April 6, 2016

The major stock market averages opened higher this morning (Dow +50 pts; SPX .5%). Believe it or not, the healthcare sector is leading (+1.7%); biotechs are up big in early trading; energy-related stocks are up nicely as well. On the other hand, transports—which have outperformed the S&P 500 this year—are down about 1% today. US oil inventories came in a bit lower than expected, and WTI crude oil is back up to $37.50/barrel. This comes despite the US dollar rising a bit. Bonds are modestly lower; the 5- and 10-year Treasury yields are trading at 1.20% and 1.75%, respectively. There’s a tug-of-war going on within the bond market. Slower economic growth overseas (and negative short term rates in Japan/Europe) is sparking demand for US Treasuries, which pushes yields lower. On the other hand, as our economy improves rates should move higher, not just because the Fed is more likely to hike rates but also because inflation expectations should rise. Speaking of the Fed, Jeff Currie of Goldman Sachs (see more below) had this to say about rate hikes: think about it in terms of 1, 2, 3. The market thinks the Fed will raise rates 1 time this year, the Fed is talking 2 hikes, and economic data suggests 3 hikes.

First quarter earnings season is about to get underway. According to Zacks Investment Research, aggregate earnings per share for S&P 500 companies are expected to be down about 10% y/y on -2% lower revenue. Even excluding the energy sector, earnings are projected to be slightly lower than year-ago levels. If true, this will be the fourth consecutive quarter with negative y/y earnings growth. Wall Street analysts currently project a return to positive y/y growth in corporate earnings during the second half of the year. My opinion: the market is telling us the analysts are a bit too pessimistic.  

The US government has successfully killed the $160bil planned merger of Allergan (AGN) and Pfizer (PFE). The Obama Administration created new rules regarding “inversions,” or mergers aimed at moving a company’s headquarters overseas to pay a lower tax rate. Both merger parties decided to drop the deal. Hillary Clinton is gloating on Twitter. The CEO of Allergan said the US is building a wall to keep people in, and the result is that US companies will be less competitive on the global stage. Pfizer’s stock is up 2.9% and Allergan’s stock is up 3% this morning. Clearly, investors are happier with the two companies apart.

Jeff Currie, commodities analyst at Goldman Sachs, addressed oil prices in a CNBC interview yesterday. He sees a “trendless market” with volatility. For oil, we still need to see more oil production cuts. Today we’re producing about 9.1 million barrels per day vs. the peak of 9.75 million. When will larger production cuts start to show up? Probably late in the third quarter or early fourth quarter. In the near term, we could possibly see $25/barrel oil because of high expected volatility, but it won’t stay there. He expects $40/barrel oil in the last half of the year.  

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