October 18, 2016

Stocks jumped at the open on better than expected earnings announcements. The Dow and SPX are currently up 90 pts & .7%, respectively. Healthcare, the supreme lagger this year, is up 1.2% in early trading. REITs, basic materials and tech are also leading. The VIX Index is down to 15.7. European markets are poised to close up 1+% and Asia was up overnight. The dollar is flat and so is oil, hovering around $49.90/barrel. Bonds are mostly unchanged with the exception of a modest rise in junk. The 5- and 10-year Treasury yields are trading around 1.25% and 1.76%. 

Morgan Stanley’s Chief US Equity Strategist Adam Parker published a note explaining his outlook for US stocks. He believes cyclical stocks (tech, industrials) generally will provide better opportunity than defensive sectors (consumer staples, utilities). He says many cyclical stocks are trading at very low P/E ratios and yet are expected to grow earnings faster than the overall S&P 500 Index. A sample of his list which selects for quality and value includes Wells Fargo, Cisco Systems, Dow Chemical, CSX, Eaton, Eastman Chemical and Aflac. 

Bank of America (BAC) reported a solid quarter, beating earnings forecasts. But the stock was up a scant .3% yesterday. Net interest yield ticked up to 2.23%, total loans increased and loan charge-offs decreased. Consumer banking profits were up 2.8% y/y, and both investment banking and securities trading beat expectations. Overall it was a very positive announcement.

Blackrock (BLK) reported a decent quarter, slightly missing revenue estimates but beating earnings forecasts. Revenue fell 3% y/y but earnings rose 3%. CEO Larry Fink noted the continued ultra-low interest rate environment has been tough and the “whole industry is facing what I would call turmoil.” Low rates reduce returns of fixed income funds and also create downward fee pressure for fund managers. But Blackrock did a good job with cost control and also managed to attract more assets into its funds. Total assets under management rose 13.6% and the company’s iShares ETF family attracted $51bil during the quarter. The stock is currently up .25%.

Johnson & Johnson (JNJ) beat Wall Street expectations with 3% y/y sales growth and 13% earnings growth. Pharmaceutical sales drove the beat, but medical devices also returned to positive growth. Management also raised the lower end of its full-year 2016 earnings guidance and said it is looking for acquisition targets. Unfortunately, the news was overshadowed by a Pfizer (PFE) announcement that it will begin selling its own (cheaper) biosimilar version of J&J’s arthritis drug Remicade. The stock is down 2.4% this morning. 

Orbital ATK (OA) successfully launched one of its Antares rockets for the first time since 2014. The company has a contract with NASA to resupply the Int’l Space Station (ISS). It recently upgraded the Antares after an engine failure in 2014. The stock is up 4.5% this morning. 

Retail price inflation is beginning to rise. The Consumer Price Index (CPI) accelerated in September to 1.5% y/y growth vs. 1.1% in August. So this is the highest year-over-year rate of price growth in two years. Energy (i.e. higher oil prices) was responsible for most of the increase. So if you look at “core” inflation, which excludes food & energy, inflation actually ticked down to 2.2% in September. Some merchandise categories have seen weaker pricing, including apparel, new cars and communications. The bottom line here is that despite the headline increase, core inflation is not rising. The Federal Reserve will take note. 

By the way, IBM just reported its 18th consecutive quarter of declining revenue growth. The stock is down 3.6% this morning.

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