August 22, 2016

Stocks gapped down (Dow -52 pts; SPX -.27%). Utilities and healthcare are the leading sectors whereas energy and materials are lower. Small-caps are up nicely, and in fact have outperformed the SPX consistently since February’s correction bottom. The dollar is roughly unchanged but commodities are a bit lower. WTI crude oil is down 2.5% to $47/barrel. Lately oil has been pushed around by (probably unfounded) speculation regarding a Saudi oil production freeze. Bonds yields are right at the top of the range we’ve seen since Brexit. The 5- and 10-year Treasury yields are currently trading at 1.14% and 1.55%, respectively. Not much volatility in Treasuries this month. 

Wall Street is debating whether utilities stocks are wildly over-valued or whether they deserve their massive 18.5% run so far this year. Utilities stocks such as Duke Energy (DUK) and Consolidated Edison (ED) are now trading at higher P/E ratios than that of the S&P 500 Index. Some investors say that’s natural in an ultra-low interest rate environment where economic growth is tepid and the Federal Reserve is unlikely to resume interest rates any time soon. Others, like Jeff Saut of Raymond James, say enough is enough. “More money has been lost reaching for yield than at the point of a gun.” Indeed, utilities have been losing momentum since the market’s recovery from Brexit, posting a flat total return vs. the SPX +7.5%. This very crowded trade may be fading. 

Pfizer (PFE) announced a deal to acquire Medivation (MDVN) for about $14bil. Pfizer is said to have competed for the deal with Gilead Sciences (GILD) and Sanofi Aventis (SNY). Pfizer will now get Medivation’s blockbuster cancer drug Xtandi. The deal didn’t come cheap—Pfizer will pay $81.50/share vs. roughly $67/share where it traded on Friday. And if you look back to where Medivation was trading when takeover rumors first broke in March (about $37), the premium is over 100%. Medivation’s expected growth is pretty attractive; earnings are expected to rise over 60% next year and 30% in 2018. 

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