July 10, 2018

Stocks gapped up at the open this morning (Dow +150 pts; SPX +.33%). Ten of eleven major market sectors are in the green, led by utilities, energy and consumer staples. The VIX Index is trading at very low levels, around 12.7. European markets will close up about .5% today and most of Asia was up overnight. So overall this is a fairly positive session. WTI crude oil is down modestly to trade around $73.70/barrel. Recall that oil hasn’t been this high since the end of 2014. Most other commodities are lower on the day, including gold, copper, and iron ore. Bonds are trading roughly flat. The 5-year and 10-year Treasury yields are currently at 2.76% and 2.86%, respectively. 

Famed stock analyst Dick Bove says investors should be buying bank stocks despite their recent weakness. He says loan volume is rising, and even though margins are flat, loan losses are low and expenses are under control. In addition, tax cuts will help boost year-over-year earnings growth. “The big banks are underperforming relative to their earnings. And I think that the [P/E] multiples continue to be relatively low in a market where multiples elsewhere are fairly high.”  

PepsiCo (PEP) reported better than expected second quarter earnings per share and the stock is up 3.5%. Unfortunately, the traditional beverage business continues to struggle with profits down 16% y/y. US consumer demand for soft drinks remains under pressure, and costs are rising for transportation and aluminum. But the Frito-Lay snack business came to the rescue with profits up 5% y/y. Snacks account for about 25% of total company revenue, but they have an outsized impact on the company’s results due to much higher profit margins. This—plus really low expectations coming into the announcement—was the biggest reason why the stock is up today. 

The Nat’l Federal of Independent Business (NFIB) says its sentiment survey of small business owners remained strong last month. The survey is hovering around 14-year highs. In other words, smaller businesses are doing very well despite rising trade tensions and interest rates. Bloomberg notes that despite continued monetary tightening from the Federal Reserve, “loan availability for small businesses continue to improve—in fact it is at a cyclical high.” This is an important piece of information because traders and investors watch NFIB results closely. 

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