April 15, 2016

Stocks opened lower but have turned around. The Dow and SPX are currently flat. Energy and healthcare sectors are in the red. The defensive sectors (consumer staples, utilities, telecom), on the other hand, are in the green. The VIX Index popped up a bit to 14 and VIX futures (May) are up to 17. So we’re seeing a little more skittishness on the part of traders as the stock market rebounds to levels not seen since December. There is a sense that further gains will have to come from better than expected first quarter earnings. The dollar is weaker on the day (and the year), but most commodities are lower. WTI crude oil is down 3% this morning to $40/barrel. Bonds prices are higher today as yields edge lower. The 5- and 10-year Treasury yields are down to 1.21% and 1.75%, respectively.

BlackRock reported first quarter results that narrowly missed expectations. Total revenue fell 4% y/y, although assets under management improved from prior quarter levels. The company brought in $36.1bil in new funds from investors, $24bil of that going into iShares ETFs. This is important because the asset management industry as a whole is seeing outflows. Fee revenue declined as investors pulled back from riskier investment products, and the company collected less from advisory & securities lending services than in the year-ago quarter. My sense is that investors felt the quarter just okay.  

Charles Schwab (SCHW) reported first quarter revenue that topped Wall Street forecasts even as profits were in line with expectations. In fact, revenue rose 16% from year-ago levels. It looks like the single interest rate hike from the Federal Reserve last December—as modest as it was—made a difference in the company’s bottom line. It is well known among institutional investors that SCHW is a go-to during periods of rising interest rates. The stock is up .5% this morning.  

In a CNBC interview Wells Fargo CFO John Shrewsbury addressed some concerns about energy-related loans and the health of the mortgage market. He reminded us that loans to energy companies account for less than 2.5% of the bank’s total assets. They have seen some defaults, but they are manageable. The mortgage pipeline is still strong, even though the first quarter saw a decrease in mortgage originations. The bank’s total mortgage pipeline (i.e. future business) is $39bil.  

US Industrial Production (IP) came in significantly weaker than expected, falling .6% in each of the last two months. This doesn’t bode well for first quarter GDP growth. Oddly enough, this comes as we’ve seen better sentiment around manufacturing activity. For example, ISM’s manufacturing business activity survey has improved steadily over the last three months, and suggests a return to growth. And today we learned that the Empire State (NY) Manufacturing Survey surged this month to levels not seen since early 2015. Part of the reason for the divergence between IP and ISM is the fact that the IP series includes not just manufacturing but also mining and utilities output, which have been very weak. According to Bloomberg, mining activity in this country is at its weakest since the early 1970s. Utility output was down 1.2% in March due to warmer weather. So manufacturing is not as soft as the headline IP figure would suggest. 

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