Author: Tim McPartland

After a few days of dipping into the 4.53% just a few days ago interest rates are trying to push higher once again–the 10 year treasury is trading at 4.74% right now at 5 a.m. (central). Folks are saying that these high rates are doing the work of the Fed and over time – months and months this may be true, but the underlying cause is a bit scary – too much supply period. We will see supply continue to be heavy for years to come–will there be demand for all the paper at current interest rates or will investors demand higher rates? A slowing economy caused by high interest rates isn’t much of an answer to a spending problem–in fact over the course of months and months (or a year) the slowing economy will cause larger deficits as tax revenues slow. Another fine mess we have on our hands.

I’ve continued to CD rates – on Fido this morning the top rate is 5.75% which is a 5 year, callable from Southern First Bank–the issue is callable starting in 6 months. Over at eTrade there are 5.7% CDs available for 1 or 2 years – both are callable. I think we will have higher rates soon–can we see 6% yet this year?

I am looking forward to earnings from the regional and community banks which we will see soon – starting next week and then into October. As noted I held preferreds in numerous small banks–and have unloaded some for decent gains, but I continue to hold a number of them. Almost all these issues are around break even (including dividends). I had decent gains in all of these issues, but let some of them slip away. I am looking to sell these issues and may do so at any time – I am concerned about commercial real estate with some of them although they haven’t shown great stress to this point in time.

Once again today we have a number of Fed yakkers–and it is fair to assume they will be dovish in the short term, but this is baked into equity markets and interest rates will move independent of their jawboning for now–their yakking is loosing its punch.

We have a few economic reports this morning–retail sales will be parsed for the ‘health of the consumer’–we’ll see.

Yesterday we had the producer price index (PPI) released and it came in hotter than expected – in large part because of energy costs. Today we have the consumer price index (CPI) and forecasters are indicating 3.6% increase year over year. At the moment the 10 year treasury is trading at a yield of 4.57%–obviously traders aren’t expecting major surprises. Certainly any surprises in the CPI of more than .1%, either way, could send yields shooting higher (or maybe lower).

It was funny, at least to me, that most of the Fed officials are now talking dovish–and a hot PPI is announced–with CPI today if we see a hotter number this dovish tone may prove to be unwarranted – or at least way too early.

I see it is an important day for those drawing their Social Security – today the annual cost of living increase is announced. I see the ‘talk’ is for a 3.2-3.4% increase. Of course part of the increase will get chewed up by medicare increases in cost (which I have seen yet). All in all we will see a monthly increase that will buy a nice steak dinner.

I have been nibbling this week – I want to write more about it and hope to today or tomorrow. My thesis is fairly simple–with interest rates near a peak, quality issues have substantial capital gain upside. A capital gain of 10% and interest/dividends of 7% gets me to 17%. The fly in the ointment, of course, is that maybe interest rates continue higher–this is why we nibble versus going ‘all in’. My assumption is simply for interest rates to hold flat–I am not counting on rates falling–this is a ‘bonus’ possibility.

So let’s get the day underway and see what kind of roller coaster ride we get.

Once again interest rates are tumbling this morning as Federal Reserve folks continue their dovish talk. There is something a bit strange that all of a sudden these folks are all talking dovish when only a month ago most of them were hawkish–seems to me that political pressure is getting to them.

The 10 year treasury is at 4.59% this morning–almost 30 basis points below the close last Friday. In the end the marketplace will determine the price of the treasuries and over the medium to long term we have huge supply caused by the inability to restrain government spending–regardless of the Fed we may well see rates higher, but of course who knows for sure.

Well we had the producer price index (PPI) just released–tomorrow is the consumer price index (CPI). The PPI has come in hotter than expected—but the CPI will be more critical. Obviously these are important numbers as we are just 2 1/2 week out from the next FOMC meeting.

Well let’s see if we get a bit more rallying in income issues–yesterday there was a small move higher–a refreshing rally OR a temporary move that does not last long. Of course – no one knows.