October 28, 2016

The major stock market averages opened higher this morning (Dow +60 pts; SPX +.25%). Gains are led by industrials, tech and energy. Healthcare, on the other hand, is the only sector in the red. The VIX Index is back down under 15 after some better than expected earnings reports. Good news is pushing the dollar slightly lower and commodities a bit higher. WTI crude oil is right around $50/barrel. Bonds are mostly unchanged today; the 5- and 10-year Treasury yields are hovering around 1.33% and 1.85%, respectively. But over the last week high-grade corporates are down about 1% and long-term Treasuries have lost about 1.8%. 

Alphabet (GOOGL) reported solid third quarter results, beating Wall Street estimates. Paid clicks up surged 33% y/y vs. about 26% expected. Ad prices fell; cost per click was down 11% vs. -7% expected. But investors are taking that in stride. Google websites revenue grew better than 20%in the quarter. The stock is up 2.2% today.

Amazon (AMZN) missed earnings forecasts even as revenue came in as expected. I’m not sure that matters. Management explained that the company is investing in building scale (i.e. stepping up investments in AWS, Alexa, digital content, fulfillment centers). The company is getting ready for the holiday shopping season. Amazon Web Services (AWS) revenue shot up up 55%, with better profit margins. Fourth quarter guidance was disappointing, and that’s probably why the stock is down 4% this morning. But overall it was as good quarter. By the way, this was the sixth straight profitable quarter for Amazon. 

Amgen (AMGN) posted a big beat, driven by reduced R&D spending, not higher product sales. The company’s biggest seller, Enbrel, saw lower sales volumes and that’s a concern. Investors are also worried about new biosimilar drugs that could intensify price competition. Management raised earnings guidance but I’m not sure that matters much at the moment. The stock is down about 10%. 

Third quarter gross domestic product (GDP) grew 2.9%--the best quarter in two years. Consumer spending (“personal consumption”) decelerated a bit to 2.1% growth, which is OK. The real drivers of growth in the quarter were stronger net exports and (at long last) higher business inventories. This is the first quarter in which inventories helped growth since early 2015. The report is fairly positive, except for the fact that business investment declined for a fourth straight quarter. Finally, I should note that inflation (GDP Price Index) decelerated to 1.5%, which is below Federal Reserve targets. Inflation is still well in hand.  


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