February 20, 2018

The major stock market averages dipped at the open but quickly recovered. The Dow and SPX are currently down 77 pts & up .1%, respectively. The SPX has now recovered 70% of its correction losses. Telecoms, utilities and consumer staples sectors are down over 1% this morning due to interest rate sensitivity and a weak earnings announcement from Wal-Mart (WMT). Semiconductors and banks, on the other hand, are in the green. The VIX Index is hovering around 20, generally regarded as the dividing line between low and high volatility. The only reason that matters is that hedge fund trade algorithms are sometimes programmed to trade on VIX moves relative to 20. Bonds are down in price again as yields head higher. The 5-year Treasury yield is up around 2.67% and the 10-year is up around 2.91%. 

Blackrock’s (BLK) chief global equity strategist says this is a great time to buy stocks. Corporate earnings, always extremely important to stock market returns, are very strong, supercharged by tax cuts. Ten out of eleven major market sectors generated strong earnings growth in the fourth quarter of 2017. And close of 80% of companies have just raised revenue guidance. Because of rising interest rates, we’re not going to get any P/E multiple expansion, but that’s OK because growth is accelerating. He says US stocks in aggregate should produce nearly 20% earnings growth this year. 

Wal-Mart (WMT) reported disappointing fourth quarter results and the stock is down 9% this morning. Same-store-sales growth was 2.6% vs. year-ago levels, which is pretty good. But two issues caught analysts’ attention. First, e-commerce sales growth decelerated to 23% growth vs. about 50% in the prior quarter. This suggests efforts to compete more effectively with Amazon (AMZN) may be slowing. Second, management guided 2018 earnings-per-share below analysts’ consensus forecast. To be fair, management expects online sales to reaccelerate toward 40% growth this year. But for a stock that surged 22% over the last four months, this is unacceptable. The valuation was clearly extended. 

So this is merger Tuesday. Albertson’s announced a deal to acquire the part Rite Aid (RAD) not already being bought by Walgreens Boots Alliance (WBA). A big reason for the deal is that Albertson’s will now have 4,350 pharmacy locations. This is part of a nationwide transformation at the intersection of healthcare and retail. Separately, Qualcomm (QCOM) just raised its bid to acquire NXP Semiconductor (NXPI) for about $44bil. At the same time, Broadcom (AVGO) continues purse a proposed acquisition of Qualcomm for about $82/share. Qualcomm’s board of directors has refused the offer and instead is focused on snapping up NXPI.  

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