Market Moves

Oil prices jumped higher today as the U.S. dollar retreated in the wake of news about the U.S. gross domestic product (GDP) and China's announced willingness to reduce the reserve requirement to provide stimulus in that country. While the moves may be temporary, market participants appear to be willing to let their fears subside regarding trade war negotiations and the possible long-term impact. 

Since oil is most frequently priced in U.S. dollars, the mathematical relationship between the U.S. dollar index and the price of oil is often an inverse relationship. (If one goes up, the other goes down.) This pattern has generally been the norm, but today's striking moves seem to portray a story of investors calming their fears about the future. If those conditions continue, the stock market could become more bullish than it has been over the summer.

Chart showing the price of oil and the performance of the U.S. dollar

Telecom Stocks Poised for Growth

Investors looking for new stock investments that haven't exploded in price yet might consider the potential for smartphones and service providers to benefit greatly in the fourth quarter. If retail stores are outperforming expectations of late, then it may imply that consumers are willing to spend some of the money they have earned lately in a high-employment economy. This could lead to gains in shares of companies that provide these services in a world where cell-phone service is seen as indispensable.

Over the summer, these companies competed fiercely to gain market share. Based on recent share performance, AT&T Inc. (T) appears to have the edge over other providers such as Verizon Communication Inc. (VZ), T-Mobile US, Inc. (TMUS), and Sprint Corporation (S). It may be a bit of surprise to realize that, even in this volatile market, shares of iPhone maker Apple Inc. (AAPL) are doing better than all of them. But almost all of them are outperforming the telecommunications sector in general, as tracked by the iShares U.S. Telecommunications ETF (IYZ). 

Chart showing the performance of stocks related to the cell phone market

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Is It Too Late to Buy Stock in Roku?

Cord cutting is a full-blown trend now as large numbers of consumers consider alternatives to cable-delivered TV services. The biggest evidence of the weight of this trend is the stunning decline in viewers at CNN and ESPN – which benefited substantially from past cable-based revenue agreements. As cord cutting moves into the mainstream and consumers switch to less expensive services, it drives this dynamic further on multiple fronts.

The second point of evidence is the stunning rise in Roku, Inc.'s (ROKU) share price. Shares of the cable-alternative hardware maker have risen from a low of $30 per share to nearly $170 per share at today's close. This rapid rise will no doubt attract eager investors who would like to have the foresight to participate in such gains; however, such investors would be wise to take a cautious approach. Since the company is just under two years past its IPO, the rise in price may be driven much more strongly by starry-eyed investor hopes than by company realities.

The chart below demonstrates that, although Roku has bested its expectations with each earnings announcement, the company has been losing money more often than not over the past year. More importantly, Roku expects to make a loss in the next quarter. If the company fulfills expectations, the loss will be 28 cents per share, making it the biggest loss since the company's first quarter. Will analysts and investors really welcome such news even if it is expected? Investors keen to buy Roku stock might do well to allow the share price to fluctuate lower before pulling the trigger.

Chart showing the share price performance of Roku, Inc. (ROKU)

The Bottom Line

Oil prices moved higher in a significantly contrary move to the U.S. dollar. This coordinated dance in assets is in line with healthy market expectations – and therefore could signal that investors are becoming less fearful in the markets. Telecom service stocks might do well in the fourth quarter, but Roku shares might be a bit overheated.

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