February 15,2018

Stocks opened higher this morning. The Dow and SPX are currently 74 pts and .3%, respectively. Stocks have been in recovery mode for the last several days, but we’re still about 5.5% below late January highs. The VIX Index has receded back to 20 and VIX March futures are trading around 17.8. Commodities are mixed today. WTI crude oil is down a bit, still trading around $60.60/barrel. Bonds are trading modestly higher today. Both investment-grade corporates and junk are in the green after a rough start for the year. The 5-year and 10-year Treasury yields are hovering around 2.63% and 2.89%, respectively. 

Mortgage rates are up around four-year highs. The average 30-year fixed rate is now 4.38% according to Freddie Mac. Despite this, the business outlook among homebuilders is very positive. The Nat’l Association of Home Builders’ sentiment index is hovering around highs not seen since mid-2005. There are reasons for their optimism: tight labor market conditions, rising household formation and low inventory of homes for-sale could continue to prop up the housing market in the face of rising mortgage rates.   

The Producer Price Index (PPI), which measures wholesale inflation, accelerated slightly in January to 2.7% y/y growth. Wholesale inflation has been trending gently higher over the last two years. For whatever reason, economists expected the PPI to fall to 2.4% last month, so for some the report was a surprise. The bottom line is that inflation is finally picking up, but not at such a rapid rate as to impair the long-term outlook for stocks.

Cisco Systems (CSCO) reported better than expected sales and earnings per share for the fourth quarter. Total sales rose 3% y/y, the highest growth rate in two years. The legacy switching & routing business actually posted positive sales growth after a long period of retrenchment. In addition, the company’s shift away from product sales and toward a subscription service model is on track. The board of directors authorized another $25bil for use in a stock buy-back program as well as another dividend hike. Finally, the company plans to repatriate $67bil of cash from overseas business units. The stock is up about 3.4% today.

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