Solid Bank Earnings Bolster Markets
Imagine you are talking to your boss about a potential project. If you proceed, there is no way to make money with it if we finish the job. Your recommendation is to nonetheless go ahead anyway. In most profit seeking enterprises, this situation would probably lead your boss to rethink your earnest employment.
Such a dilemma currently exists in the financial world as there are billions of dollars of fixed income securities with negative yields which are being purchased even though if they are held to maturity, the owner will lose money. Yet, willingly, there are plenty of buyers, typically institutions which have some kind of regulatory requirement as to minimum fixed income ownership and liabilities which must be met. When the ten year treasury hit 1.39% a few weeks ago, many observers in the investment world knew the end was nigh, it had to be. Treasuries have bounced some, finishing yesterday at a generous 1.594%. Purchasers of these supposedly risk free assets might be a bit nervous, nonetheless, as lo and behold, better growth and inflation may be starting to percolate. Gulp.
You see, when the June retail sales number registered a hearty .6% (expected .1%), it was more confirmation the domestic economy is at the very least, solid. Earlier in the week, super bank JP Morgan Chase (JPM) registered a plus $6 billion profit, and Citibank (C) and Wells Fargo (WFC) followed by meeting expectations as well.
All the money center banks suffer from minimal net interest margins and if the Federal Reserve Bank decides to eventually do the deed, should benefit immensely. In conjunction with the bank results, some of the largest employers in the land, including Wal-Mart, Chase, Starbucks, and Target have publicly indicated they are giving their hard working employees much deserved raises in pay. As we know wage inflation constitutes the majority of the entire inflation number, it is not a stretch to believe a stronger inflation figure should be expected.
Putting it all together, bond buyers, who have benefited from a nearly 20 year bull market, certainly could be vulnerable, especially at sub 2% interest rates for most of the world. If money leaves the fixed income market, it has to go somewhere, right? Hmm, I wonder where, don’t you?
Elsewhere in the financial world, investors were dutifully impressed by Pokemon Go and bid up its parent Nintendo (NTDOY). Amazon Prime (AMZN) had a big day as the juggernaut that Bozos built continues to attract millions of customers. China’s economy posted stronger numbers and the fallout from Br-exit seems to have abated with the pound rebounding to $1.35 as currency markets have seen lower volatility. In the political world, the Republican convention is next week and should be, at the very least, entertaining. How presidential it will be is a related and just as relevant question. Finally, prayers go out to the families of those who lost their loved ones in Nice this week.
Disclosure: Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can ...
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