May 10, 2017

Stocks opened mixed this morning (Dow -12 pts; SPX flat). Healthcare (especially biotechs), industrials and consumer discretionary sectors are dragging on the market. On the other hand, energy stocks are trading sharply higher as oil prices rebound. The VIX Index, which measures investor fear, is now at extreme lows, trading around 9.8. The last time the VIX traded under 10 was the end of 2006. So hedge funds and high-frequency traders are really wringing their hands. WTI crude oil is up 3.9% this morning to trade around $47.60/barrel. Other commodities (gold, iron ore, copper) are modestly higher as well, but have really taken a beating this month. In fact, copper is down 12% from its February peak, presumably on softer economic data out of China. Bonds are trading a bit higher today after a 3-week slide. The 5- and 10-year Treasury yields are hovering around 1.91% and 2.38%, respectively. And by the way, junk bonds continue to power ahead. The SPDR Barclays High Yield Bond ETF (JNK) is up 3.2% so far this year. 

Bloomberg reports auto loan fraud is rising. That is, borrowers (and car dealers) are falsifying information on loan applications. It is estimated that roughly 1% of applications include a “material misrepresentation” and lenders’ losses from these loans could double this year. About a year ago, we heard a warning from JP Morgan’s CEO Jamie Dimon about sub-prime auto lending and since then the issue has simmered on the back burner of investors’ minds. Total auto debt has risen 50% in the last 6 years to about $1.1 trillion. Banks have already begun to tighten lending standards and that could be one reason why US auto sales are a bit lower this year. 

Disney (DIS) reported mixed quarterly results and the stock is down 2.9% at the moment. Profits surprised to the upside with 10% y/y growth. However, revenue growth of 3% y/y missed Wall Street analysts’ expectations. The culprit was Disney’s cable division, where subscriber numbers fell for ESPN. Sports leagues are forcing ESPN to pay more to broadcast games, but viewership is not growing. Profits in the cable division fell 3%. The film studio and theme parks divisions performed much better, with profits rising about 20%. 

EOG Resources (EOG) is up 3% today after a very bullish analyst report from Raymond James. The company reported an excellent first quarter results yesterday, with revenue and earnings narrowly beat Wall Street expectations. In fact, the company reported its first quarterly profit since Q215 and posted its highest EBITDA profit margin since Q414. The average cost of drilling a well fell 6% from year-ago levels. But management is keeping an eye on rising labor and services costs. Finally, management noted it has thousands of potential wells that could earn 30% net profits at $40 oil. 

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