October 31, 2016

Stocks opened mixed this morning (Dow -13 pts; SPX +.06%). The rate sensitive sectors—utilities, real estate—are up nicely in early trading. Biotechs, medical device stocks and the energy sector are in the red. WTI crude oil is trading sharply lower to $47.60/barrel as investors come to realize that OPEC’s jibber-jabber about a production cut is likely nothing but talk. Bonds prices are up a bit this morning as yields edged lower. The 5- and 10-year Treasury yields are back down to 1.32% and 1.83%, respectively. 

Author and Wharton Business School Professor Jeremy Siegel reduced his SPX price target for year-end to a range of 2250-2300. His prior price target was 2300. First, he expects a Fed rate hike in December and that could dent the rally. Second, while earnings have come in better than expected, forward guidance hasn’t been great. Third, as yields rise, bonds will compete more with stocks for investor dollars. “It’s going to be harder to make headway, I think.” So now he believes the stock market will tread water for a while. We need rising earnings to “get over the hump of a rising 10-year [Treasury].” 

Eastman Chemical (EMN) reported a solid third quarter with revenue and earnings growth of -7% and +1%, respectively.  Volumes were flat y/y so pricing was fully responsible for the sales decline. The company is on track to reduce costs by $100mil this year and raw materials costs are down, so despite falling sales, earnings were up slightly. The global business environment is challenging and demand in China is soft. But management guided fourth quarter earnings higher than expected. Management said this is a “world where you need to create your own growth.” The stock rose 4% on high volume after the announcement on Friday. 

Chevron (CVX) reported better than expected third quarter results. Revenue fell 12% y/y but that’s the best quarterly growth rate in two years. The US oil exploration business lost money but overseas oil and natural gas saw improving profits. Total production came in weaker than expected but it does look like the crisis is over and the energy sector is beginning to recover. Still, the company further reduced 2016 capital spending guidance. In a Bloomberg interview on Friday, Oppenheimer analyst Fadel Gheit said Chevron and Exxon need $60+/barrel oil in order to survive in the long term.  

General Electric (GE) inked a deal to combine its oil & gas business with Baker Hughes (BHI), structuring the deal so that GE will remain in control. GE will own about 62.5% of the new Baker Hughes, which will the country’s second-largest oil & gas services provider behind Schlumberger (SLB).  

We got some encouraging consumer income & spending data this morning. Personal incomes rose .3% in September from prior month levels and spending rose .5% in the month. On a year-over-year basis incomes are up 3.2% and spending is up 3.4%. The savings rate dipped a bit to 5.7% but that’s still very respectable. The consumer is in great shape. Now, the inflation rate on consumer spending came in at a very tame 1.2% y/y and even if you strip out volatile categories like food & energy, inflation is still running at a tepid 1.7% y/y. So this report shouldn’t encourage the Federal Reserve to begin raising interest rates. 

Hillary Clinton’s campaign suffered a setback as the FBI on Friday said it will broaden the investigation into her misuse of classified information while serving as Secretary of State. FBI Director Comey said new evidence has come to light as a result of an unrelated case that tangentially involves one of Ms. Clinton’s closest aides. Her political machine immediately set about discrediting Mr. Comey, who several months ago decided not to prosecute her despite clear evidence that she mishandled classified information. In a research piece over the weekend, Citigroup says it believes Ms. Clinton will still win the election, but concedes it is possible this event will throw the election off course. At the very least, voter turnout will suffer. 

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