What You Need to Know For March 24, 2016
• Stocks closed yesterday just off their lows as market digested events in Brussels, Fed rumors and the latest political news
• Nasdaq fell over 1% on weakness in the Energy sector
• Bonds and Gold took a pause; US Dollar stronger in Europe and Asia
• New Housing Sales for February: Weakness nearly everywhere.
• Gilead Sciences/Merck: Unwelcome patent suit ruling is a long way from over.
• Financial Stocks: Some surprising winners this year. Better days ahead
The Box Scores
Key Market Measures (Monday’s Close)
Dow Jones 17,503 -0.5%
S&P 500 2,037 -0.6%
NASDAQ 4,769 -1.1%
Crude $40 -0.7%
Gold $1,222 -0.2%
Winners & Weaklings
Strongest: Utilities down 0.2%
Weakest: Energy down 3.2%
Stocks Lower
After five weeks of gains, the market is consolidating. We think that is a good sign. Considering how far the market has come back from the January lows market stability makes a positive statement. Yesterday, hedge fund manager Marty Sass stated that he has been putting literally half of his huge portfolio back in the market. After moving heavily into cash at the start of 2016, Mr. Sass naturally has enormous credibility. Good luck Marty.
The FOMC meeting last week may be history but the market is still looking for signs of a rate hike. Yesterday several FOMC members openly discussed their disagreement on rate policy with Chair Yellen, and this morning St. Louis Fed President James Bullard speaks to the New York Association for Business Economics. The speech takes place at 8:15 AM. He is an inflation hawk so we should be prepared for a weak opening.
Economic News: New Homes Sales Sink
The big news yesterday was New Home Sales. The headlines were ok, but the devil is always in the details. Total sales for February came in at 512,000 versus expectations of 515,000. That is pretty close to the mark. However, all the gain took place in the West +39%. Every other region was a bummer: Northeast, -24%, Midwest, -18% and the South, -4%. Is all this winter-weather related?
Meanwhile, the Mortgage Bankers Association weekly report shows applications nationwide fell 3% and refinance applications fell 5%. Mortgage rates were slightly lower during this period. We’re keeping a close watch on the sector as we go further into the prime spring season.
Company Thoughts & Commentary*
Gilead (GILD: $90, down 4%) The headlines are worse than the news. In their ongoing litigation with pharma giant Merck over patents covering Gilead’s super blockbuster hepatitis drugs Harvoni and Sovaldi, yesterday was a setback. The jury found in favor of Merck. The stock sold off on the news. All things considered, the reaction was relatively mild on a day when high growth stocks were under pressure.
Any further selling will provide a special opportunity to own Gilead. Here is why. Forget the headlines, this litigation is likely to go on unresolved for a very long time. Sales of Harvoni and Sovaldi, two drugs that contributed $12.5 billion in revenue last year, will continue. Gilead and Merck are the only two drug companies in the game. Yesterday, one Wall Street analyst predicted a global market of $100 billion. The rewards are worth living with the litigation headlines. We would buy the stock here and even more if the stock goes lower.
Financial Stocks: Some Surprising Winners This Year; Better Days Ahead
It has been tough sledding for financial stocks this year. Paper-thin interest spreads make it difficult for traditional banks to make money on the difference between the cost of borrowing and lending rates. With that in mind, our Financial favorites this year have been diversified players that earn their keep from services like investment banking: Goldman Sachs (GS: $154, unchanged), The Blackstone Group (BX: $27, down 3%) and Bank America (BAC: $14, down 1%) the company that owns Merrill Lynch. So which of these has performed the best so far? The answer will surprise you; none of the above.
The best performing financial favorite has been Annaly Capital Management (NLY: $10.42, unch.) where the stock has gained 5% in value since back in the last month when we added it to our list. Here is a company that thrives when interest rates are nice and wide. We know that Annaly is run by some pretty smart minds and the stock performance lends a lot of credibility to that notion. But now with a better stock market environment, it is time to realize that Blackstone and Goldman Sachs should benefit as well.
*For The Full Story on these companies, please see our individual reports.
Good Investing,
Todd Shaver
Editor in Chief