April 14, 2016

Stocks sank at the open, but quickly recovered (Dow +32 pts; SPX +.14%, Nasdaq flat). Telecoms are faring well (+.5%), as are bank stocks (+.8%) and airlines. Semiconductors, on the other hand, are down 1% in early trading and consumer staples are down as well. The VIX Index is settling nicely down around 13.5. Europe is poised to close up and Asia was higher overnight. WTI crude oil is flat, trading around $41.90/barrel and that’s really key to keeping this rally alive. Brent crude is trading up above $44/barrel. Bonds are selling off again.

In a CNBC interview, Blackrock CEO Larry Fink lamented the fact that low interest rates around the world are hurting savers. “Over 70% of our clients are retirement plans and insurance plans. Our clients are…very worried how they’re going to meet their liabilities” because bond yields are so low. He said the world has become too dependent on stimulative monetary policy from central banks to prop up economic growth. At the same time, we’ve seen very little input from the fiscal side (i.e. policies regarding taxation and government spending). Mr. Fink noted that monetary policy stimulus is supposed to be temporary whereas fiscal stimulus is typically longer term in scope. “I don’t call seven, eight years temporary.”

Bank of America (BAC) posted first quarter revenue & earnings roughly in line with expectations. Total revenue was down 9% y/y and adjusted earnings fell 21% y/y. The CFO, on a conference call with analysts, noted that “in quarters like this, revenue is going to be challenged. Markets were volatile, and long-term interest rates declined significantly.” And of course, low rates are compressing profitability for the banks. Trading revenue fell year-over-year no matter how you slice it (global, equity, fixed income); investment banking was down as well. Consumer banking, however, stood out with a 22% increase in profits. Wealth management profits rose 13%. The bank doubled the amount of capital it has set aside to deal with potentially bad loans. Management says this is a preemptive move and the new amount of reserves should suffice for the next 2 2 ½ years. So how do you think the stock is faring today? It’s up 1.9%. And let’s get a couple of things straight. Loan losses across the board in the US have been well below normal for the past couple of years, so the system is very capable of dealing with additional losses in mining and oil & gas. Second, a lot of risk has been priced into stocks like BAC, which is trading at a price/book value of .6. Third, the traditional lending business is fairly strong with good loan growth.

Delta Airlines (DAL) beat earnings expectations on in-line revenue. In fact, earnings adjusted for one-time items grew nearly 200% year-over-year. Profits were helped by lower oil prices; the company spent one-third less on fuel than it did in the year-ago quarter. Total industry capacity growth should be about 2-3% this year, and that’s a bit lower than many investors were expecting. So that’s good news for the industry. In addition, the company is buying back about 8% of its outstanding shares this year.  That’s huge. The stock is up 1.9% this morning.

The Consumer Price Index (CPI) rose .9% y/y in March, which is slightly less than expected. Remember, this is a closely-watched gauge of inflation and the Federal Reserve is hyper vigilant to any changes in the inflation outlook. If you strip out food & energy, the “core” CPI rose 2.2%, a modest deceleration from February’s 2.3% growth.  This report likely confirms that the Fed will not raise rates at its April meeting. 


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