December 5, 2017

Stocks opened mixed this morning (Dow flat; SPX +.28%). The tech sector is bouncing back (+1%), and banks are rising on tax reform expectations. On the other hand, utilities and telecoms are in the red. The VIX Index is back down around 10.8 and VIX December futures are trading down to 11.45. So yesterday’s mini volatility spike is fading. The dollar is a bit stronger today (but still down 8% this year) and commodities are lower. WTI crude oil is flat around $57.50/barrel. Copper is down 4% after Bloomberg News reported China is poised to slow investment in infrastructure next year. Chinese leaders managed to boost economic growth in 2017 with a 20% increase in spending on roads, bridges, subways, etc. Economists are expecting that growth rate to fall in half near year. Bonds are following the trend of recent days. Shorter term bonds are selling off but longer term bonds are holding steady. The 5-year Treasury note yield is up around 1.26%, a fresh multi-year high. The 10-year Treasury yield, on the other hand, is unchanged at 2.37%. The difference between the 2-year and 10-year yields is the smallest since late 2007. 

Toll Brothers (TOL) reported quarterly results that disappointed investors. Both revenue and earnings per share were just  short of expectations due to lower realized home prices. Revenue rose 9% from year-ago levels and earnings per share shot up 75%. Orders for new homes rose 14.5% from year-ago levels, but that’s the slowest pace of orders growth in six quarters. Toll is a luxury homebuilder but this year introduced a line of new homes to cater to millennials who are looking for smaller, cheaper new homes. That move is translating into lower profit margins. The stock is down nearly 7% this morning. 

Disney (DIS) plans to buy all the entertainment assets of 21st Century Fox. CNBC reports deal negotiations are nearly complete and consideration (all Disney stock) will be about $60bil. Fox will keep news and regional sports networks. DIS is down 3% this morning and FOXA is up a bit. 

ISM’s Non-Manufacturing Index fell to 57.4 in November from 60.1 in the prior month. Economists were expecting a smaller dip. But this is just noise. The real story is that while hurricane-related issues have played havoc with economic data recently, underlying business activity in the service sector is still very strong. Bloomberg points out two important facts. First, the “new orders” component of the index improved to 64.0, suggesting the index will remain strong over the next couple of months. Second, while the headline index value is at its “lowest reading in four months…it is sill consistent with levels historically associated with real GDP growth of 3.5% or better.” 

The CEO of Bank of America (BAC) was interviewed by CNBC this morning on a wide range of banking and economic topics. Brian Moynihan believes tax reform will help the banking sector as more small and mid-size companies will see higher profit margins and that should boost demand for commercial loans. Separately, he said consumer spending during this holiday season has been strong. In fact, so far this year credit and debit card spending is up 6.5%. That’s up from about 5% growth in the prior year. Finally, he said his bank is overcapitalized and just boosted its stock buy-back program by $5bil. He said Bank of America has $25bil in “extra capital” sitting around doing nothing and implied that it will be returned to shareholders. 

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