January 31, 2017

Stocks sank at the open again this morning (Dow -164 pts; SPX -.55%). Transports and semiconductors are down over 1.5% in early trading. Biotechs, gold miners and utilities are higher on the day. The dollar is weaker today against a basket of foreign currencies. After hitting a multi-year high in December, it has fallen back about 3.5%. Dollar weakness is helping prop up oil. WTI crude is trading up above $53/barrel this morning. Bonds are rising in price as yields edge lower. The 5-year Treasury shot up to 2.10% last month but is now trading at 1.90%. The 10-year Treasury’s recent high was 2.6% but it is now trading around 2.44%. 

The Employment Cost Index (ECI) rose less than expected in the fourth quarter of 2016. By the way, this is one of the key metrics the Federal Reserve uses to gauge wage inflation in the economy. The ECI is up 2.2% year-over-year and that is considered moderate growth. In fact, the average annual increase in ECI from 2009 to present has been 2.0%. Digging into the data, we see that wages are rising, but are partially offset by a modest decrease in benefits. The conclusion is that wages are rising at an acceptable pace and shouldn’t produce alarm among Fed officials. In other words, this report shouldn’t force the Fed to accelerate their rate hike plans. 

The Case-Shiller Home Price Index (for the 20 largest metro areas) rose 5.3% y/y in November, a bit higher than economists anticipated. The rate of home price growth has been around 5% for the last couple of years. Bloomberg says November’s acceleration was “presumably more related to underlying economic momentum in the latter half of the year than any reaction to the election…” By the way, some cities (San Fran, Boston, Denver, Charlotte, Portland, Dallas and Seattle) are now seeing home prices higher than pre-recession levels. 

President Trump held a meeting with CEOs from top pharmaceutical companies. He used the carrot-and-stick on them, as he is wont to do. On one hand, he said pharma makers have done a good job innovating. But on the other hand, “the pricing has been astronomical.” So he’s looking for business leaders to moderate pricing in exchange for some action to shorten the time it takes to get a developmental drugs through the FDA. Anyway, these stocks are mostly trading up today. 

Well in to fourth quarter earnings season, we’ve now seen about 200 of the S&P 500 companies report. Aggregate sales growth is tracking to 2.8% y/y and earnings growth is currently 4%. And, unlike last year, only three sectors are showing negative sales growth: consumer staples, utilities, and telecom. This is shaping up to be a decent earnings season. 

Aetna (AET) reported fourth quarter revenue in line with expectations and earnings per share significantly higher than Wall Street anticipated. The percent of insurance premiums spent on claims rose a bit to 82.1% and total health insurance subscribers (“membership”) fell at bit from year-ago levels. Insurers, of course, are dealing with the fact that ObamaCare Exchanges have been horrendously unprofitable. And the Justice Dept. recently killed Aetna’s planned acquisition of Humana. Finally, add to that potential changes to the Affordable Care Act and the outlook is a bit murky. The stock is up modestly today. 

United Parcel Service (UPS) reported a disappointing quarter, with revenue and earnings up only about 4-5% from year-ago levels. Wall Street expected more. In addition, the company guided 2017 earnings lower. However, the company did manage to deliver 16% more packages during the holiday in 2016 vs. 2015. And daily shipments during the quarter increased 5%. It looks like an un-funded pension liability was partly to blame for the weak results. In addition, the company says it is in the middle of a change in product mix that disrupted sales. The stock is down 5.5% at the moment, but was down much more earlier. 

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