October 19, 2016

Stocks opened higher as the market continues to digest quarterly earnings announcements. The Dow and SPX are currently up 67 pts & .26%, respectively. The energy sector is up over 1.7% in early trading. Gold miners and banks are up as well. WTI crude oil climbed back over $51/barrel this morning. In fact, oil briefly touched a 15-month high of $51.72/barrel. Bonds are slightly higher as well, with the 5-year Treasury yield down to 1.22% and the 10-year trading at 1.74%. 

Hedge fund manager Jamie Dinan says he expects the Federal Reserve to raise its short-term policy interest rate in December. But that shouldn’t scare the market. He says we’ve got some inflation and some growth, about 2.2% each, so a rate hike is warranted. Besides, monetary stimulus has reached its limit around the world. Despite extreme stimulus in the US, Europe and Japan, he sees a “dearth of aggregate demand.” And until governments begin to shift to fiscal stimulus this market will continue to drift in the doldrums.  

Famed banking analyst Dick Bove was interviewed on CNBC this morning. He said the “dictatorship of the Fed on the regulation side has basically taken away capitalism.” He continued, “The banks have been forced to siphon staggering amounts of money into the coughers of the US government, directly and through the Federal Reserve, as a result of all of these regulations that have been thrown at them. As a result, the velocity of money in the US economy has gone down consistently year after year…which has slowed economic growth.” He concludes that “Dodd-Frank has had a staggeringly bad effect on the banking industry.” 

Housing starts (i.e. ground-breaking on new projects) sank 9% in September following a 5.6% dip in the prior month. Those are month-over-month figures, but year-over-year growth isn’t any better (down 12%). The good news, however, is that the drop in new starts was driven entirely by apartment/condo projects. Single-family home starts, on the other hand, rose 8% in the month and 5% from year-ago levels. And single-family is where we’re really short on supply after about eight years of under-building. The simple fact remains that we are not building enough single-family homes to keep up with population growth & demand. Having been decimated in the Financial Crisis, homebuilders are very disciplined and cautious.  

Intel (INTC) beat revenue and earnings expectations for the third quarter, but offered weak profit margin guidance. PC revenue came in better than expected as customers began to build inventory a bit. Datacenter revenue reached a record. But guidance for gross margin was weak (about 61% vs. 63% expected). The CEO says this has to do with start-up costs for a new manufacturing process. Investors are clearly disappointed, though, and the stock is down over 5% this morning.

Halliburton (HAL) reported a good quarter, narrowly beating earnings expectations. That the company reported a positive profit at all is pretty encouraging. Wall Street analysts expected a loss. Management is beginning to see a pick-up in demand for oilfield services. The stock is up 4.6% this morning.

Morgan Stanley (MS) also beat revenue and profit expectations. Both metrics show a massive rebound from year-ago levels, driven by higher fixed income/currency/commodities trading revenue. Management has also been successful in controlling costs (i.e. layoffs). Investment banking revenue fell 7% y/y and wealth management revenue rose 2% y/y. Financial services companies are often measured by return-on-equity (ROE), and the company’s ROE accelerated to 8.7% in the quarter. The long-term target is 9-11%. As a side note, before the Financial Crisis ROEs of 12-13% were common, but those days are gone. The stock is flat this morning.


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