October 31, 2017

Stocks opened modestly higher this morning (Dow +12 pts; SPX +.13%). Semiconductors, banks and retailers are all in the green. Biotechs, real estate, gold miners and transports are in the red. The VIX Index sank 3% to trading around 10, so the mini-spike we saw a few days ago appears to have been a false volatility alarm. The stock market hasn’t had a 5% correction all year. Commodities are mostly lower today. WTI crude oil is flat at about $54 (highest since February). Bonds are mostly unchanged. The 5-year Treasury yield is trading at 2.0% and the 10-year yield is currently at 2.37%. 

Merck (MRK) reminded us again why it’s difficult to invest in pharmaceutical companies. The maker of an innovative new cancer treatment announced it is pulling its application to market the drug for lung cancer in Europe. The CEO cited delays in a key clinical trial which was expected to produce strong results. As a result, Merck will not report the results in the near future. The drug, Keytruda, received US FDA approval to treat lung cancer last May but investors are focused on further proof—via trials—that it is more effective than Bristol-Myers’ Opdivo drug. I thought this had already been sufficiently proven, but I guess not. According to Bloomberg, this setback could allow Opdivo to beat Keytruda to market in Europe. The stock fell 5.5% yesterday and is down about the same for the year.  

Aetna (AET) reported third quarter results today. Revenue fell 5% y/y, a bit shy of Wall Street forecasts. But earnings per share shot up 18% and management raised full-year 2017 earnings guidance. The company noted declining membership within the unprofitable ObamaCare exchange products, which is good news for investors. And that allowed medical costs to decline. Management now says medical costs will rise 5.5% this year vs. the previous 6% guidance. By the way, Wall Street analysts were projecting earnings of $9.56/sh this year and new guidance is for about $9.75/sh. Despite this, the stock is down about 1% today. There are a lot of moving pieces in this story. We learned this week that CVS Health is negotiating to possibly acquire Aetna for over $200/sh. And for that reason, the stock is still up 7% this month. Neither CEO will comment on that report, however. 

Despite some rather soft inflation data this month, the Employment Cost Index (ECI) suggests wage inflation is rising. ECI accelerated to 2.5% y/y growth in the third quarter. That makes sense, of course, since there’s not much slack in the job market. The unemployment rate is down to 4.2%. And this level of wage inflation is corroborated by recent data from the Bureau of Labor Statistics. Wages are clearly rising; 2.5% growth is the second-fastest since the end of the last recession. This report didn’t receive a lot of press coverage today, but you can bet the Federal Reserve will be discussing it this week.    

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