November 2, 2017

Stocks sank at the open (Dow flat; SPX -.22%; Nasdaq -.3%). Consumer discretionary, materials and telecom sectors are down about 1% in early trading. Real estate and utilities are in the green as interest rates fall. The VIX Index is down around 10. The dollar is down a bit today (and down about 7% on the year) and commodities are up slightly. WTI crude oil is trading flat at $54.30/barrel. Bonds are trading modestly higher after President Trump announced his nominee for the Chair of the Federal Reserve. The 5-year and 10-year Treasury yields are hovering around 2.0% and 2.36%, respectively. Famed economist Mohamed El-Erian says the nominee, Jerome Powell, brings “continuity and experience” and he is a wise choice.  

At yesterday’s policy meeting, the Federal Reserve declined to raise its short-term policy interest rate. Balance sheet run-off is proceeding as planned. The Fed is walking a bit of a tightrope. On the one hand, core inflation remains low, and that’s probably why they didn’t hike rates. But on the other hand, the Fed views the economy as “solid” and accelerating, and that argues for interest rate normalization. These two conditions don’t usually go together. As a result, the Fed is cautious and most investors see this as a level-headed approach. The bond market didn’t react much to the announcement.

Republicans in the House of Representatives introduced their tax reform plan. As expected, the bill would reduce the top corporate tax rate to 20% permanently. On the individual income tax side, AMT would be repealed, retirement plan contribution limits would rise along with the child tax credit, and the estate tax exemption would double. The current seven tax brackets would collapse to four: 12%, 25%, 35%, 39.6%. In addition, the standard deduction would double, so fewer taxpayers would itemize deductions. Unfortunately, the bill caps some important write-offs like mortgage interest and state & local property taxes. This last point will clearly spark debate. At the moment, homebuilder stocks are down 3-5% this morning. Home Depot (HD)  and Lowes (LOW) are down 2-5%. 

On his show Mad Money last night, Jim Cramer addressed skittishness among individual investors. In October, the SPX climbed another 2% to  make the year-to-date return on the index 15%. He says a great many investors are really worried that the stock market rally can’t possibly continue. But, he says, they need to “look past the cynicism” and understand that we’ve just entered a period of “synchronized worldwide growth.” China’s economy is stabilized, Japan has “ignited,” and Europe’s financial crisis is over. “Even Russia came back on line.” At the same time, US companies are pretty lean, and businesses are actually investing again. His advice: forget about whether we get tax reform, who runs the Fed, where rates are going in 2018. “Don’t fight” the rally.   

Pfizer (PFE) reported decent third quarter results, beating Wall Street earnings forecasts. Revenue rose only 1% from year-ago levels but earnings per share increased 10%. And management’s fourth quarter earnings guidance is in line with Wall Street forecasts. So there were no surprises. Bloomberg’s reaction to the announcement: “Boring is safe. Boring is good.” That’s because pharmaceutical and biotech stocks (i.e. Celgene, Merck) have been smashed during this earnings season for reporting bad news. 

Facebook (FB) reported an excellent quarter last night but the stock is trading down 2.7% today. Revenue grew 47% from year-ago levels and earnings per share shot up nearly 100%. Both metrics were better than analysts expected. The company’s dominance in online advertising was yet again clearly demonstrated. Unfortunately, however, Facebook has been caught up in the ongoing investigation into Russian government meddling in the 2016 US presidential election. Russian operatives apparently paid Facebook (in rubles) to post advertisements clearly meant to inflame racial & political tensions. So yesterday, CEO Zuckerberg announced a massive investment in what I’ll call adult supervision, one that will “significantly impact our profitability going forward.” The investment will boost Facebook’s ability to detect “bad content and bad actors.” 
 


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