July 21, 2016

Stocks opened lower this morning (Dow -17 pts; SPX flat). Energy, healthcare and consumer discretion are higher but just about every other sector is modestly lower. The VIX has fallen flat around 1 12, indicating low expected volatility over the next 30 days. The dollar is flat and commodities are higher on the day.  WTI crude oil is down a bit to $45.40/barrel. Bonds are lower again this morning with yields moving higher. The 5- and 10-year Treasury yields are up to 1.14% and 1.60%, respectively. 

With a 3.5% run in the first half of July and an 8.6% rally off the Brexit bottom, it does look like the S&P 500 Index has convincingly broken out of its trading range. This comes as a complete and total surprise to everyone. Zacks Investment Research last Friday declared,“100% of bears soil[ed] their pants.” The financial news media is struggling to explain why this happened. And I actually heard a CNBC reporter/contributor say something like maybe Brexit was what we needed to break stocks out of their doldrums. Of course, that makes no sense. And then Zacks this morning implied that the “earnings yield spread of stocks over the 10-year Treasury is the main bullish consideration…” So I think there is a lot of confusion/misinterpretation of the situation.

In reality, we are seeing a rebound in the economy and corporate earnings are coming in better than expected. That’s why the stock market is moving up. In recent weeks we’ve seen pretty encouraging jobs data as well as ISM manufacturing and services reports. The Citigroup Economic Surprise Index has absolutely spiked over the last month. And although second quarter earnings season has just begun in earnest (100 of the S&P 500 companies having reported) year-over-year revenue & earnings growth are tracking to +2% and -2%, respectively. That’s a lot better than Wall Street was predicting a couple of weeks ago. Not to pile on, but this morning’s Index of Leading Economic Indicators rose .3% in June from prior month levels; economists were expecting a .2% gain. Initial filings for unemployment insurance continue to fall even though they are already at historically low levels. And existing home sales rose 1.1% in June to an annualized rate of 5.57 million units. That’s the highest rate in nine years. 

BB&T (BBT) reported better-than-expected revenue and earnings for the second quarter. The bank’s net interest margin only fell .02% from the prior quarter, to 3.41%. And that’s higher than in the year-ago quarter. Loan charge-offs came in lower than expected. It looks like BB&T’s recent string of acquisitions is adding to profitability. The stock is up 1.2% this morning. 

Southwest Airlines (LUV) is plunging this morning after issuing weak third quarter guidance due to falling ticket prices. On a year-over-year basis, revenue rose 5% and earnings were up 16%. Those are pretty solid growth figures, in line with Wall Street expectations. But growth is clearly slowing from year-ago and prior quarter levels. Competition among the airlines is heating up and as United Continental (UAL) noted, capacity throughout the industry needs to shrink. 

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