May 17, 2018

Stocks opened lower today but quickly turned around. The Dow is currently flat and the SPX is up .12%. Energy (+1.2%) is the big winner as oil prices rose to 3 ½ year highs. Industrials, consumer staples and materials are also rebounding after a tough March/April. Europe closed up about .8% and Asia was mixed overnight. Emerging markets stocks are down about 1% today and have underperformed over the last month. The VIX Index is down again, trading under 13. The dollar is up again (+1.5% on the year) and despite that oil prices have rallied over the last several months. WTI crude oil touched $71.90/barrel for the first time since November 2014. Recently, oil has responded to President Trump’s threats to reestablish trade sanctions with Iran. Oil demand is rising. Morgan Stanley analysts are predicting $90/barrel crude oil by 2020. Bonds are trading slightly lower today. The 5-year and 10-year Treasury yields are hovering around 2.93% and 3.11%, respectively. The next resistance level for the 10-year is 3.18%. 

Mortgage rates have risen to a 7-year high. The average 30-year fixed rate is now 4.61% according to Freddie Mac. The organization’s chief economist says prospective home buyers are rushing to buy because they believe rates will continue to head higher. “The is what happens when the economy is strong. All the higher-rate environment does is it either causes them to try and rush or look at different properties that are more affordable.” 

Sam Stovall, investment strategist at CFRA, says corporate earnings were much better than expected in the first quarter, rising 22% from year-ago levels. This is the 25th consecutive quarter that aggregate S&P 500 earnings have exceeded Wall Street forecasts. The worry, of course, is that earnings are at a peak for the cycle. He points out, however, that even if this is true, earnings aren’t going negative—they’re just decelerating into 2019. At the moment, he expects 10% earnings growth next year. He urges investors to stay the course; there is no evidence that stocks are poised to “morph into a near bear market.” 

Cisco Systems (CSCO) reported first quarter results that narrowly beat Wall Street forecasts. Revenue rose 4.4% y/y and earnings-per-share grew 10%. The company managed to show year-over-year growth in new product orders in every geographic region and in most product segments. The exception was sales to “service providers” such as telecom and cable TV carriers. Analysts didn’t like seeing weakness there, although to be fair, that is a legacy business. Cisco is in the middle of a huge business model shift away from hardware sales (i.e. routers and switches) toward recurring service & software sales. Recurring revenue was 32% of total revenue in the quarter. And deferred revenue from these subscriptions rose 29% from year-ago levels. The stock initial fell 4% but is now down 2.5% today. 

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