July 18, 2018

Stocks opened a bit higher this morning (Dow +63 pts; SPX +.13%). Defensive sectors—utilities, real estate, consumer staples—are down today. The financial sector, on the other hand, is up 1.5% after a strong earnings report from Morgan Stanley (see below). The industrials sectors is up over 1% on strength in the transports. Semiconductor equipment manufacturers are jumping today after a positive earnings announcement from ASML Holdings (ASML). Remember, this group has been smashed on trade tariff fears. European stock markets are poised to close up about .7%, but outside of Japan most of Asia was down overnight. Commodities are mostly lower today; WTI crude oil is trading down around $67.95/barrel. Bonds are mostly unchanged, continuing the month-long trend of extremely low volatility in the bond market.  

Morgan Stanley (MS) reported impressive second quarter results, with 12% y/y revenue growth and 44% earnings-per-share growth. Digging into the company’s business segments, wealth management revenue rose 4% from year-ago levels, investment banking revenue jumped 23%; equity trading revenue rose 15% and fixed income trading revenue climbed 12%. The stock is up 2.8% this morning. 

US housing starts—that is, ground-breaking on new construction projects—fell 12% in June from prior month levels, to an annualized rate of 1.17 million units. This comes as a surprise to economists, who were anticipating a much smaller decline for the month. So in a market where the supply of new housing is really struggling to keep up with demand, the pace of construction is the slowest in over a year. Starts for new single-family homes fell 9% and this is where much of the supply shortage lies. On the other hand, starts for multi-family units plunged nearly 20% and that’s probably good news since this segment is more of less adequately supplied. Homebuilders are beginning to complain of higher raw material (i.e. lumber) costs as well as a shortage of construction workers. 

Berkshire Hathaway’s (BRK/A) board of directors has removed its cap on stock buy-backs, giving Warren Buffett freedom to repurchases shares rather than hunt for new business acquisitions. The company has a massive $100bil cash hoard because in recent years it has grown profits faster than it has been able to invest in new businesses. So this change in policy is a big deal for investors because buy-backs increase earnings-per-share and also help prop up the stock price. 

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