All eyes are on the bond market this morning as the 10-year Treasury yield creeps above 2.6% toward its post-election high of about 2.62%. There’s a school of thought that if that level breaks, yields have a lot higher to go. So far, though, that line has managed to hold. Stocks are lower, though not by much—the S&P 500 has declined 0.2% to 2797.99 at 12:14 p.m. today, while the Dow Jones Industrial Average has dropped 91.83 points, or 0.4%, to 26,023.82, and the Nasdaq Composite is little changed at 7298.57. While that’s likely a hangover from yesterday’s big gain, it also feels as if everyone’s waiting to see if the 10-year finally manages to break out—and what will happen when it does. Still, the Russell 3000 is now worth more than $30 trillion…not too shabby.
With earnings season underway, we have plenty of company news to keep us busy. Morgan Stanley (MS) reported better-than- expected earnings that had the stock trading lower earlier this morning but its shares have rebounded and are up 0.5% at $55.60. Taiwan Semiconductor Manufacturing (TSM) has gained 3.5%%, to $$44.64, after its own earnings beat. Amazon.com (AMZN), meanwhile, has narrowed the choice of cities for its second headquarters down to 20, while Netflix (NFLX) has risen 1% to $219.68 after a positive note touting its Altered Carbon series .
Now if only the 10-year would get it over with.
What to Expect When You’re Expecting Earnings, American Express Edition
American Express (AXP) reports earnings after the close today, and investors will be paying close attention to its capital returns.
American Express had a pretty great 2017, but some analysts are growing concerned that the new tax law may hurt its share-repurchase program. JPMorgan Chase (JPM) and Citigroup (C) have reported messier fourth-quarter earnings due to one-time tax-related charges, and American Express will likely report an unadjusted fourth-quarter loss because of the new law. Unfortunately, that could dent its common equity Tier 1 capital ratio, or CET1, and could limit its ability to repurchase shares.
Guggenheim’s Jeff Cantwell estimates that American Express will see about a 150-basis-point hit its CET1, bringing it down to 10%. He warns that because of the requirements of the Comprehensive Capital Analysis and Review, American Express may suspend its buybacks to rebuild capital. (This won’t be a problem for bigger financials, like JPMorgan, which have much more capital on their balance sheets.)
Still, Cantwell remains optimistic: He believes that lower corporate taxes will be good for the company, and he reiterated a Buy rating on the stock, while raising his price target by $5 to $109. It remains to be seen whether the rest of the market will agree.
Gold Bugs, Rejoice?
It’s been tough out there for lovers of gold. Since the election of President Donald Trump, geopolitical tensions have risen, but even worries about nuclear war flitting in and out of the headlines haven’t been able to lift the the shiny yellow metal, which has gained about 4% since then. Recently, though, gold has been rallying—gaining 5.4% over the past month—and there’s no missing the renewed optimism about the metal.
Gabelli & Co.’s Chris Mancini writes that beginning in December, the price of gold and the 10- year Treasury yield, which had been moving in opposite directions, have been positively correlated, as both have risen simultaneously. That’s a sign that some eventual inflation may be on the way, due to the $1.5 trillion of newly borrowed money in the form of tax cuts and the potential for more borrowing from Washington, given that the debt ceiling will have to be raised to avoid a government shutdown.
“If borrowing and spending continues as the normal course of business in Washington, then owning gold might be a good hedge as new money begins to swirl around the economy,” Mancini concludes.
Which makes sense. At least we can survive inflation.
Chipotle Will Take Any Help It Can Get
Chipotle Mexican Grill (CMG) could be one of the biggest beneficiaries of lower corporate taxes…if it can get out of its own way.
Maxim Group analyst Stephen Anderson estimates that Chipotle now has a 25.6% tax rate, below its previous 38% rate, and that reduction alone would boost annualized earnings per share by around $2 this year, and as much as $2.50 next year. It won’t get the full boost—Anderson expects EPS to get a bump of some 45 to 50 cents—as management puts its tax savings back into the restaurants by creating new menu items, increasing incentives for managers, and boosting tech-enabled sales. In addition, he writes that management will use the cash to accelerate share repurchases, adding 18 cents to this year’s EPS and 53 cents to 2019’s EPS. Anderson reiterated his Buy rating and his $425 price target on the stock today.
We have to wonder how much of this is already priced into Chipotle’s shares. Its stock, which is trading near $334 today, has gained nearly 16% so far this year.
