June 30, 2017

Stocks opened modestly higher following yesterday’s rout. The Dow and SPX are currently up 58 pts & .18%, respectively. Most sectors are trying to bounce back, except for financials, healthcare and telecom. The deep cyclical-type groups are weaker today—biotechs, semiconductors, banks. The VIX Index is sitting at 11.5 and VIX are trading at 12.3. The dollar is modestly stronger today against a basket of foreign currencies, but oil prices are rising as well. WTI crude is trading up around $45.40/barrel. Bonds are ever-so-slightly lower in price, higher in yield. The 5-year Treasury yield ticked up to 1.86% and the 10-year yield is up to 2.28%. 

Yesterday’s declines were centered in the tech sector. The PowerSharers QQQ Trust (QQQ) fell 1.7% and experienced twice the normal trading volume. And the Nasdaq Composite Index ended the day about 3% below its recent highs.  The VIX Index touched 15 briefly yesterday, the highest intra-day level since May 18. Despite the drop in tech, the more defensive sectors didn’t rally either. Utilities fell .8% and the consumer staples sector fell 1.17%. So it doesn’t look like investors were shifting from growth to value or running for safety. 

Nike (NKE) reported quarterly results that beat Wall Street forecasts. Revenue rose 5% y/y and earnings per share surged 23%. Retail apparel has been a tough industry lately, and the company has announced plans to cut 2% of its global workforce. It has also conceded to selling some of its products on amazon.com. All in all, results were far better than in the prior quarter. The stock is up 8.5% this morning. 

Morgan Stanley boosted its dividend by 25% after passing the Federal Reserve’s stress test. The board also increased its stock buyback program from $3.5bil to $5bil. In other words, the company plans to buy back that much in stock over the four quarters beginning the third calendar quarter of this year. Morgan Stanley’s CEO said that as long as the yield curve doesn’t flatten further, US banks are an excellent investment opportunity. 

The Federal Trade Commission (FTC) is objecting to Walgreens Boots Alliance’s (WBA) planned acquisition of Rite-Aid (RAD). So yesterday, the two companies called off the merger. But in an amazingly cunning move, they agreed to a new deal in which WAB would
Buy about half of RAD’s 4,500 stores for about $5.2bil in cash. RAD plans to use the cash to pay down debt and will focus on its best regions (west coast, rust belt). WBA, on the other hand, will now have the scale to take on CVS. That is, if the new deal passes the FTC. 

Personal incomes rose 3.5% y/y in May and real personal spending climbed 2.7%. Both figures matched prior month levels. The consumer savings rate jumped to 5.5%. Those rates of growth are middling. The price inflation rate on consumer purchases is the real news because it fell in May to a year-over-year rate of just 1.4%. That’s pretty low and I just don’t see how the Federal Reserve can continue raising short-term interest rates until inflation picks up. 

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