January 17, 2018

The major US stock market averages shot up this morning in response to corporate earnings announcements and economic data. The Dow and SPX are currently up 185 pts & .5%, respectively. Nine of eleven market sectors are trading higher. Interestingly, the defensive sectors—utilities, consumer staples, real estate—are bouncing back after a rough couple of weeks. But we’re also getting participation from some cyclical groups (semiconductors, biotechs, retailers). Both the dollar and commodities are modestly higher. WTI crude oil bounced back to $64/barrel. Bonds are selling off again as yields head higher. The 5-year and 10-year Treasury yields ticked up top 2.38% and 2.56%, respectively. The 10-year runs into resistance at 2.63%. 

US industrial production surged .9% in December from prior month levels. Economists were anticipating about half that much. So now production—including output from factories, mines and utilities—has accelerated for four straight months. In addition, capacity utilization in the nation’s factories climbed all the way to 77.9%, a level we haven’t seen since the beginning of 2015. As a rule of thumb, factory capacity utilization hovers around 80% only when the economy is faring well. According to Bloomberg, the “economy ended 2017 on a high note. Output growth appeared to be accelerating as both households and businesses felt more confident…”

Bank of America (BAC) missed Wall Street revenue forecasts but beat earnings-per-share expectations. Profitability improved during the quarter, and net interest income rose 11%. The bank saw loans and deposits grow, but Wall Street may take issue with the slow rate of loan growth. The CEO talked about the impact of tax reform, saying he expects BAC’s effective tax rate to fall to 20% from 29% currently. The stock is down about 1% at the moment. 

And by the way, Bank of America just issued a warning to its customers on Bitcoin. The bank, which owns Merrill Lynch, has just banned its financial advisors from buying cryptocurrency investments for their customers. CEO Brian Moynihan said he is limiting BAC’s exposure to crypto and “customers should be careful here.” He also noted that cryptocurrencies are useful for criminals because fund flows are hard to track. Separately, the CEO of Wells Fargo said today that Bitcoin “is a pyramid scheme. It makes no sense.” And he issued his own warning, which we haven’t heard from anyone else: if cryptocurrencies crash, “it will spill over into equities.” Bitcoin has recently fallen 50% from its highs. 

In a move that can be described as boring but potentially important, new accounting rules from the Financial Accounting Standards Board (FASB) are set to change the way US companies report their partial ownership stakes in other companies. Bloomberg ran an article today about the rule change. These holdings are called “equity investments” and are common for large publicly-traded companies. Berkshire Hathaway (BRK/B), for example, holds a large number of shares in Coca-Cola (KO) and American Express (AXP). Anyway, going forward Berkshire will have to account for the change in value of those stock holdings on its financial statements. And that means more fluctuation for the company’s earnings per share. Berkshire’s CEO Warren Buffett refers to the accounting change as a “nightmare” because it will distort the profitability of his company. But I want to emphasize that for professional analysts and investors, the rule change doesn’t really matter. That’s because investors know that stock investments are only a sideline for Berkshire, and don’t matter all that much. Much more important are the operating businesses fully owned by the company—like insurance and railways. And more generally, for any publicly-traded company, analysts are always stripping out unimportant or one-time items from financial statements in order to understand the health of the main underlying business. 

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