June 13, 2018

Stocks opened modestly higher (Dow +12 pts; SPX +.1%). Telecoms are down over 3% in early trading as a result of yesterday’s court decision on AT&T (sell below). That’s a one-time hit. But retailers, semiconductors and healthcare stocks are in the green. The VIX Index continues to slide toward 12 and VIX July futures are down around 13.7. It’s safe to say the recent stock market correction has been resolved even though we’re not yet back to all-time highs. Commodities are mostly higher today (gold, copper, iron ore, oil). WTI crude oil is hovering around $66.50/barrel. Bonds are ever so slightly higher on the day. The 5-year and 10-year Treasury yields are hovering around 2.81% and 2.95%, respectively. The Federal Reserve’s monthly policy meeting will wrap up today, however, so you can expect some interest rate volatility.  

Investors yawned at the North Korean summit. Barron’s reacted thus: “Can we all agree that North Korea is not a market issue?” The more important issue is monetary policy. This week, the Federal Reserve, European Central Bank and Bank of Japan will all hold policy meetings. Will the Fed hike rates 3 or 4 times this year? Is inflation a problem for the stock market or not? Will the ECB decide that stimulus is no longer needed? 

The Producer Price Index (PPI) rose a bit higher than expected in May. Wholesale inflation accelerated to 3.1% y/y growth vs. economists’ consensus forecast of 2.8%. That’s the highest rate of inflation since the beginning of 2012. Even excluding the more volatile categories of food & energy, PPI was “hotter” than expected. We know from CEO commentary during the first quarter earnings season that costs for raw materials and transportation are rising. But while it’s beginning to dent corporate profit margins, there’s not much evidence of that inflation being passed on to consumers…yet. The Fed will certainly weigh this report in its policy decision today.

Yesterday, a federal judge allowed AT&T (T) to close its planned acquisition of Time Warner (TWX) for about $85bil. The Justice Dept. had sued to stop the deal, but the judge approved it without any conditions. CNBC has characterized this as “one of the biggest M&A decisions ever” because it could unleash a wave of consolidation in the media sector. It seems the entire media world is trying to consolidate in order to compete in the digital age. In particular, telecom and cable companies are desperate to acquire content companies. We know that Comcast (CMCSA) is competing with Disney (DIS) to buy 21st Century Fox  (FOX). And it is now likely that Verizon (VZ) and Charter will be looking for acquisitions in the content space as well. The anti-trust roadblock has now been removed. This is why the content providers are up today and telecoms are down. 

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