August 9, 2017

Stocks opened lower today (Dow -67 pts; SPX -.27%). President Trump and North Korea’s less-than-stable dictator are practicing some nuclear brinksmanship. Real estate & healthcare are the only sectors not in the red. The consumer discretionary sector is down .9% mostly due to Disney (see below). The VIX Index is up a bit to trade around 11.7 and VIX September futures are trading up around 13. Those are still pretty tame levels though. WTI crude oil is up slightly to $49/barrel. Gold is up .8% today (and 10% so far this year). Bonds are higher in price, lower in yield. The 5- and 10-year Treasury yields are current at 1.78% and 2.22%, respectively. Geopolitical events tend to result in lower bonds yields. 

Famed bond fund manager Jeffrey Gundlach says he monitors all kinds of economic data weekly and “can’t find a single one” that suggests a recession is coming. “You can’t find [recession] in the data.” In addition, he discussed the yield curve, which has been flattening this year. He says that’s true, but keep in mind the spread between the 2-year and 10-year Treasury yields is now very close to its 40-50 year average. So this is not really the caution flag some say it is. Mr. Gundlach remains bullish on the stock market but expects a short-lived correction soon, especially if interest rates begin to rise significantly late this year. 

CNBC is already warning of a new “debt ceiling crisis” in Washington. We have heard rumors that congress may not be able to pass a “clean” bill to increase the maximum size of federal government debt. And of course, we all remember the last political fights over the debt ceiling, back in 2011 & 2013. The term “clean” simply refers to a bill without additional conditions or provisions. Rep. Tom Cole (R) has said that is unlikely. So we may have to do this the hard way: gnashing of teeth and stalemate until the federal government is on the brink of running out of cash to run daily operations. Some Wall Street firms are warning clients that stock market volatility could rise over the next 30 days. 

Disney (DIS) reported second quarter results yesterday. Revenue (+3% y/y) missed Wall Street forecasts but earnings per share (up 10% y/y) came in better than expected. Theme park revenue rose 12%, and CEO Bob Iger said the health of the American consumer is “fairly strong.” But results in the cable TV and movie studio units were not great. Finally, the company announced it will create its own video streaming service by early 2018. Accordingly, it will no longer offer new content through Netflix beginning in 2019. So this new “direct to consumer” approach threatens to cut out the middlemen (i.e. Comcast, DirecTV, Netflix). And it means ESPN and live sporting events will soon be available through a single online subscription service, which Mr. Iger called the “Netflix of sports.” This is apparently why Disney just bought a controlling interest in BamTech, a streaming service created by Major League Baseball. The CEO had this to say: “If you look at Disney’s businesses, except for the theme parks, virtually all of the businesses touch consumers through third parties, everything from big box retailers to the owners of motion-picture theaters. This is an opportunity to reach the consumer directly.” This comes as a shock to investors and it could potentially shake up the entire media industry. The stock is down nearly 5% this morning. 

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