April 6, 2017

Stocks opened higher this morning (Dow +63 pts; SPX +.28%). Most sectors are in the green, led by energy and financials. Transports and retailers are up nicely as well. The only sectors trading lower are telecom and utilities. The VIX Index is back down around 12 after a mini-spike to 13 yesterday. Commodities are mixed. Copper and gold are down modestly, but still up on the year. WTI crude oil is back up to $51.60/barrel. Bonds are modestly lower this morning. The 5-year Treasury yield has been hovering around 1.88% for the last few days. The 10-year Treasury yield is trading around 2.36%. 

I need to address the abrupt turnaround in the stock market yesterday. For the first half of the session, just about everything was trading higher (SPX +.75%). But along about 2pm EST, stocks dropped on heavy volume. Speaker of the House of Representatives Paul Ryan said this in a press conference: “We will need more time to do tax reform.” Referring to the president, house and senate, he said the “three entities aren’t on the same page” with regard to the plan and the time table. That is clearly not good news. At the same time, minutes from the Federal Reserve’s last policy meeting were published, hinting that the Fed is considering reducing the size of its balance sheet this year. That’s a step toward tightening monetary policy that no one expected in 2017, and it could mean sharply higher interest rates. Finally, the Fed made comments suggesting the stock market is highly valued. It is unusual—but not unprecedented—for the Fed to delve into that subject. So all this uncertainty culminated in a quick stock market reversal of about 1%.  

Lee Cooperman of Omega Advisors was interviewed on CNBC yesterday. “The conditions that would normally bring a significant market decline are not present.” Those conditions are: signs of oncoming recession, euphoric pricing in the market, hostile Federal Reserve, and negative geopolitical events. “The line of least resistance is still up, but it would be at a very gradual slope.” Mr. Cooperman believes se’re heading back to “normalcy” in terms of politics, bond yields, fed policy, and inflation. He says over the next couple of years, we’ll see a 4% 10-year Treasury yield and a 2% Fed-funds rate. He addressed stock market valuation as well. In his opinion, a “full but not unreasonable” [P/E] multiple is 17 times; earnings (optimistically) could be $140/sh, implying modest upside in the market from here. Euphoria isn’t present yet, but he’s watching for it. Again, at this point the market is not over-valued—it is “reasonably, fully-valued.”  

Health insurance companies continue to flee from the various ObamaCare exchanges. This week, Wellmark and Aetna (AET) announced they will pull out of Iowa’s exchange. Aetna’s press release said the decision was reached as a result of “financial risk and an uncertain outlook for the marketplace.” In other words, insurance companies are losing money with the exchange system. 

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