August 11, 2016

The major stock market indices opened sharply higher this morning (Dow +127 pts; SPX +.5%). The Nasdaq is up .46%. Energy and consumer discretionary sectors are leading the way in early trading. Utilities are in the red. The VIX Index, which measures investor fear, is down under 12 and that means very little volatility is expected in the stock market over the next 30 days. And the same index for long-term Treasury bonds, VXTLT, suggests the same low volatility in the bond market. The dollar is flat today and oil is recovering from its recent slide (WTI crude now trading back over $43/barrel). Most other commodities are up on the day, with the Bloomberg Commodity Index +.5% today and +6.5% on the year. Bonds are broadly unchanged. The 5- and 10-year Treasury yields are hovering around 1.09% and 1.52%, respectively. Bond yields have quietly edged higher over the last month. And by the way, the number of negative yield bonds around the world actually shrunk in that time period. 

According to the Mortgage Bankers Association (MBA), US mortgage loan delinquencies fell to 4.66% in the second quarter of 2016 from about 4.77% in the prior quarter. That’s the lowest delinquency rate since the fall of 2006. In addition, foreclosures as a percent of total loans fell to 1.64%, the lowest since the fall of 2007. I’d also add that 30-day credit card delinquencies are down around the lowest levels in at least 15 years. The consumer is in good shape. 

US import prices fell 3.7% y/y in July vs. -4.7% in June. Import prices have been falling (i.e. deflation) for two years, primarily due to lower oil prices and the stronger dollar. This deflationary trend bottomed out last September down 11% y/y and has been steadily improving since. So conditions are normalizing but this report confirms that consumer price inflation in the US is likely to remains tame for a while.     

Tom Lee, equity strategist with Fundstrat Global, was interviewed on CNBC this morning. “I think the switch that we’re starting to see over the last few months is, I think it starts to make sense for investors to think about growth trades.” He doesn’t see lower interest rates as a sign that the economy is stalling out, but rather a sign that investors around the world have been searching for “carry.” As for recent oil price declines, he says day-to-day moves in oil are just “noise” at this point. More importantly, the earnings recession is ending and estimates are rising. He believes “inflation is under-priced in the markets and that means…you really should be buying equities over other asset classes.” 

Macy’s (M) reported solid second quarter results. Both revenue and earnings beat Wall Street estimates even though year-over-year same-store-sales growth is still negative. Management announced a number of restructuring initiatives aimed at reinvigorating growth. The company plans to close about 100 of their roughly 700 stores. The stock is up nearly 10% this morning, but is still down about 40% over the last 12 months.

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