October 12, 2017

The major stock market averages gapped down at the open but quickly turned around. The Dow and SPX are currently flat. Just like yesterday’s session, defensive and interest rate sensitive sectors are leading. The only exception is telecom, down 2%. I get the sense that the stock market needs to rest and investors need to settle in and digest third quarter earnings announcements before acting with any conviction. Oil prices sank this morning; WTI crude is down 1.7% to trade around $50.80/barrel. The bond market is slightly higher as yields edge lower. The 5-year and 10-year Treasury yields are hovering around 1.94% and 2.34%, respectively. From a technical analysis perspective, the 5-year yield hasn’t been able to move above 1.96% since late March, so that’s the key resistance level to watch. 

General Motors (GM) announced it will shutter a Detroit plant for six weeks, and then bring it back online at a permanently lower production rate because demand for sedans in the US is falling. More specifically, GM has apparently noticed that the LaCrosse, Cadillac CT6 and Impala aren’t very popular. Unsold inventory has risen to unacceptable levels. GM plans to lay off about 200 workers. 

Williams Sonoma (WSM) sank 3% this morning after a Credit Suisse analyst downgraded the stock to Underperform and reaffirmed his 12-month price target of $44/share. The stock is currently trading around $49/share. The report pointed out that the company will have to invest aggressively in e-commerce to reignite growth. Profit margins are falling, organic growth lags peers, and shipping revenue is falling. Brick-and-mortar retailers are in the middle of a massive paradigm shift that is threatening to shake out many of the players we see today. Over the last 12 months, WSM stock is flat; Dillard’s (DDS) is down over 22%; Macy’s (M) is down over 40%; JC Penny’s is down over 60%. 

The Producer Price Index (PPI), which measures wholesale inflation, rose 2.6% in September from year-ago levels. That’s the fastest  rate of price growth since early 2012. Hurricane-related shortages impacted the index, specifically in food & chemical production. Excluding food & energy, PPI rose 2.2% in the month. Core wholesale inflation is rising, but the underlying trend is not alarming. 

JP Morgan (JPM) reported third quarter results that were greeted with a shoulder shrug. Both revenue and earnings per share beat Wall Street expectations. Loan growth exceeded forecasts, up 7% from year-ago levels. The bank’s net-interest-margin rose to 2.37% as interest rates throughout the economy climbed a bit during the quarter. Commercial and consumer banking accelerated. But analysts don’t like the fact that securities trading revenue fell 21% y/y. And mortgage-related revenue fell 17% as re-fi activity dried up. In addition, the company set aside more reserves against potential loan losses, and while the increase wasn’t particularly sharp, analysts are looking for any signs that credit is deteriorating. The stock is down .9% today. 

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