 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Tuesday's Headlines 1. Markets Rally on Strong Earnings from Banks and Health Care 2. IMF Lowers Global Growth Expectations to 3% 3. Brexit Hopes Still Alive 4. Drug Distributors May Settle on Opioid Crisis Lawsuits Markets Closed
 Image: Getty Images
Markets Today
It was nice, for a day, to get away from trade war concerns and focus on company fundamentals. Earnings season always puts those in perspective, and the world's biggest banks took the stage this morning with some strong results.
JPMorgan Chase, the world's 6th largest bank, kicked things off by blowing away analysts estimates and earning $9 billion on over $30 billion in revenue for the quarter. Nice margins for a bank.
Goldman Sachs saw its profit fall 27% to $1.79 billion in the quarter ended Sept. 30 from $2.45 billion a year ago. Total net revenue fell 6% to $8.32 billion. You can blame Uber, WeWork, and some other failed or failing IPOs for that, since Goldman was a lead underwriter for those stocks. The bank has slowly been transitioning to be more consumer facing with its Marcus online bank and its partnership with Apple on the Apple card. CEO and DJ David Solomon will unveil a 2020 masterplan later this year outlining the bank's transformation.
photo courtesy NYObserver.com  Blackrock, which has just $7 trillion in assets under management, also beat analysts expectations on profit and revenue, and managed to attract over $80 billion in new money from investors during the quarter. That's no small feat given that many investors, both institutional and retail, shunned stocks in favor of bonds last quarter. Blackrock owns iShares, one of the largest ETF issuers, and that division took in over $40 billion in new money from investors looking for more ETF exposure.
In banking, big is beautiful at times like these. When parts of your business like trading and underwriting are weak, it allows you to lean on your other businesses to generate more revenue and margins until the weakness subsides. Here are those three banks against the S&P 500 (in green) this year.
charts courtesy YCHARTS  Earnings & Trade Wars I know I said we could avoid the trade war today, but we are going to start hearing about it a lot in the coming days as companies from other sectors that are sensitive to trade report their results. It's the main reason that companies in 8 out of the 11 S&P 500 sectors have lowered their forecasts.
LPL Financial's Ryan Detrick put a fine point on it in his morning note today.
Detrick writes: "The trade conflict is weighing on earnings in several ways. Slower economic growth in the United States is hampering revenue, while tariffs and supply chain disruptions are hurting profit margins. Uncertainty around future trade actions is weighing on corporate confidence, which has limited the capital investment needed to drive productivity gains (output per hour worked) that can boost profit margins. On top of all that, slower growth of international economies—partially due to the trade dispute—has added to near-term pressure on revenue. Roughly 40% of revenue for S&P 500 companies is derived internationally."
That's why profit estimates are lower for the third quarter of 2019, but are expected to rise into 2020.  IMF Lowers Global Growth Forecasts This was to be expected, and it's actually not as bad as expected.
The International Monetary Fund lowered global growth forecasts in its Global Economic Outlook to 3%, down 0.2% from its April forecast. That's the lowest growth rate since the Financial Crisis. The IMF cites weakening growth caused by rising trade barriers and increasing geopolitical tensions behind the downgrade. It estimates that the U.S.-China trade war has shaved off 0.8% from global GDP.
The IMF also says growth is being impacted by structural forces, such as low productivity growth and aging demographics in advanced economies.
That's the bad news.
The good news is that 3% is still growth, and none of the countries the IMF reviewed are in a recession right now. It expects growth to climb to 3.4% in 2020 assuming there are no existential threats and a resolution to the trade war.
Here's the IMF's country by country growth forecast for 2020.  Brexit Hopes One of those existential threats could be a bad outcome for Brexit. As you can see by the IMF's chart, the U.K. has one of the lowest GDP growth rates at 1.2%, and is only expected to grow to 1.4% in 2020.
Miraculously, Brexit negotiations have taken a positive turn in the last few days.
According to multiple reports, Prime Minister Boris Johnson and the EU's negotiating team have agreed in principle that there will be a customs border down the Irish Sea. A similar arrangement was rejected by former PM Theresa May.
The Guardian writes, "Johnson will still have to win over parliament – including the Democratic Unionist party (DUP) and the hardline Tory Brexiters of the European Research Group (ERG) – on the basis that, under the deal, Northern Ireland will still legally be within the UK's customs territory."
Johnson may present a draft of this plan to British Parliament as soon as tomorrow, and, if approved, a deal could be in place by the end of the week. It may not be the Brexit deal everyone wants, but if it's close enough and the EU approves it, Brexit could happen by October 31.
The British Pound is acting like it's a real possibility. Here's the Pound over the last 5 days against the U.S. Dollar.
chart courtesy tradingview.com  Drug Distributors Near $18 billion Opioid Settlement
McKesson Corp., Cardinal Health, and AmeriSource Bergen Corp., three of the largest pharmaceutical distributors, are on the verge of agreeing to an $18 billion legal settlement related to their part in the opioid crisis that has devastated communities across the U.S. According to an exclusive report from the Wall Street Journal, the distributors would pay $18 billion over 18 years as part of the settlement. Johnson & Johnson, which has also been named in several suits related to the opioid epidemic, might also pay a settlement.
It's no wonder that these drug distributors were the strongest performing stocks today. $18 billion over 18 years seems like a small price to pay, given the loss of life and the estimated $78.5 billion in economic damage the CDC estimates the prescription drug causes every year, but this may just be the beginning of many settlements in the pharmaceutical sector.
There have been over 2,000 lawsuits filed against drugmakers, distributors and marketing companies targeting the industry's overly aggressive marketing of prescription painkillers and lack of oversight over drug distribution which has contributed to widespread opioid addiction.
According to the National Health Institute, at least 400,000 people have died in the U.S. from overdoses of legal and illegal opioids since 1999. The lawsuits are seeking to recoup the costs borne by communities grappling with widespread addiction, including burdens on emergency services, medical care and foster services for children born to addicted parents.
Last month, Purdue Pharma, the maker of Oxycontin, filed for bankruptcy as it tried to implement a $10-$12 billion settlement that was rejected by several states which wanted the Sackler family, who owned the company, to contribute more to the deal.
(chart courtesy YCHARTS)  Pharmaceutical companies McKesson, Cardinal Health, and AmerisourceBergen jumped 11.1%, 10.5% and 8%, as news broke that they were in talks to settle a case by state and local governments for their role in the opioid epidemic, see above for details. Insurance giant UnitedHealth Group rose 8.1% on strong earnings.  Possibly signaling a move away from value stocks, energy companies Cimarex Energy and Hess dropped 2.6% and 1.6% respectively. By the same token consumer staples companies Conagra and Procter & Gamble fell 2.5% and 2.2% respectively as well. Word of the Day Generally Accepted Accounting Principles (GAAP) Generally accepted accounting principles (GAAP) refer to a common set of accepted accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP improves the clarity of the communication of financial information.  Today in History October 15, 2019 The Clayton Antitrust Act was enacted, which strengthened antitrust enforcement, but also explicitly exempted labor unions from antitrust restrictions. Previously the supreme court had ruled that unions were in violation of antitrust legislation and used antitrust legislation to prevent labor organizing. This law helped pave the way for the expansion of unions in America throughout the first half of the 20th century.
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Tuesday, October 15, 2019
Bank Shot
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