August 8, 2017

Stocks opened lower but quickly turned around (Dow +41 pts; SPX +.28%). Banks, semiconductors, retailers and energy producers are leading the charge, whereas biotechs, gold miners and REITs are lower. European markets closed higher by about a quarter of a percent. Most of Asia has traded higher over the last couple of days despite some saber rattling by North Korea. The VIX isn’t showing any signs of panic either. Commodities are mostly higher today, but WTI crude oil is down around $48.30/barrel. Typically, negative geopolitical events result in higher oil prices, but we haven’t seen it yet. Bonds are trading modestly lower this morning. The 5-year and 10-year Treasury yields are hovering around 1.84% and 2.29%, respectively. When asked about a bond market price bubble, JP Morgan CEO Jamie Dimon said, “I wouldn’t personally buy into 10-year sovereign debt anywhere around the world.” That’s because he thinks interest rates will be moving gradually higher. 

Leon Cooperman, Chairman of Omega Advisors, was interviewed on CNBC yesterday. He reiterated his view that the stock market is fairly valued at the moment, and “we’re headed to normalization” (4% nominal economic growth, 2% inflation). That means interest rates will  be floating upward. Therefore, he says, the “multiple on the S&P ought to be 17 times.” His current 2017 earnings estimate is $136/share, suggesting a year-end price target below the index’s current level. But that’s temporary. He did note rolling corrections in the market right now, which are providing some opportunities for investors. And he still believes the long-term average return on the US stock market will be about 8% per year. Finally, he doesn’t see any signs of an oncoming recession: no euphoria among investors, no signs of collapsing economic growth, the Fed is not hostile in its monetary policy. Of course, a major geopolitical event could trigger a bear market and/or recession, but no one can predict that. In the meantime, “a value investor can find a lot of things they can do.” He currently owns Google, Facebook, First Data, Hess, Nabors, Energy Transfer Partners, Aercap. 

CVS Health (CVS) reported good second quarter results, narrowly beating Wall Street forecasts. Revenue rose 4.5% y/y and earnings grew 1%. CVS has lost some key prescription contracts over the last year and earnings growth has decelerated. But while retail pharmacy sales fell by 2.2% in the quarter, revenue for the pharmacy benefit management unit rose 9.5%. That business manages drug coverage for large corporations and health insurers. So analysts are saying the quarter was better than feared. Finally, management boosted the low end of its third quarter earnings guidance. Despite this, the stock is down 1% this morning. 

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