November 8, 2018

Stocks opened mixed today (Dow +65 pts; SPX flat; Nasdaq -.3%). Banks (+.9%) and retailers (+.8%) are the clear leaders. On the other hand, utilities and energy stocks are down between .7% and 1%. It’s a bit surprising that anything is up after yesterday’s monster rally, which saw the SPX up 2%. The VIX Index dove to 16 yesterday and VIX December futures are down around 16.8. Traders are furiously debating whether October’s correction will resume, or whether the market is setting up for a holiday rally. Meanwhile, the SPX is now only 4.5% off of its all-time high. The US dollar is stronger today and not surprisingly, emerging markets stocks (i.e. iShares Emerging Markets ETF) are down over 1.5% today. Commodities are mostly lower. WTI crude oil is down over 1% again this morning to trade around $60.75/barrel. Some market commentators are beginning to panic because oil has fallen 20% from its early October highs. Here again, a debate is emerging as to whether global oil demand is falling. The last time oil fell 20% was the first half of 2017. Bonds are mostly unchanged as yields hover in place awaiting the Fed announcement later today. The 5-year and 10-year Treasury note yields are trading at 3.08% and 3.23%, respectively.

Famed investor Mario Gabelli, in a CNBC interview today, said he thinks the trade war with China will continue for a while longer. However, he’s not terribly worried about it. “Trump will make love to Xi at some point in time and that will help the 2020 dynamics of the global economy…” Once we get China’s economy humming along again, he believes the global economy will be “quite vibrant looking in to 2020.” Mr. Gabelli is much more worried about Federal budget deficits and the Fed’s interest rate normalization process because higher inflation/interest rates tend to put downward pressure on P/E multiples. As evidence, the SPX forward P/E ratio was up around 18.5 in early January but has sunk to 16.3. Surely, higher interest rates had something to do with that.

Third quarter mortgage delinquencies edged up to 4.47% of all outstanding US mortgages. That’s very low compared with historical figures. For some context, delinquencies reached 10% during the housing crisis and fell all the way to 4.24% in 2017. In addition, mortgage foreclosures fell to .99% of all loans last quarter, the lowest rate since 2006. The Mortgage Bankers Association (MBA) said, “…the healthy economy is overall supporting low mortgage delinquencies and foreclosure inventories.” Despite mostly favorable trends in the housing market, homebuilder DR Horton (DHI) disappointed investors today when it issued a cautious outlook. Management noted “some moderation of demand” and said it won’t give 2019 guidance “due to uncertainty based on recent market conditions.” It is true that the volume of home sales has fallen as mortgage rates climbed. The average 30-year fixed mortgage rate is up to 4.8% from about 3.8% a year ago.


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