July 19, 2016

The major stock market averages opened slightly lower this morning (Dow flat; SPX -.16%). The Nasdaq is down .18%. Eight of ten market sectors are down, led by energy and materials. Industrials and financials are eking out gains. The VIX Index is trading up a bit to 12.5 (considered very low) and VIX August futures have come down quite a bit to 15.6. Since breaching new highs on July 11th, the SPX has risen another 1.1% and the prior highs of May 2015 may now serve as support rather than resistance. I haven’t heard any technical analysts claim a “qualified breakout,” but certainly every day the SPX holds above 2135 the odds increase that this rally will continue. The dollar is up .5% today and commodities are broadly lower. Brexit certainly did encourage the dollar to head higher. WTI crude oil is down modestly just under $45/barrel. Bonds are roughly unchanged; Treasuries are up in price and corporate bonds are down slightly. 

US housing starts jumped 4.8% in June to an annualized rate of 1.19 million units. That’s a 4-month high. June building permits also came in better than expected. Housing starts have been in a general up-trend since 2011 and except for a dip in early 2015 starts have been moving back toward the long-run average of around 1.3 - 1.5 million units. Housing has been absolutely crucial to propping up economic growth, adding about .5% to GDP in the first quarter of 2016. 

Bloomberg reports government anti-trust regulators are preparing to fight some very large mergers in the healthcare insurance space. The Justice Dept. is apparently preparing a suit to block Anthem’s $48bil takeover of Cigna, and Aetna’s $37bil acquisition of Humana. At the moment there are five major health insurers and regulators are concerned that consolidation will affect the competitive dynamic and insurance pricing. The companies will, of course, offer to sell some assets to assuage those concerns but Bloomberg says that may not fly. All four stocks are down in early trading. 

Corporate earnings announcements have been somewhat positive. Johnson & Johnson (JNJ) handily beat earnings forecasts with 8.9% growth in pharmaceutical sales during the second quarter. The drug division’s success helped offset flat-to-down sales in both consumer products and medical devices. The stock is up 1.3% this morning. Lockheed Martin (LMT) also beat second quarter estimates and raised third quarter earnings guidance. Deliveries of the company’s F-35 fighter jet were ahead of expectations. The stock is up 2.5% at the moment. 

In addition, Goldman Sachs (GS) posted sales and earnings far higher than Wall Street estimates, driven by a 33% increase in fixed income trading revenue. The other divisions (investment banking, investment management) didn’t do so well. The firm is struggling to adapt to a post-financial crisis world, cutting compensation and laying off workers. The stock is down 1% this morning. Yesterday, Netflix (NFLX) reported a decline in subscriber growth and offered weak third quarter guidance. The stock is down something like 12%. 

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