Yesterday, I returned to CNBC to offer insight on the top market headlines.
One big news item for the day was Jeff Gundlach’s yield call to buy mortgage REITs over utilities. Host Melissa Lee asked if we would follow his advice. The short answer is, we would not. We think retail investors may get confused about what a REIT is and what the dividend represents. Anything with a high dividend is a warning that there’s a high risk involved with investing in that instrument. Investors may not understand that REITs pay out the dividend based on the operating cash flows. The dividends go up and down, this isn’t a steady-eddy dividend like they are used to and is a note of caution.
Another topic of discussion this week has been the April jobs report and if it will determine gold’s next move. The jobs number is going to move gold in some way. The Fed indirectly sets the price of the dollar and one of the big things they look at is employment and guiding the economy towards full employment. So this impact on currency will ultimately effect commodities, i.e. gold.
Finally, we discussed the status of the S&P. For the last two years it has ping-ponged between the same high and low. I think the potential break out of this range has everything to do with interest rates and the underlying economy. When we look at the S&P, we are looking at earnings and some multiple, and that multiple is set by interest rates. The lower the interest rate, the higher the multiple investors are willing to pay up for. When I look at these two things, it looks like the economy is getting better, very slowly, but not enough to drive revenues meaningfully. And interest rates can’t go much lower, so we’re probably going to stay in this range until either the interest rate changes or the economy gets remarkably better.