Tuesday, July 18, 2017

Mixed markets after uneven earnings and defeat for new healthcare bill

Dow was down 54 (after recovering 100 off the lows), decliners over advancers about 5-4 & NAZ gained 29.  The MLP index was up pennies to the 303s & the REIT index fell a fraction in the 351s.  Junk bond funds were mixed & Treasuries climbed higher.  Oil rose in the 46s & gold gained 8 to 1242.

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Sentiment among American homebuilders deteriorated to an 8-month low in Jul on concerns about higher material costs, according to the National Association of Home Builders/Wells Fargo.  Builders' Housing Market Index decreased to 64 (est. 67) from 66 in Jun (revised from 67).  The measure of 6-month sales outlook dropped to a 5-month low of 73 from 75.  Index of current sales fell to 70, the weakest since Nov, from 72.  Builders are faced with a tough choice when dealing with higher materials costs such as lumber, either raise prices on homes or absorb the added expense.  While they see demand remaining strong, an acceleration in prices on new homes risks putting some properties out of reach.  Stable sales & construction mean housing will probably do little to add to economic growth.  “Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber,” NAHB Chairman Granger MacDonald said.  “This is hurting housing affordability even as consumer interest in the new-home market remains strong.”  “Builders will need to manage some increasing supply-side costs to keep home prices competitive,” Robert Dietz, chief economist at NAHB, said.  The gauge of prospective-buyer traffic fell to 48, lowest since Feb, from 49

While a lot of attention in the nation’s capital has been focused on repealing & replacing the ObamaCare, Reps have a full docket of items to tackle within the coming months including raising the debt ceiling, passing a spending bill & overhauling the tax code.  The Senate delayed its Aug recess in order to make progress on these legislative goals.  While Americans eagerly await the Trump administration's long-anticipated tax cuts, there are a couple of things that have to happen in Congress before households see any benefit.  Before any tax bill can even be introduced into Congress, lawmakers must agree on a fiscal year 2018 budget.  This has to do with the nature of the reconciliation process, which will allow Reps to approve the legislation with a simple majority.  Currently, lawmakers are operating under spending mandate for 2017, which includes instructions to pass health care thru the fast-track process.  Once the current fiscal bill expires, Reps lose that reconciliation directive & will resubmit for a new directive to pass tax reform through reconciliation.  This will mean that once the new budget is approved, they can no longer pass health care measures with a 51-vote majority.  But only after the budget is adopted can Congress begin working on tax reform, which will then need to be approved by both chambers of Congress as well.  The White House has said it expects to have a tax bill signed before the end of the year.  Yesterday, the House Budget Committee released a draft proposal.  The bill is expected to be put up for a vote to advance within the chamber tomorrow.  It will first have to be approved by the specific committee, then the full House & then it will be sent to the Senate for another round of voting. Like the ill-fated Senate health care debate, some experts believe fractures within the GOP could make passing a spending bill a difficult task for the Rep Party.  Intraparty fissures among moderates & conservatives could trip this bill up in a similar fashion.  Additionally there are some fiscal challenges.  Reconciliation requires a bill to reduce the deficit over the long-term.  Reps designed their health care proposals to slash hundreds of billions of $s from the federal deficit over the next decade.  Tax reform, however, is expected to be revenue neutral.  The reason the GOP tackled health care reform first is because they were expecting those massive tax cuts to allow them to have extra money to play around with for the tax overhaul.  This is called many big messes.

Trump's tax reform: What needs to happen next

With recent acquisitions and new product approvals expected to boost sales, health care products giant Johnson & Johnson, a Dow stock & Dividend Aristocrat, raised its financial forecasts for the year, despite a dip in Q2 profit. The higher forecast pleased traders.  Its biggest acquisition ever, the $30B purchase of Swiss biopharmaceutical company Actelion, was completed on Jun 16, bringing J&J multiple new prescription medicines to sell.  Last week, the FDA approved Tremfya, an injected drug for the painful skin condition psoriasis that expands the company's key franchise of treatments for immune system disorders.  The first full qtr of sales from its acquisition of Abbott Medical Optics pushed up sales 5.1% for the medical devices business, which began restructuring begun a year ago to improve its results.  Meanwhile, other minor acquisitions & approval of the company's surging multiple myeloma drug to treat additional patients should also add to future revenue.  Still, higher spending on marketing, production and research pushed down Q2 profit 4.3%.  JNJ said it now expects full-year earnings of $7.12-7.22, up from the Apr forecast for $7-7.15.  It forecast revenue of $75.8-76.1B, up from $75.4-76.1B.  The stock jumped up 2.31.  If you would like to learn more about JNJ, click on this link:

Johnson & Johnson tops 2Q profit forecasts

Goldman Sachs (another Dow stock) earnings in Q2 were flat with the same period a year ago, largely due to poor performance in trading.  But the results still beat forecasts.  Because GS had fewer shares outstanding versus a year earlier, its EPS increased to $3.95 from $3.72.  That beat estimates of $3.38.  Its trading desks had a tough qtr, which reverberated throughout the firm's results.  The division had revenue of $3.05B, down 17%.  The pain was particularly acute in fixed-income, currency & commodities division, which reported a 40% drop in revenue compared with a year earlier.  The bank attributed the decline to a "challenging environment characterized by low levels of volatility, low client activity and generally difficult market-making conditions."  Investment banking revenue fell 3% from a year earlier, largely due to a drop in advisory fees.  The difficulties were reflected in its return-on-equity ratio, a measurement of profitability, which fell to 8.7%.  Typically a bank like GS tries to keep its return on equity above 10%.  Overall, firm-wide revenue fell to $7.89B compared to $7.93B a year earlier.  The stock sank 5.95.  If you would like to learn more about GS, click on this link:

Goldman Sachs profits flat in 2Q, but still beat forecasts

Consumer banking giant Bank of America reported a 10% rise in Q2 profits as gains from higher interest rates were more than enough to offset a drop in trading revenue.  EPS was 49¢, compared with 43¢ in the same period a year earlier.  The results beat forecasts of 43¢.  Like its competitors, BAC benefited from rising interest rates. The Federal Reserve has raised interest rates 3 times since Dec, which has allowed banks to charge higher interest rates to borrowers when they take out loans.  Because of its large consumer banking division, its fortunes, as the nation's 2nd-largest bank by assets, are often more directly tied into interest rates than its rivals, who have much larger trading divisions & are less exposed to short-term interest rates.  Net interest income increased 9% compared to a year ago to $10.99B. The rate it paid on deposits was unchanged from a year earlier at 0.04%, which allowed its profit margins to grow.  Its efficiency ratio in its consumer banking division, which measures how much money was spent on overhead, dropped from 57% to 52%.  A lower efficiency ratio is a positive thing for a bank.  "Against modest economic growth ... we had one of the strongest quarters in our history," said CEO Brian Moynihan.  The stock lost 12¢.  If you would like to learn more about BAC, click on this link:

Rising interest rates boost Bank of America's profits

Early earnings are coming in less than inspiring.  If this is any kind of indication, they will not provide a big lift to the stock market.  Meanwhile, DC has gone into a dreary mode.  The defeat of a new healthcare bill spells a tough time for all meaningful legislation in the works & that is more important for the future of the stock market.  However the stock market is taking this in stride.  The Dow bounced back from its AM lows & NAZ is back in record territory.  However gold & Treasuries are finding buyers buyers with the all the chaos in DC.  This could still be a tough summer for stocks.

Dow Jones Inudstrials


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