October 27, 2016

Stocks opened mixed (Dow +45 pts; SPX +.08%). The best performing sectors in early trading are telecom (+.8%) and healthcare +1%). Banks and biotechs are also up nicely. Gold miners, utilities and REITs are down. The VIX Index is up around 14.7 and VIX November futures are trading up to 15.7, so volatility expectations are rising again. WTI crude oil is up a bit, hovering around $50/barrel. Most other commodities (i.e. gold, copper, iron ore) are up as well. Bonds continue to sell off as yields march higher. The 5-year Treasury yield spiked to 1.34%, the highest since early June. The 10-year Treasury yield is up to 1.85%. The Federal Reserve’s monthly policy meeting is next week and traders are building in some expectation for a possible rate hike. As evidence, the 2-year Treasury yield is back up near .9% where it seems to climb every time Fed officials threaten to hike. 

It’s hard to image, however, that the Fed will hike rates this month. Economic indicators have been tepid. The Citigroup Economic Surprise Index fell from +40 to -11 in the last three months. The Fed’s Labor Market Conditions Index (LMCI) just posted another negative month. Corporate capital spending (capital goods orders excluding defense & aircraft) is still weak. And finally, inflation is still below Fed targets. 

Qualcomm (QCOM) announced a deal to buy NXPI Semiconductor (NXPI) for $47bil. This is the largest merger QCOM has ever been involved with, and it is aimed at diversifying away from cellphone chips. QCOM has about $30bil in cash (mostly overseas) so it will need to raise some debt for the acquisition. The stock is up about 4% this morning and about 41% so far this year. 

Bristol Myers (BMY) reported solid quarter results, with revenue up 21% and earnings up 97% y/y. Both metrics beat Wall Street forecasts. The stock has been pummeled lately by concerns over its Opdivo cancer drug, which performed very well in the quarter (sales tripled). Also, the company has found that combining Opdivo with another drug (Yervoy) increased its efficacy. Sales of most of the Bristol’s major drugs matched or beat forecasts. Management raised full-year 2016 earnings guidance by about 10% and introduced 2017 guidance which is ahead of analysts’ consensus forecast. The stock is up 6% this morning. 

Dow Chemical (DOW) also exceeded expectations with 4% revenue growth and 11% earnings growth in the third quarter. Total volume of product sold increased and profit margins expanded. The company’s agricultural division turned around and helped drive growth. The planned merger with DuPont should close in the first quarter of 2017. CEO Andrew Liveris addressed China’s economy. Demand in China is “spotty,” depending on what business you’re in. “I would agree…there is, in industrial China, in commodity China, in asset-intensive China, there is a slow-down.” But food safety and eco-focused products, for example, are experiencing huge growth in the country. The stock is up 1.9% this morning. 

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