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‘A lot of sectors look like they're getting back to normal’: Expert

Opimas CEO Octavio Marenzi joins Yahoo Finance's Akiko Fujita to break down the latest market action as third-quarter earnings season kicks off.

Video Transcript

AKIKO FUJITA: Let's kick things off, though, with a conversation with Octavio Marenzi. He is the CEO of Opimas, joining us today. And Octavio, let's start by looking ahead at the earnings season, set to kick off this week. Certainly expectations are very low there.

Analysts expecting Q3 earnings for S&P 500 companies to fall 20.7%, to be precise. How much expectation is there for any potential to the upside to be a catalyst?

OCTAVIO MARENZI: Well, I think, you know, usually, the earnings come in slightly higher than expectations. It's remarkable how consistent that seems to happen. So it will probably come in a bit above minus 20%, which is, of course, still an absolutely miserable result.

It's not as bad as Q2, which was down over 30%. So we're moving in the right direction, albeit slowly. But it still is the second worst quarter we've seen since 2009 or something of that sort. So I think that underlying that, there's a tremendous difference in how individual sectors have actually been performing and would like to perform this quarter.

So you mentioned the energy sector. Things there look absolutely miserable. We're expecting that sector to actually make a loss as a whole and the profits earnings come down by more than 100%. So that's a sector deeply in the red. The very low oil prices haven't helped. Even those individual sectors, maybe something like oil storage is not doing badly. But the oil sector is doing really, really badly.

But there are sort of pockets of hope. And if you look at retailing, retailing has recovered quite nicely right across the board, with the possible exception of luxury goods. So we're seeing good increases there. So a lot of sectors look like they're getting back to normal.

And of course, then there's those sectors who look absolutely miserable, things like travel and certain parts of entertainment, amusement parks. Movie theaters are absolutely dead in the water. There was one exception within entertainment, and that was the whole video game sector. And that has done incredibly well.

In fact, if you look at the early days of the COVID crisis, those two sectors that did the best were quite kind of depressing to look at. They were actually alcohol sales and liquor stores and video games. So it seems Americans flocked to those two sectors and was spending lots of money there. So there are certain companies sort of like Electronic Arts and Nintendo who have done very, very well as a result and should carry on doing quite well.

AKIKO FUJITA: Yeah, you've got a number of sectors there. So let's try to break that down here. You mentioned retailers. We've got Amazon with their Prime Day tomorrow. That stock is up about 6% ahead of that. Expectations there-- generate $10 billion in sales, at least that's according to eMarketer.

When you look at the retail space as a whole, it does feel like you sort of have the haves and have nots. Amazon certainly at the front of the have pack. How do you separate those narratives? It sounds like you're quite positive in the recovery in retail overall.

OCTAVIO MARENZI: Yes, I mean, if you look at the overall spending levels, they've bounced back quite nicely. So if you look at how much people are spending at department stores or grocery stores, things of that sort, we were talking about, just last month, things being up about 30% compared to one year prior.

So it looks like there was a sort of a pent-up demand that people didn't do during the COVID lockdown. And once that sort of eased, they're still in the process now of spending that money that they sort set aside and saved and didn't spend during lockdown.

Now you could ask yourself, what happens if another lockdown comes? It looks like we're on the way in the US and in Europe and maybe other parts of the world in terms of moving at least partially back in that direction. So that's somewhat in question. But at the moment, this quarter looks like it was relatively good for retailers overall.

Now, as I mentioned, there were certain sectors that didn't do well. So luxury has not done well. That is down quite substantially. But most of the other sectors are doing quite well. Now it looks a bit like that sector suffered terribly because we did see a spate of bankruptcies in the past two quarters in the retail sector.

So we saw some big names basically disappear, people like Neiman Marcus, JC Penney, a handful of others, Ann Taylor, Lord and Taylor. People like that went out of business but those are firms that were really struggling quite badly for some time before COVID came along. So those firms are sort of more put out of the misery finally by going bankrupt. They'd been racking up losses for years and years and years.

AKIKO FUJITA: We've got the big banks reporting this week. And ahead of that, we're seeing the financials up about 1% today. How are you looking at that space right now? And are there any particular names that you think really offer good value?

OCTAVIO MARENZI: It's so hard to say what the earnings are going to be in the banking sector for one simple reason. In the past two quarters, what we saw was a real dichotomy in the banking sector and the financials.

So the trading activities and asset management activities and capital markets activities did phenomenally well. So we saw a lot of volatility in the markets. We saw the markets go up a lot. And that really helped those lines of business. So the whole investment banking side of things did really, really well.

What did badly was the retail banking and, to a certain extent, the corporate banking side, sort of the more run of the mill Main Street banking activities. But those things didn't do as bad as the numbers indicated really. They did badly because the banks set aside a lot of capital to cover credit losses.

They said unemployment looks really bad at the moment. The economy looks bad so we're going to expect to lose a lot against our loans. They hadn't actually lost that money, but they were just setting aside reserves in the anticipation of losing that money in the future. And that dragged down their earnings quite substantially in Q2 and Q3.

I think in many of those cases, they might have over predicted that and compensated too much. So then they have to correct that again, and that will boost their earnings in coming quarters. So, to a certain extent, because those reductions and earnings are based on forecasts and not actual reductions, it makes it-- it's almost a bit arbitrary in terms of the when the up or down gets recognized. And the banks have some discretion in terms of doing that. So it becomes fairly subjective again.

So like I said, it's a very hard sector to look at. The investment banking side this quarter didn't do as well as last quarter. So we didn't see the volumes in volatility that we saw in Q2 or at the end of Q1. So that sector probably hasn't done as well, but done pretty well. So I hate to give you a roundabout answer and say, I really don't know. It's really hard to look into that sector and figure out. So much is up to their discretion in terms of what they report.

AKIKO FUJITA: Let's talk about some of the travel names out there. We've got Delta and United reporting this week. Airlines, of course, among the hardest hit as a result of this pandemic. And, just, people aren't traveling as much as they used to.

You look at a name like Delta. You could argue that their cash burn is slow, but certainly, when you look at the numbers in terms of travelers and the pace of the recovery, it seems like a very long road ahead. How are you positioned in that space?

OCTAVIO MARENZI: Well I would say that looks a bit like catching a falling knife to get into that sector. So the airlines have done, of course, really badly. They continue to do really badly. Though this quarter, it looks like they're doing a bit less badly than in previous quarters. People are traveling a bit more.

But like I said before, that's all very much COVID dependent and virus dependent. And if we now see and we are seeing case counts go back up, and people will naturally become more reluctant to travel, and if we now see more government lockdowns and shutdowns or partial ones, where I can see their revenues plunge back down the way they did in the second quarter of the year, assuming the third quarter, things looking bad.

I mean, in the second quarter, their revenues were down 70%. And this quarter, it looks like they're on track for being down 50%. So they've gone from really, really bad just to really bad. And that's sort of progress, but that's progress of a sort, I suppose. But so I don't expect them to do much, but it all depends on how things pan out for the next few weeks in terms of COVID.

AKIKO FUJITA: Octavio Marenzi, good to talk to you today. I appreciate your time.

OCTAVIO MARENZI: Thank you very much.