January 17, 2017

Stocks sank at the open (Dow -48 pts; SPX -.26%). The SPX is now about .5% off of its record high, set back on 1/6. Defensive sectors (utilities, consumer staples) are leading way, up over 1% in early trading. The financial sector, up 16% since the election, is down about 1.7% today. The US dollar is weaker today and commodities are higher. WTI crude oil is trading up around $52.60/barrel. Bonds are trading up as yields fall. The 5- and 10-year Treasury yields are hovering around 1.84% and 2.34%, respectively. Remember, rates rose aggressively from Brexit last summer through December 15th. But since then we’ve seen some give-back (or “consolidation”) in rates. 

Speaking of rates, the CEO of Bank of America (BAC) was interviewed in Davos today. He said, “You want rates to rise for the right reason. There’s good demand. Wages are rising in America. The economy is growing in America. That’s the right reason.” 

Automakers are buckling under pressure from President-Elect Trump to build more cars here in the US. CNBC reports General Motors (GM) will announce a $1bil investment in domestic plants and 1,000 new manufacturing jobs. Hyundai says it will invest another $1.5bil in the US over the next 5 years. Ford (F) and Fiat Chrysler (FCAU) have already outlined plans for US investment going forward. Mr. Trump has threatened a 35% import tax on vehicles built in Mexico and sold in the US. 

British American Tobacco (BTI) announced a deal to acquire Reynolds American (RAI) for $49bil. Reynolds had been holding out for a higher offer and it seems to have worked. The combined entity will be a largest tobacco company in the world. Reynolds’ stock is up 3.3% this morning; it has outperformed the S&P 500 Index consistently for at least the last 10 years. 

Morgan Stanley (MS) reported solid fourth quarter results, exceeding Wall Street forecasts for both revenue and earnings. Business activity accelerated from year-ago levels, with revenue up 15% and earnings per share up 88%. Revenue from the trading operation shot up over 100% y/y and the wealth management business saw record revenue. Investment banking revenue rose almost 22%. Believe it or not, the stock is down 2% this morning. 

Fourth quarter earnings season is underway. According to Zacks Investment Research, Wall Street analysts currently expect S&P 500 companies to report 4% y/y revenue growth and 4% earnings per share growth. Remember, prior to the third quarter of 2016, we suffered through five consecutive quarters of negative year-over-year earnings growth. And by the way, the energy sector is now expected to post its first positive y/y earnings growth in two years. So the earnings recession is over.  

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