Financial Review

The Rally Resumes

…No geopolitical collapse, stocks rally. Retail sales up. Inventories higher. 2-yr. note yield highest in almost a decade. Earnings look good, but priced in already. Netflix adds users. BofA has record profits. Suspicious groups on Facebook. Merck scores with immunotherapy.

Financial Review by Sinclair Noe for 04-16-2018

DOW + 212 = 24,573
SPX + 21 = 2677
NAS + 49 = 7156
RUT + 13 = 1563
10 Y  un = 2.83%
OIL – 1.05 = 66.34
GOLD + .10 = 1346.50


The price of oil fell as traders started to see a decreased likelihood of further escalation between Western powers and Syria, following Friday night’s air strikes. A coalition of the USA, UK, and France led targeted strikes on bases in Syria on Friday evening. British foreign secretary Boris Johnson told the media that the UK has no current plans for more strikes, while Trump tweeted over the weekend “Mission Accomplished!” So, it was a quick, minor action that did not disrupt oil supplies in the region, and prices dropped.


Any Russian retaliation appears to be limited to cyber space. The United States and Britain are warning of a global cyber attack targeting routers and other networking equipment, blaming Russian government-backed hackers for the campaign on government agencies, businesses and critical infrastructure operators.


Nikki Haley, the U.S. ambassador to the United Nations, appeared on CBS’s “Face the Nation” yesterday, and she announced that “you will see that Russian sanctions will be coming down. Secretary Steven Mnuchin will be announcing those on Monday, if he hasn’t already.” Haley said the fresh round of penalties would “go directly to any sorts of companies that were dealing with equipment” related to Syrian President Bashar al-Assad and his chemical weapons. Today, White House Press Secretary Sarah Huckabee Sanders said: “We are considering additional sanctions on Russia and a decision will be made in the near future.”


Retail sales rebounded in March after three straight monthly declines. More households were buying more cars and trucks. The Commerce Department said on Monday retail sales increased 0.6 percent last month after an unrevised 0.1 percent dip in February. January data was revised to show sales falling 0.2 percent instead of the previously reported 0.1 percent drop. Retail sales in March increased 4.5 percent from a year ago. Consumer spending grew at a 4.0 percent annualized rate in the fourth quarter. It is expected to have slowed to below a 1.5 percent rate of increase in the first quarter. The government will publish its advance estimate for first-quarter GDP growth later this month.


In a second report on Monday, the Commerce Department said that business inventories rose 0.6 percent in February after a similar increase in January. Inventory investment is expected to contribute to growth in the first quarter after subtracting 0.5 percentage point from GDP growth in the fourth quarter.


Separately, the Empire State manufacturing index gave up most of the gains in April that it saw in the prior month. The index slipped to a reading of 15.8 in April from 22.5 in March.


The National Association of Home Builders’ monthly confidence gauge ticked down one point to a reading of 69 in April. In April, the sub-gauge of current sales conditions fell two points to 75, and the index of future sales expectations edged down one point to 77. The tracker of buyer traffic was unchanged at 51. Any reading over 50 signals improving conditions.


Richard Clarida, a Columbia University economist who also is a managing director at Pimco, has been nominated to be the vice chairman of the Federal Reserve.


Treasury two-year note yields moved up again on today, reaching 2.39 percent, their highest level in almost a decade. Two-year yields are up more 1 percent point since September alone, with Federal Reserve officials sounding like they’re not ready to back off from their plan to continue raising interest rates.


According to FactSet, earnings for companies in the S&P 500 are expected to grow 17.3% in the first quarter, while sales grow 10%. For both, such rates would represent the fastest pace of growth since the first quarter of 2011. You have to think that the good news on earnings is already priced into stock prices. What we still need to learn is the guidance for future quarters. Among S&P 500 companies that have reported this season, their stocks fell an average 0.7 percent on the first day after earnings, data compiled by Bloomberg show. Tech stocks fared the worst, with shares falling 3.6 percent despite better-than-expected results.


After the closing bell, Netflix posted first quarter earnings, but for Netflix, the key metric is new subscribers and they added far more users than expected in the first quarter, and posted quarterly earnings that were in line with expectations, and revenue that was slightly above estimates. Netflix reported earnings per share of 64 cents adjusted – matching estimates. Revenue came in at $3.7 billion – matching estimates. They added 7.4 million subscribers – beating estimates for 6.5 million new users. The company’s earnings guidance also came in well above Wall Street’s forecast. Shares rose more than 6 percent after hours.


Netflix is now one of the biggest buyers of content, as it is expecting to lay out about $12 billion from cash flow for original TV shows and movies this year. Netflix can afford it. It added about 19 million streaming subscribers in 2016 and 23.8 million 2017. If it keeps growing by 20 million subscribers a year on average, Netflix will add about $2.5 billion in new revenue a year to its top-line. Moody’s expects Netflix’s subscriber base, which now has 117 million members, to rise to 200 million by the end of 2021, with revenue growing 20% over that time period from the $11.7 billion recorded in 2017.


Bank of America’s profits rose to a record $6.9 billion last quarter, or 62 cents per share, up from $5.34 billion, or 45 cents a share, from the same period a year ago. That beat estimates of 59 cents per share. Total revenue for Bank of America in the quarter was $23.1 billion, up from $22.2 billion in the same period a year earlier. Like its competitors JPMorgan Chase and Citigroup, Bank of America reported a sharp drop in its tax bill, which helped boost profits. While the bank’s pretax income rose by roughly $1 billion, the amount it paid in taxes fell by roughly $500 million in the quarter. BofA estimates that the tax law cut its effective tax rate by 9 percentage points. Higher interest rates benefited the bank as well. The Federal Reserve has steadily raised interest rates, allowing banks to charge customers more to borrow. In Bank of America’s consumer banking division, its largest business by revenue and profit, net interest income rose 13 percent from a year earlier. The bank also grew loans and deposits in the quarter.


M&T Bank reported net operating earnings of $2.26 per share in first-quarter 2018. The bottom line improved 5.1% year over year. M&T also posted higher top-line growth. Improved credit quality was a positive factor and pressure on margin eased. However, a decrease in loan and deposit balances was a headwind. Also, results were affected by higher expenses. M&T Bank’s revenues came in at $1.4 billion compared with the year-ago figure of $1.3 billion.


Charles Schwab posted a beat on earnings per share and net income for its first quarter. The bank reported trading activity rose nearly 40% year-over-year to a new all-time high. It also said it opened 443,000 new accounts, its highest quarterly number in 18 years.


Advertising giant WPP may have to be broken up now that CEO Martin Sorrell is leaving the company. Sorrell is under investigation for alleged misconduct and misuse of corporate assets. He left days before results of that probe are expected to be made public.


Most of the political ads about divisive issues that ran on Facebook before the 2016 U.S. presidential election were sponsored by “suspicious groups” with no publicly available information about them, according to a study released today and based on a database of five million ads on Facebook. according to a University of Wisconsin-Madison study, one in six of those groups was linked to Russia, and the identities of the rest of the 122 groups that are labeled “suspicious” are still unknown, an indication of the influence of “astroturf” or shell companies in U.S. politics. The researchers labeled suspicious ad-buyers as groups with pages that have been inactive, inaccessible, removed or banned by Facebook since the election and there was no information available publicly about them. The research team also found that voters were disproportionately targeted in swing states like Wisconsin and Pennsylvania with ads that focused on issues like guns, immigration and race relations.


CNBC reports that Amazon shelved plans to sell drugs to hospitals and other businesses. Amazon might ultimately enter the broader retail prescription-drug market, but the idea that the online giant might not take on one segment of the supply chain was enough to send shares of pharmacies and drug distributors surging. CVS rose as much as 8.7 percent, the biggest intraday gain since December 2011. Drugstore chain Walgreens Boots Alliance was up as much as 6.8 percent. Neither company’s main business is selling directly to hospitals or doctors. Distributor Cardinal Health was up as much as 6.4 percent, and McKesson gained up to 5.5 percent.


Immunotherapy, a new kind of cancer treatment that harnesses the body’s immune system, is going mainstream. In data presented today at the American Association of Cancer Research’s annual meeting and published in the New England Journal of Medicine, Merck found that a combination of the immunotherapy drug Keytruda and chemotherapy was able to extend the lives of people with a common form of lung cancer when compared with traditional chemotherapy, cutting the risk of death in half. Meanwhile, Bristol-Myers Squibb found that its immunotherapy drug in combination with another managed to keep lung cancers that had a certain number of mutations from getting worse for a longer period than those treated with chemotherapy.

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