September 21, 2016

Stocks opened modestly higher this morning despite hand-wringing about today’s Federal Reserve policy meeting. (The Bank of Japan just announced an update to its monetary policy and investors are generally pleased with that.) The Dow and SPX are currently flat. Energy is by far and away the best performing sector in early trading (+1%). Transports, banks, retailers and semiconductors are up modestly as well. On the other side of the coin, biotechs and consumer staples groups are slightly lower in early trading. WTI crude oil is up about 2% to $45/barrel. Bonds are slightly lower as yields tick up. The 5-year Treasury yield is hovering around 1.22% and the 10-year Treasury yield is trading around 1.70%. By the way, the 2-year Treasury, which is more sensitive to the threat of Red rate hikes, has moved up to .8%. However, we note that the last few times Fed officials have tricked us into believing they would raise rates, the 2-year yield spiked up to .9%. So bond traders are a bit guarded here. 

Investor Mario Gabelli says he’s in favor of a Fed rate hike because short-term interest rates need to move “higher over time.” He says the market is beginning to “bake in” a near-term hike. Yes, a rate hike could disrupt the stock market but that will be temporary and isn’t a cause for panic. 

According to CNBC, the threat of a Fed rate hike shouldn’t affect the housing market much. First, mortgage rates are priced off of longer term interest rates whereas the Fed’s policy rate is very short-term. Second, what we’re really talking about here is a single .25% rate hike, which in the scheme of things is minor. So while mortgage rates are up a bit, the current 30-year fixed rate is still only 3.75%. “A tiny move in mortgage rates isn't going to make most people suddenly decide they really don't want that new house after all. Homebuying is a really big decision, and once you're in, you're not easily dissuaded.”

Bloomberg reports both Democrats and Republicans agree that the country needs more infrastructure spending. Higher levels of government spending are in the offing, says Goldman Sachs, despite who wins the White House. Goldman suggests investors look to industries such as aerospace and defense, managed care, basic materials and industrial manufacturers. Government spending has not been terribly strong of late—it shrank .5% in the second quarter. But the firm now estimates spending will increase by 1.5% in 2018, and that should help boost corporate earnings. 

Hedge fund manager Leon Cooperman has been accused of insider trading by the SEC. His fund, Omega Advisors, manages approximately $5bil. The fund apparently profited from trading shares of Atlas Pipeline Partners back in 2010 and the SEC says Mr. Cooperman benefited from non-public information given by Atlas’ CEO. Mr. Cooperman says the SEC has offered him a settlement, which he has rejected. Omega Advisors claims innocence. Mr. Cooperman’s reputation on Wall Street has always been impeccable. But of course, we’ve also seen a pattern of insider trading among hedge fund managers over the last several years. 


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