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Bank Stocks May See More Trouble As Inflation and Yields Fall
MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN SHARES OF NFLX
It will be another roller coaster week for stocks as investors now have earnings to digest and there will be no shortage of those. Netflix will be the headliner this week, and there is no doubting that strong results out of Netflix may get the bulls juices flowing again. But for Netflix, it may come down to subscriber growth which is the metric that matters most. After a disappointing second quarter, the company will need to deliver better than expected third-quarter subscriber growth. The results come Tuesday at the close of trading.
None of that may matter if the bond yields continue to climb, and as we have talked about the 10-year may be the most crucial gauge. Should the yield on the 10yr fall below 3.12% it may set up a move sharply lower back to the 3% range perhaps even the 2.90’s.
The inflation outlook continues to look tame when considering the movement in some essential commodities.
Copper, a core base metal and gauge for economic growth, has performed poorly in recent months.
Platinum, an essential metal used in catalytic converters in the auto industry, is trading at prices not seen since the 2008 financial crisis.
Iron-ore another key metal used in construction has seen its price continue to slide.
PPI & CPI
The producer price index y/y growth has now turned lower and is showing signs of disinflation.
CPI has as well.
It would all seem to suggest that inflation rates are likely to stay low with a risk of disinflation -slowing inflation. If that is the case, it poses a serious problem should the Fed continue to raise rates. It seems more likely to me that yields on the long-end of the curve will continue to sink over the longer-term, not rise. That will further pressure spreads on yields and potentially invert the yield curve. That would obviously be a horrible scenario of the banks.
The way the bank stocks are now trading it would seem that investors may be thinking the same. It was the higher interest rate story that helped to push the bank stocks up in the post-election run-up in late 2016. Now it seems to be going the other way.
Back tomorrow with the look ahead for the week.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.
inflation, yields, rates, banks, netflix, cpi, ppi