Pain management for CVS

Stocks tumbled yesterday as bond yields climbed for a fifth straight session with 10-year yields topping levels not seen since 2008. The housing sector remains hot according to the latest numbers.

A whole lot of nothing can be something. If you are a regular reader and you fight your way through my many, many missives about the Federal Reserve and its interest rate policy… well, good on you. As much as you want to believe that there is some mystical force that will make your investments wildly successful or a perpetual loser, I am sorry to inform you that it does not exist. The closest thing to that would be the Fed. Page 1 of the Old Wall Street Sayings Handbook says, “You can’t fight the Fed!” If you don’t believe it, just try, and see how that works out for you .

Yesterday afternoon we got a glimpse into what the venerable central bankers were thinking about at their July 26^th meeting when they decided to pump rates ¼ of a percentage point higher. First of all, the market largely expected the bump-up, which, in effect, gave the Fed the “all clear” to do it without causing a major meltdown. It was done, it’s now in the past, and time to look forward. So, now what?

Can Fed members FINALLY take their summer breaks and enjoy what’s left of the warm summer sun? Inflation has pulled back and the economy… well, the economy seems to be resilient. The economy remains resilient because consumers just won’t give their wallets a rest. Many experts believe that excess savings from the pandemic is to blame for the extended period of consumption growth. They also expect those excess savings to be nearing an end in this quarter or next. If those experts are correct, we can expect further downward pressure on inflation… and GDP. But really, what do the Fed members think?

Let me paint the scene for you. In a bland board room deep within a bland Washington DC building, a group of brilliant economists are sitting around a table. The walls are covered with pictures of bankers from decades past, most of whom you never heard of. There is even one painting of a man wearing a powdered wig clutching a pile of parchment papers. There is a pitcher of warm tap water surrounded by unused glasses and a large, empty urn of coffee. There is another coffee urn that reads “decaffeinated,” which is not conspicuously full. There are piles of unread papers lining the table’s edge. One or two of the bankers have laptops opened in front of them, spreadsheets at the ready. The room feels stuffy even though the air temperature is a chilly 65ºf (that’s 18ºc). Despite this, there is an old fan manufactured by General Electric in the corner which provides a nice background sound for the bankers’ hearty discussion.

The bankers already know that they will agree to raise rates by a non-invasive +25 basis points… because, why not… for good measure. It is clear to all of them that rates are already in the restrictive zone. They all know that restrictive monetary policy takes time to propagate through the economy and that the totality of the effects from last year’s super-hike cycle have not played out yet. What they don’t know is exactly when. Moreover, some – the more cautious ones – worry that when those effects do take hold, it could be disastrous for the economy. Those cautious members would prefer to leave rates unchanged for a while and see what comes up. That contingent of, let’s call them doves, is still a minority. The rest want to remain at the ready for more rate hikes. Some would be happy to continue hiking until the US Economy falls to its knees in a recession. That is, after all, a foolproof method to conquer inflation. They all, however, agree that inflation is still too high, and the risk for an uptick still exists. They are reminded of this risk when they see the pictures of Alan Greenspan and Paul Volcker on the back wall of the boardroom. They were also reminded of the risk when they filled up their cars with gasoline on the way to the meeting… those prices have been slowly climbing .

So, they sit around for 2 days, drink lots of coffee, take many breaks, ogle over many colorful charts, squint to read many printed pages of figures, and chat. Someone finally says, “time to vote,” and announces sharply, “all those against a +25 basis-point hike raise their hands.” At least 2 members can feel the muscles in their arms tensing, but their arms are restrained. “The aye’s carry the vote to raise the Federal Funds Rate by +25 basis points; the vote is unanimous.” Chairman Powell rushes to get ready for his press conference and the rest of the bankers file out hoping to beat beltway traffic.

Alas, there were no surprises and no hidden messages in the FOMC minutes. Traders were hoping to see a growing contingency of doves, which it did not. Disappointed, the market gave up ground yesterday. The lights in the boardroom were turned off and the room locked until the group reconvenes in September. Unfortunately, someone forgot to turn off the fan.

WHAT’S HAPPENING BEFORE THE OPENING BELL

CVS Health Group (CVS) shares are lower by -5.32% in the premarket after the Wall Street Journal reported that 4-million-member Blue Shield of California is dropping CVS’ Caremark group as its pharmacy-benefit manager in favor of a group of drug delivery and claims processors, one of which is Amazon. In the past 30 days 44% of analysts have revised their price targets 3 up, 8 down, 14 unchanged. Dividend yield: 3.32%. Potential average analyst target upside: +28.3%.

Cisco Systems Inc (CSCO) shares are higher by +2.36% in the premarket after it announced that it beat EPS and Revenues by +7.69% and +1.03% respectively. The company provided positive guidance for the current quarter and full-year guidance that was in line with analysts’ estimates allaying fears of an equipment slowdown. Dividend yield: 2.94%. Potential average analyst target upside: +10.0%.

YESTERDAY’S MARKETS

NEXT UP

• Initial Jobless Claims (August 12^th) is expected to come in at 240k, down slightly from last week’s 248k claims.
• Conference Board Leading Economic Index (July) may have pulled back by -0.4% after a -0.7% decline in June.