July 26, 2016

Stocks opened lower this morning but quickly turned around (Dow -30 pts; SPX flat). Investors are clearly freaked out about the Federal Reserve meeting, which kicks off today. Interest-rate sensitive sectors (utilities, telecom, REITs) are falling the most in early trading. Industrials and materials are in the green. The dollar is a bit weaker. Unfortunately, WTI crude oil is down under $43/barrel and that’s hurting stocks as well. Bonds are slightly weaker, with yields climbing. The 5- and 10-year Treasury yields are up to 1.15% and 1.57%, respectively. 

The S&P Case-Shiller Home Price Index climbed 5.05% y/y in May, holding even with April’s price growth. The index for the 20 largest metro areas rose 5.24%. 

Private research firm Markit Economics says its US service sector PMI shrank to 50.9 this month from 51.4 in June. These are preliminary numbers, and of course investors don’t put as much weight on Markit indices as they do ISM indices. But this is a very weak reading, suggesting that June’s surge in economic activity has faded. As with any PMI index, 50.0 is the dividing line between expanding and contracting business activity.  

New home sales rose 3.5% in June to an annualized rate of 592,000 units. That’s the highest annualized unit figure since February 2008. So the stable, steady up-trend in new home sales continues. 

Reynolds American (RAI) missed revenue and earnings expectations for the second quarter. Net sales jumped 33% and earnings jumped 14% y/y but most of that was due to the Lorillard acquisition. Cigarette volumes declined during the quarter. On a positive note, the acquisition did increase Reynolds’ market share within the US to 34.6%. Management raised the dividend payout to 80% matching Altria (MO) and that means the dividend grows by 9.5%. The company also announced a $2bil stock buy-back program. That’s really necessary because of the share count dilution associated with the acquisition. 2016 earnings should climb 14-18%. The stock is down 3.9% in early trading. 

United Technologies (UTX) reported second quarter results that exceeded Wall Street forecasts. Both sales and earnings didn’t grow much from year-ago levels, but the CEO had some encouraging comments on the conference call. The aircraft engine business is growing nicely and new equipment orders in the Otis elevator business rose 3%. On Brexit: “We’re really not going to see much of a short-term impact from Brexit.” The UK will continue to be “one of the most investable markets that we have in Europe.” And despite a relatively weak global economic environment, he said “we feel very comfortable about the year.” The stock is up about 2% this morning. 

Volatility, diving interest rates and an earnings recession have made this a difficult market to navigate. Today, CNBC contributor Joe Terranova said “The problem is positioning on the part of active management. We’ve been on the wrong side no matter what moves we’ve made.” Everyone is waiting for a selloff in order to hit the “reset button.” Jim Cramer also chimed in, “The cheapest stocks are not proving to be cheap.”

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