December 4, 2017

The major stock market averages opened higher this morning (Dow +225 pts; SPX +.57%). Over the weekend the US Senate narrowly passed its tax reform bill, clearing the way for a conference committee to iron out differences with the House’s own bill. Value is performing better than growth today. Banks and telecoms are up over 2% in early trading. Retailers and transports are up between 1.5% and 2.5%. None of these groups has led the SPX this year, so we’re seeing a bit of catch-up. The tech sector, up over 30% this year, is taking a breather. European markets are poised to close up over 1% and Asia was mixed overnight. The dollar is stronger against a basket of foreign currencies and commodities are mostly lower. WTI crude oil is down 1% to trade at $57.70/barrel. Shorter-term bonds are selling off this morning. The 5-year Treasury yield rose to 2.15%, the highest since the spring of 2011. The 2-year Treasury yield is up around a nine year high. Longer term bonds, on the other hand, are pretty flat. The 10-year Treasury yield is hovering around 2.39%. So the yield curve is flattening again and that’s a caution flag. 

US factory orders declined by a very modest .1% in October from prior month levels mostly because the government upwardly revised September orders to show a huge gain. It is true that commercial aircraft orders, which are very lumpy, sagged during the month. But this is all noise. What matters is that we are seeing a very strong trend in corporate capital spending. New orders for capital goods, excluding aircraft and defense equipment, surged 10.8% from year-ago levels. We haven’t seen that kind of growth in business investment since early 2012. This up-trend started about a year ago and is one big reason why US economic growth has accelerated recently. 

As rumored, CVS Health (CVS) will indeed acquire health insurer Aetna (AET). The takeout price will be about $207/share for AET. CVS will borrow $45bil in order to complete the $67.5bil acquisition. Not surprisingly, the credit ratings agencies put CVS on negative credit watch but the company will likely retain its investment grade rating. This move is clearly meant to defend against Amazon’s (AMZN) planned entrance into healthcare. But it is also intended to boost CVS’s profit margins, which have been falling. Integrating health insurance, retail pharmacies, small healthcare clinics and pharmacy benefit management has not been done before. Interestingly, both stocks are down today, indicating skepticism on the part of investors. AET is trading at $108/share, far lower than the takeout price. 

Disney (DIS) stock exploded 6+% higher this morning after a report over the weekend that it has re-engaged in talks to buy some assets from 21st Century Fox. Disney wants Fox’s film & TV studio as well as some international business units. 

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