where they are spending. Our thinking has been that Costco and Amazon would benefit from this, particularly as they try to stretch their disposable spending dollars. Again, inflation continues to be persistent, but we're also seeing that pinch if you will from the return of student debt payments. So I think Mastercard is going to have a good quarter, I'm curious to see what they say about the holiday shopping season. But with Amazon, remember, they had their Prime event earlier this month, that should give them a good lift in guidance. So all in all, we continue to favor Amazon going into the holiday shopping season. J.D. DURKIN: This conversation is making me hungry, especially because I have another question on Chipotle. You've been looking for a catalyst for that stock, Chris. What should we expect on Thursday? CHRIS VERSACE: So when they report, I think they're going to have solid comps for the quarter. They've already tipped their hand that they're looking at another round of price increases, so that's really what we run what we want to drill down on. Is it pricing across the board? Is it more selective? And I say this because past a certain point there is some concern that, not just Chipotle, but any other companies that continue to raise prices might effectively price themselves out of where consumers are willing to spend. So that's going to be a key part for us later this week when it comes to the shares of Chipotle. J.D. DURKIN: All right, it's an ever-growing laundry list, but we do have a few more names we want to mention. Some favorites of ours here whenever we have these conversations, United Rentals and Vulcan Materials-- obviously, maybe they lack a bit of the flash high profile tech earnings, so what should we be paying attention to for some of those names, Chris, that I know you're focused on? CHRIS VERSACE: Well, you are right they fall below the radar relative to a lot of other high profile names that'll happen this week, but those two positions, which I affectionately call are rebuilding America positions, we know the construction data has been positive. We know the weekly rail data for aggregates has been positive as well. So for us it's really going to be what are we seeing in terms of pricing? We know that there was some incremental aggregate pricing middle of 2023. Is that sticking? And then the other thing that I really want to hear United Rentals talk about is the landscape of higher interest rates and what that means for borrowing costs for companies. Because what I'm thinking here, J.D., is we might actually see United benefit from that. And here's the thinking, folks that would be buying construction equipment, might be sitting back and going, it's a lot more costly for me to buy that equipment now because rates are higher. I'll just rent it instead. That could be a real sleeper catalyst for United Rentals. J.D. DURKIN: Now, I appreciate that context there. Chris, any earnings outside of the portfolio on the watch list, other names you're following for the next few days? CHRIS VERSACE: It is a big, big week, so there really is no shortage of it. We have a bunch of energy names later in the week. We'll be focused on them, regarding XLE. We've also got results from Ford, General Motors. What's that looking like? What's the impact on their production from the UAW strike? What do they see on the road ahead for that? But we've also got Intel, so we'll want to hear what they're seeing on the data center market front, what do they think about capital spending. Those comments will flow through to our thoughts on Marvell as well as Applied Materials. J.D. DURKIN: Few names like ExxonMobil and Chevron at the end of the week as-- you and I could do an entire hour long special just on earnings, like the 30% of the S&P 500 company set to report in the next four days alone. There's a lot. CHRIS VERSACE: So here's my thought on it. So here's my thought on that. You ready? Let's do it. J.D. DURKIN: \"Let's do it,\" he says. OK. CHRIS VERSACE: Let's do it. J.D. DURKIN: Well, we will figure out which of these big names-- because we do want to make sure that we're doing our diligence to bring our members as much information as they need to be well-positioned on names, either directly in the portfolio or other names they will certainly see a lot of flashy headlines about, maybe just need that little bit of extra context. However, Chris, as if earnings were not enough-- and trust me it is-- we also have the Fed's favorite inflation gauge, PCE, wrapping up the week on Friday. In addition to all the caffeine will need between now and then, Chris, how important is this report to watch after the many Fed speakers we heard from last week? CHRIS VERSACE: So the September PCE price index, particularly the core PCE price index, data is going to be important. And just remember the context, where we saw September CPI, PPI starting to move back in the wrong direction. And the thing with this is the core PCE index has been not only described many, many times by Powell, the rest of the Fed heads-- typically speaking it's one of their preferred inflation metrics. So here too, if it starts to move in the wrong direction or doesn't really show a lot of progress, that's going to be worrisome for the Fed. And, again, following Powell's comments that a rate hike is largely off the table for November, I wouldn't be surprised if a stronger than expected or PCE price index for September leads the December expectations for a rate hike to bubble up. That's what I'll be watching. J.D. DURKIN: Absolutely. Anything else that you'd like to mention before we leave it for now, keeping in mind we hit a lot of topics there? CHRIS VERSACE: Yeah, there's only really two general things that I'm sure members members will quickly pick this up. The first is going to be-- we're going to continue to keep our eye on developments in the Middle East and what that might mean for our shares of gold, GLD, for oil, XLE, as well as defense company Lockheed Martin. And then back here at home, perhaps the Republicans might get their house in order, no pun intended there. But we want to see what happens on the speaker front. My expectation is that something is going to happen, just not sure what. J.D. DURKIN: That's right. There are nine candidates right now. They'll be a secret ballot tonight. Tuesday morning, the open ballot, down to two people, and then, of course, you're back where we were a week ago, where at least you have a nominee, but, of course, that person needs support from the chamber. My goodness, caffeine indeed all around. Plenty to think on there. Chris Versace, thank you as always, my friend. Have a great week. CHRIS VERSACE: You to, J.D. J.D. DURKIN: Members, that man, Mr. Versace, will be back tomorrow for his reaction to earnings and much more. Have a great day and we will see you again soon. 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