September 28, 2016

Stocks gapped up at the open but quickly gave way this morning. The Dow and SPX are currently down -18 pts & -.2%, respectively. Telecoms, utilities and healthcare stocks are down the most. The energy sector is up a bit as oil prices stabilize. WTI crude oil is trading flat at about $44.70/barrel. Bonds are mostly unchanged. The 5- and 10-year Treasury yields are hovering around 1.12% and 1.55%, respectively. 

Durable goods orders fell flat in August following a healthy 3.6% jump in the prior month. Economists were expecting a 1.5% decline in August, so this will be viewed as a modest upside surprise. You may know that a sub-component of durable goods orders—core capital goods orders excluding defense equipment and aircraft—is widely viewed as a proxy for corporate capital spending in America. By that gauge, orders rose .6% in August following a .8% gain in July. This is even better news, suggesting the beginnings of a pick-up in business investment spending. We need to see improvement here. On a year-over-year basis, core capital goods orders are down 3%.  

Twitter (TWTR) stock is up 20% over the last few trading sessions as traders speculate about a potential acquisition. Yesterday, Bloomberg reported a rumor that Disney (DIS) is preparing a bid to buy Twitter. Previous rumors had Alphabet (GOOGL) and Microsoft (MSFT) also expressing interest. Anyway, a Citigroup analyst says this is a bad idea for Disney. Mergers between traditional media and technology companies don’t generally turn out well. More importantly, Twitter is losing traction in its business; monthly average users aren’t really growing. And perhaps most critical, the analyst can’t figure out how Disney could monetize its media content on Twitter’s platform. 

Under the heading CEOs Behaving Badly, Mylan (MYL) and Wells Fargo (WFC) are squarely in the sights of congress and federal regulators for their misdeeds: Mylan’s outrageous price increases on its EpiPen; Wells’ widespread opening of bogus bank accounts to help salespeople meet quotas. Both CEOs have testified before angry congressional committees. An editorial in Barron’s over the weekend said this about Mylan: “Since there is no federal law against price gouging, the whole committee hearing was nothing but an Orwellian hate session, a show trial, a ritualized display like a peacock in full plumage.” In Wells’ case, laws were broken and the bank will pay a fine. But Senator Elizabeth Warren (among others) is calling for CEO John Stumpf to resign and surrender past compensation. Today, Stumpf announced he will forego about $41mil in stock awards and said he will not take a bonus for 2016. He is trying to keep his job. 

Monday night’s presidential campaign debate doesn’t seem to have changed voters’ minds and was more of a collection of snarky jabs that studiously avoided the real issues. CNBC interviewed the “man on the street” afterward and my favorite comments characterized the debate as “a “dumpster fire” only useful for “entertainment” value. By the way, most level-headed investors admit that the campaign and election likely will not have a major impact on the stock market. That’s certainly what history suggests. 

Federal Reserve Vice Chair Stanley Fischer says the labor market is getting tighter and wages are starting to rise. He notes wage growth has accelerated from 2.0% last year to 2.5% this year. “We think that 3% [wage growth] is a rate that’s consistent with a reasonable rate of inflation.” So that should tell you the Fed is targeting 3% wage growth as a sign that it needs to begin tightening monetary policy. Usually, we only hear about the 2% core inflation target, so this is something new. Another interesting takeaway is that he attributed a better job market to the Fed’s suppression of interest rates. He said, “it’s pressure keeping…interest rates low, that helps cause this to happen.” That linkage is lost on me (and probably most investors). 
 
Bloomberg reports Cisco Systems (CSCO) will soon announce a plan to spend up to $4bil building out manufacturing capacity in Mexico. There are two takeaways here. First, this is the kind of significant investment in growth that Corporate America has shied away from over the last couple of years. We need more of this. Second, this could ignite a political firestorm. Bloomberg notes, “The timing could be delicate for Cisco—six weeks after the company announced job cuts and a day after the US presidential debate, in which…Donald Trump decried the flow of jobs to Mexico…”  


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