August 17, 2016

Stocks opened lower this morning for the second consecutive session. The Dow is off 70 pts and the SPX is down .3%. Nine of ten major market sectors are lower, led by telecoms, consumer discretionary and materials. Only utilities are slightly higher. The VIX Index is up around 13.3 and VIX September futures are trading at 15.4. Volatility is expected to increase as we move into fall. WTI crude oil is modestly lower to $46.30/barrel. Bonds are mostly lower in price, higher in yield. The 5-year Treasury yield is up to 1.17% and the 10-year is flat at 1.57%.    

CNBC interviewed former PIMCO CEO Mohamed El-Erian this morning. He said the world needs to stop relying on monetary policy (i.e. low interest rates) as a means of propping up economic growth. “We have relied excessively on central banks…and if we’re not careful we’re going to take a turn where slow growth becomes recession.” He is calling for tax reform (lower taxes with fewer exemptions) and “pro-growth” investment (i.e. more infrastructure spending by the government). Also, we need to deal with pockets of over-indebtedness (i.e. student loans). “We as a society fell in love with finance as the engine of growth…and we have forgotten what it takes to grow an economy in an inclusive manner.” He is essentially echoing calls by Janet Yellen—and before her Ben Bernanke—that politicians need to do something to invigorate growth. They can’t simply leave it to the Federal Reserve. 

Target (TGT) reported disappointing second quarter results and the stock is down about 6%. Same-store-sales fell 1.1% and customer traffic fell for the first time in a year-and-a-half. Management cuts its full-year 2016 forecast. The CEO said sales of Apple (AAPL) products fell 20%. Groceries were also weak and investors are wondering is Target is losing market share across a broad set of merchandise categories. If there was any good news, it is that online sales rose 16%. 

Separately, Lowe’s (LOW) reported a weak quarter. Same-store-sales rose 2% vs. Wall Street projections for around 4%. Home Depot, on the other hand, reported same-store-sales growth of 4.7%. So clearly Loew’s is losing market share. Home improvement is a bright spot within retail, and both companies said the promotional environment is normal, meaning no extra discounting is necessary to draw customers. The stock is down nearly 7% this morning. 

Yesterday, Aetna (AET) announced it is pulling out of most of the ObamaCare health insurance exchanges in which it participates. The move follows a similar announcement by United Healthcare (UNH) last April. The problem, of course, is that insurance companies are losing money on the exchanges. Well today, Bloomberg reports Aetna (AET) previously warned the Justice Department that is would pull out of the exchanges if the government tried to block its planned merger with Humana (HUM). Of course, the government recently sued to stop the deal. So now this is looking like a tit-for-tat. AET stock is up 1% today. Here is Forbes’ take on the story, which is classic: “…activities which make losses should not happen. And if an activity starts to make losses then we want that activity to stop happening. This is because a loss is the universe’s method of telling us the alternative uses of those scarce resources would be a better use of those scarce resources.” 


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