7/14/17 – Stocks Close at All-Time Highs

Stocks rallied this week following comments from Fed Chairwoman Janet Yellen that we might not see additional interest rate increases this year. Markets responded very positively to the news and closed the week at all-time highs. For the week, the Dow gained 1.0% while the S&P 500 increased 1.4%. Earnings seasons started today with JP Morgan, Wells Fargo, PNC and Citigroup reporting. All four beat expectations, but all four stocks traded lower on the news. Over the next few weeks we’ll get 2nd quarter earnings from most major companies.

JP Morgan CEO Makes Headlines – JP Morgan released earnings today that far exceeded estimates, but comments from CEO Jamie Dimon on the earnings call created the headlines. It’s rare when CEOs speak so frankly, but his frustration with the lack of activity in Washington DC was apparent. The entire quote is in this link, but here’s the highlights, “Since the Great Recession, which is now eight years old, we’ve been growing at 1.5 to 2% in spite of stupidity and political gridlock. Because the American business sector is powerful and strong, and is going to grow regardless…what I’m saying is it would be much stronger growth had we made intelligent decisions and were there not gridlock…I don’t buy the argument that we’re relegated to this forever. We’re not. If this administration can make breakthroughs in taxes and infrastructure, regulatory reform…It’s almost an embarrassment being an American citizen traveling around the world and listening to the stupid sh*t we have to deal with in this country. And at one point we all have to to get our act together or we won’t do what we’re supposed to for the average Americans.” I find his candor refreshing and hope politicians on both sides can stop trying to win the 24-hr news cycle and make progress on key issues.

Pharmaceutical Pricing – The Orphan Drug Program encourages pharmaceutical companies to develop drugs for rare diseases and conditions. Without such a program, companies wouldn’t invest hundreds of millions, or billions, of dollars into drug research. Because of this, drugs for rare diseases often have exorbitant prices. Novartis, a Swiss pharmaceutical, finds itself in a difficult position with a rare disease drug called Ilaris. Ilaris treats rare inflammatory disorders and costs $16,000 per dose, or $64k a year. The company generated over $280 million in sales from Ilaris last year.

Recently a clinical trial showed Ilaris reduced complications (such as strokes) for patients who suffered a heart attack. This potentially opens the enormous cardiovascular market to Ilaris. Over 600,000 Americans suffer a heart attack each year. However, at $64k/yr, the drug is at least 10x more expensive the mass cardiovascular market would support. Federal regulations prevent a company from selling the same drug at different prices based on the use of the drug, meaning Novartis has a big decision to make. Slash the price and hope Ilaris can penetrate the cardiovascular market or maintain the price and retain a small, but consistent revenue stream. Some analysts think Ilaris could be a $1 billion drug in the cardio market, but there’s no guarantee doctors will embrace it. What is best for patients? What is best for Novartis? Is there a way to slightly change the drug to get a new patent and then have tiered pricing by use?  So far, Novartis hasn’t announced its plans, but I find it a fascinating example of the economics of drug pricing and drug research and development. Read More

Oil rebounded this week, increasing 5.1% to close at $46.61/barrel. The yield on the 10-yr Treasury moved lower, closing at 2.33% from 2.38% a week ago. The average rate on a 30-yr fixed rate moved higher this week, to 4.03% from 3.96% last week. This is the first time since May that average mortgage rates were above 4%.

Close Weekly YTD
Dow Jones 21,637.74 1.0% 9.5%
S&P 500 2,459.27 1.4% 9.8%
Oil 46.61 5.1% (13.5%)
10-yr Treasury (∆ in bps) 2.33 (6) (12)

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