ALWAYS EXPECT THE UNEXPECTED

Is inflation increasing? The narrative has been myopically focused upon deflation for a myriad of reasons. Last week’s release of both the PPI and CPI indicated that inflation is perhaps accelerating.
Commenting first about the PPI, core PPI rose by the greatest amount in three years, the result of shelter. The core CPI also rose the most in four years (August 2011), a broad based increase led by shelter costs (OER) rising to a new cyclical high. Is this the start of a trend or a “one off” event? A strong argument can be made for either case but I would err to the inflationary side.
Wage gains are accelerating so are housing prices that is supporting a nascent increase in OER. Rents are up exponentially. All are primary inflationary components and trends that are not easily reversed.
Against this backdrop short dated treasuries fell in price as the data indicated inflation is heading or is around the 2.0% Federal Reserve targeted level.
Is the market on the verge of a massive transition? Are rates—as defined by the 10-year treasury about to go up 50%? What??!! Is this not inflammatory? If the yield on the 10-year increases by 50%, the yield would be around 2.55% or about 45 basis points below Goldman’s and PIMCO’s year-end target.
Is oil on the verge of a 50% increase to around $45 barrel? What??!! Another unsubstantiated remark or is it? Depending upon the source, consensus is now calling for $40-$45 oil by year end.
Are equities suggesting the above is about to occur? Six days do not make a trend but…Value is out performing momentum for the first time in six years, perhaps the result of possible higher interest rates that would greatly impact the future value of the momentum issues that are priced to the greatest extreme as compared to value since at least 1980.
Speaking of Friday, Bloomberg listed the 10 most owned stocks in robo investors’ portfolios. The names should not be a shock. The top five are AMZN, NFLX, GOOG, FB, TSLA. Is this suggesting a peak in these issues given if it was only this easy to make money all would be gazillionaires?
Last week I referenced Bloomberg stating four stocks—all of the above for the exception of TSLA–were up a collectively 82% in 2015, a gain that boosted the marquee averages given the typical index was down between 5% and 40%.
I ask are not robo investors just momentum investors which are analogous to HFTs? Perhaps. Year to date these four issues are down about 14% and off about 23% collectively from their apex.
What will happen this week? The economic calendar is crowded with housing statistics, manufacturing and spending indices and the second reading of fourth quarter growth. How will this data be interpreted?
Last night the foreign markets were up. London was up 1.32%, Paris up 1.62% and Frankfurt up 1.68%. China was up 2.25%, Japan up 0.90% and Hang Sang up 0.93%.
The Dow should open considerably higher on reports that there will be an output freeze by March 1. Oil is up about 4%. The correlation between oil and the markets is extremely close since late 2014. The 10-year is off 9/32 to yield 1.78%.