August 2, 2016

Stocks opened sharply lower this morning despite some better-than-expected earnings announcements. The Dow and SPX are currently down 117 pts & .8%, respectively. All ten major market sectors are lower in early trading. Biotechs, semiconductors and transports are all down over 1% at the moment. The dollar is lower and commodities are higher—even oil, which has been in a downtrend lately. WTI crude oil is back up to $40.50/barrel. Bonds are lower as yields move up a bit. The 5- and 10-year Treasury yields are currently at 1.08% and 1.54%, respectively. Yields look like they want to move up in the near-term. 

In a CNBC interview yesterday, JP Morgan CEO Jamie Dimon set the record straight on the US economy & capital markets. “What we see is a strong consumer…more household formation, more people buying homes, more people with jobs.” And as for the weak GDP report he said, “I’m not even sure if [the GDP numbers] are accurate.” When asked whether the bond market is forming a price bubble, he said, “I would be a little worried about the 10-year bond.” Today’s [10-year Treasury] price is not a “normal price.” Of course, ultra-low interest rates are a problem for his bank, and the big question going forward is, do we have enough growth to begin normalizing interest rates? He seemed to think it will happen sooner or later. In the meantime, “The American banking system is in great shape.”

Speaking of the consumer, we got the June Personal Income & Spending report this morning. Incomes rose .2% in June from prior month levels, as expected. Spending climbed .4% for the second month in a row, proving that the consumer is in spending mode. Of course, when spending outpaces incomes that means the savings rate is falling. But in this case, it’s nothing to worry about. The savings rate ticked down to 5.3%, which is pretty close to the long-term average. Core retail inflation (PCE Deflator excluding food & energy) remained unchanged at 1.6% y/y, which is very tame. Remember, the Federal Reserve’s target for Core PCE is 2.0%. So it’s still not time to hike rates. 

Wall Street has turned bearish on stocks over the last week, mostly because 1) the market just climbed to all-time highs, and 2) August—especially over the last few years—has been a bad month for stocks. Goldman Sachs in a research note said markets are now more vulnerable to growth & policy disappointments. So they’re more vulnerable? Than what? Than last summer or winter when we got 12-15% corrections? This is silliness. The firm downgraded equities to “neutral” for the next three months. So to be clear, this is a short-term trading recommendation. 

CVS Health reported 18% y/y revenue growth and 8% earnings growth for the second quarter. That’s a huge number for sales growth, but Wall Street analysts were expecting more. As usual, the pharmacy services business did the heavy lifting, with sales up over 20%. But drug prices are coming down and of course that dented results. No matter, management’s third quarter earnings guidance was a bit higher than Wall Street projections and that’s enough to bump the stock up 4% this morning. 

Cardinal Health (CAH), which distributes drugs through pharmacies like CVS, posted second quarter sales and earnings growth of 18% beating analysts’ consensus forecast. Unfortunately, current quarter guidance was worse than expected due to the loss off a key customer. But the stock has under-performed this year so it’s actually up 1.8% this morning. 

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