May 17, 2016

Stocks opened lower this morning despite some better than expected economic data. The Dow and S&P 500 are currently down 55 pts & .2%, respectively. The defensive sectors (consumer staples, utilities) are taking it on the chin. The banks and transports, on the other hand, are in green in early trading. The dollar is slightly weaker on the day and commodities are a bit higher. The Bloomberg Commodity Index, by the way, is up 9% so far this year. WTI crude oil is trading up to $48/barrel. That’s a fresh 6-month high. Bonds are lower on the day after a higher inflation report (see below). The 5- and 10-year Treasury yields are up to 1.27% and 1.75%, respectively. The 2-year Treasury, which is more sensitive to Fed rate hike expectations, has moved up to .8% from .71% a week ago. 

And one more thing: we’re hearing more concern about the spread between the 2-year and 10-year yields. That spread is at its lowest since late 2007. Now, typically a low spread signals a slowing of economic growth and even recession. But as CNBC recognized yesterday, that signal is currently “broken.” That’s because with ultra-low rates (and sometimes negative rates) around the world, foreign investors are piling into Treasuries for better yield, and that’s driving down longer term rates in the US. Of course, lackluster economic growth is also holding back rates, but the point is that one can’t just read the spread and predict recession.   

The Federal National Mortgage Assn. (Fannie Mae) upgraded its 2016 estimate for US mortgage originations. Incoming data for new home purchases and refinancings has been stronger than expected. Fannie now sees 2016 mortgage originations falling only 3.7% (previously -9%). Purchase originations should rise 9% this year and refinancings will fall nearly 19%. Separately, US housing starts (ground-breaking on new home construction) rose 6.6% m/m in April to an annualized rate of 1.17 million units. That’s pretty close to what we need to keep up with population growth. 

The Consumer Price Index (CPI) rose 1.1% in April from year-ago levels, in line with expectations. This is one of the most closely watched gauges of retail inflation. The so-called Core CPI, which excludes food & energy prices, rose 2.1% y/y. That’s also in line with forecasts. Consumer inflation has been accelerating gradually over the last year or so. We’re seeing labor costs inch up (2.5% growth) and rents as well (3+%). It seems reasonably clear that we’re returning to a more normal level of inflation. Nonetheless, CNBC’s near-panic inflation scare headlines this morning seem unwarranted. 

Industrial production surprised to the upside, rising .7% in April after a downwardly revised .9% drop in March. Factory capacity utilization also inched up to 75.4% from 74.9% in the prior month. Manufacturing, a key component of industrial production, rose .3% in April, offsetting the prior month’s decline. That’s the first increase in manufacturing activity in 3 months. Mining and utility output surged .7% in the month. In an article today, Bloomberg says “The worst of America’s manufacturing slump is probably over, although the industry may do little to add to economic growth.”    

Rich Bernstein, a 30-year Wall Street veteran and widely followed analyst, was recently interviewed by CNBC about (among other things) the biggest mistakes investors make. Citing Delbar research, he said individual investors have timed their mutual fund trades terribly over the last 20 years, and “have barely outperformed cash.”  The number one mistake investors make is trying to time the market. Number two, investors need to “turn off the TV.” Financial news media “makes everything seem important.” And since a critical investing “skill is to understand what is important and what is not,” the media is making successful investing more difficult. He says it’s hard enough for professional investors to figure that out; individual investors have almost no chance. 

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