April 29, 2016

Stocks opened lower this morning but quickly pared losses (Dow & SPX flat). The tech sector is in the green after yesterday’s drubbing. Telecoms and utilities are trading lower. April has been a pretty good month for the stock market, especially for banks, biotechs, and energy companies. Oil prices continue to drive higher. WTI crude oil is pushing $45.50/barrel and it looks like the next resistance will come just under $48/barrel. My guess is we see that level before too long. Bonds are faring a bit better today as yields moderate. The 2- and 5-year Treasury yields are at .82% and 1.33%, respectively. Over the last month, both high-grade corporate and junk bond prices have done very well, rising 2-4%. Remember, the rebound in junk suggests Q1 recession fears were far over-estimated.

First quarter gross domestic product (GDP) was revised down to just .5% growth from the prior estimate of 1.4%. The US economy has clearly softened over the last 9 months. Of course, in 8 of the last 10 years first quarter GDP has been weak relative to all other quarters. So there may be some seasonality there. But this is still a disappointment. Consumer spending (“consumption”) was revised lower to 1.9% growth from the prior estimate of 2.4%. That’s still fairly healthy. Housing and government spending were also positive contributors to growth. Unfortunately, however, business investment and exports continued to detract from economic growth. I should also point out that the core GDP Price Index, which measures inflation, accelerated to 2.1%. That’s the highest inflation growth since the middle of 2012. Typically, you don’t want to see rising inflation alongside decelerating growth. Anyway, this report vindicates the Fed’s decision not to raise interest rates.  

 So this is merger Thursday. Comcast (CMCSA) confirmed an offer to buy DreamWorks Animation (DWA) for $3.5bil. That translates to a premium of about 24% over yesterday’s share price. Abbot Labs (ABT) agreed to purchase St. Jude Medical (STJ) for about $25bil (cash & stock). That translates to a premium of about 30% over where STJ was trading yesterday. ABT aims to build out its cardiovascular product line. Finally, Abbvie (ABBV)—a spin-off of Abbot Labs—announced a deal to acquire Stemcentrx for $5.8bil (cash & stock) to get the company’s experimental oncology drugs. This is good news for Abbvie, which desperately needs to diversify its revenue streams.  


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