Interest in Bonds Rising Despite Low Real Yields and Major Stock Indices’ Records

General Electric plans to split up into three companies. Investors buying bonds despite low real yields. Producer Price Index shows high inflation at the producer level. Some companies are moving after the infrastructure bill.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Breaking down the infrastructure bill
5 min read
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Key Takeaways

  • American Manufacturing Icon Announces Plans to Split Up into Three Companies

  • Follow the Money: Breaking Down the Infrastructure Spending Bill 

  • Analyzing Who May Benefit from Infrastructure Spending 

(Tuesday Market Open) The S&P 500 futures (/ES) were struggling to stay positive before the open which means the S&P 500’s (SPX) eight-day win streak may be at risk. Meanwhile the Nasdaq Composite (COMP:GIDS) is working on an 11-day win streak and Nasdaq futures were trading higher before the open. The Cboe Volatility Index (VIX) dropped to 15 last week but has crept higher in the last few days and volatility in oil prices (/CL) could also be prompting some traders to take profits. Finally, the market could be just taking a breather after last week’s hefty load of earnings.

Despite the positive moves in stocks, investors continue to buy up Treasuries—pushing prices higher and yields lower. The 30-year Treasury Index (TYX) is down almost 5% in the last four days. The latest Consumer Price Index (CPI) was released in September and measured inflation at 5.4% for the year. The 30-year Treasury yield closed Monday at 1.88%. This means investor are getting a real yield of -3.52% (1.88-5.4) which is why the bond buying is perplexing.

The inflation picture is still pretty bad according the October Producer Price Index (PPI) that was released this morning. Inflation at the producer level is up 8.6% over the year and up 0.6% from September to October. Many producers have been able to shield consumers from rising costs, but eventually something may have to give. The October Consumer Price Index (CPI) comes out Wednesday.

Outside of inflation, The Wall Street Journal is reporting that General Electric (GE) has announced plans to break up into three different companies focusing on aviation, health care, and energy. The once symbol of American manufacturing has struggled in recent years and has sold off parts of its business to try and stabilize its operations.

Electric vehicle (EV) chargers got another boost as EVgo (EVGO) was up nearly 37% in premarket trading on the news that it and Uber (UBER) have reached a deal that gives Uber drivers certain discounts and benefits at EVgo charging stations. Additionally, General Motors (GM) plans to add 40,000 new electric vehicle chargers across the U.S. and Canada.

In earnings news, game maker Roblox (RBLX) was up 24% in premarket trading after it announced that it beat on both revenue and earnings estimates. The company reported a 31% increase in average daily users compared to a year ago.  

Despite some reports of cooling in the housing market, DR Horton (DHI) reported better than expected earnings and increased earnings guidance as well as its dividend. A higher dividend is often seen as a show of strength by many investors because it reflects confidence in future earnings.

The infrastructure bill captured a lot of headlines on Monday and helped push basic materials and industrials among the day’s top performers. The rallies led to record closes for the S&P 500 (SPX), Dow Jones Industrial Average ($DJI), Nasdaq Composite (COMP:GIDS), and the Russell 2000 (RUT). Outside of the infrastructure bill, some company-specific announcements helped to move stocks too.  

Warren Buffett’s Berkshire Hathaway (BRK/A, BRK/B) announced earnings on Saturday, beating on revenue estimates but missing on earnings. The stock rallied to a new 52-week high before it sold off and closed only slightly higher on the day.  

Elsewhere, semiconductor maker AMD (AMD) unveiled its new product EPYC and a partnership with the company formerly known as Facebook—Meta (FB). The two companies worked together to create EPYC chips. The new chips offer higher performance and increased power efficiency, and Meta hopes it can use these chips to create the next evolution of the internet.

Infrastructure’s Reach

The $550 billion Infrastructure Investment and Jobs Act was passed over the weekend and is expected to be signed President Joe Biden when Congress reopens. The legislation directs where federal funds will be funneled to over the next five years. While there are many important details to be ironed out, the White House fact sheet lists the following items and dollar amounts:

  • $110 billion to roads and bridges
  • $11 billion to road safety
  • $39 billion to public transit
  • $66 billion to passenger and freight rail
  • $15 billion to electric vehicles and busses
  • $22 billion to airports, ports, and waterways
  • $50 billion to water infrastructure
  • $55 billion to clean water
  • $65 billion to high-speed internet
  • $21 billion to environmental clean up
  • $73 billion to power infrastructure

In response to the news, several sectors have seen rallies from potential beneficiaries of the infrastructure spending. It’s hard to track down all the companies that could benefit because of the sheer number and because many are privately held. But here are a few that appear to be benefitting.  

Starting with basic materials, Vulcan (VMC) and Martin Marietta (MLM) rallied 4.95% and 3% on the day because they provide crushed stone, sand, gravel, asphalt, cement, and so on. These are all materials used in construction, roads, and more. Nucor (NUE) is the largest domestic steelmaker in North America. It provides items like steel plates, rebar, structural steel, guard rails, etc. for airports, bridges, dams, and waterways. Nucor was up 3.6% on the day.

Also, in the basic materials sector is copper miner Freeport-McMoRan (FCX), which was up 6.45% because copper is used in electric wiring for buildings, as well as motorized and electric vehicles. Additionally, some important plumbing fittings and components are copper.

In the industrials sector, Caterpillar (CAT) and Deere (DE) rallied 4% and 1.6% respectively because they make much of the heavy equipment and machinery used in most projects on the infrastructure list including asphalt pavers, compactors, dump trucks, excavators, pipelayers, backhoes, and more.

From the consumer discretionary sector, ChargePoint (CHPT) rose nearly 12% because of money earmarked for the expansion of the electric vehicle charging centers, which ChargePoint specializes in.

The utilities sector also has a few beneficiaries including Brookfield Infrastructure (BIPC) and its sister company Brookfield Infrastructure Partners (BIP). These companies work outside of just utilities and stretch into utilities, transportation, energy, and data infrastructure. The stocks were up 4.37% and 2.4% respectively.  

Green stock indices
CHART OF THE DAY:IN THE GREEN. The Nasdaq OMX Green Economy Index (QGREEN—candlesticks) has climbed more than 45% over the previous year. The biggest factors of this sector’s growth appear to come from the solar industry group measured by the Nasdaq OMX Solar Index (GRNSOLAR—green) and the clean water industry group measured by the Nasdaq OMX U.S. Water Index (GRNWATUSL—pink). However, the wind energy group has underperformed according to the Nasdaq OMX Wind (GRNWIND—blue).  Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platformFor illustrative purposes only. Past performance does not guarantee future results. 

Government Watchdogs: The next spending bill is expected to focus on social welfare and climate change as part of President Biden’s Build Back Better Program. According to NBC News, Democrats have agreed to a top line number of $1.75 billion, but there are many details to be ironed out. Plus, the legislation will move back and forth between the House and the Senate, so a lot of changes will likely be made. However, investors may want to keep an eye on these proceedings and try to determine which publicly traded companies could be the next beneficiaries of this spending bill.

Spending Spoiler: Precious metals traders may be thinking that the additional government spending could be inflationary despite the White House’s insistence that it won’t be. Gold futures (/GC) rose 0.51%, building on a three-day win streak. Silver futures (/SI) is also working on a three-day rally by closing 1.59% higher. Finally, copper futures closed higher by 1.24%.

Of course, copper is much more than a precious metal; in fact, many investors see it as more an industrial metal because of its uses in wiring and other construction items mentioned above. HRC steel futures also rose 1.3% on the day. Higher demand for these metals may come with infrastructure spending, which could result in higher prices—especially if worker shortages and supply chain issues aren’t solved before the spending hits.

Adding to any inflationary fears, oil futures (/CL) were up for the second day in a row as oil products are another commodity set to benefit from infrastructure spending. Oil added another 1.16% on Monday.

Movie Matters: Outside of infrastructure and just as things seemed to be getting back to normal, theater company AMC Entertainment (AMC) delivered a bit of a bomb. Despite beating on earnings and revenues, AMC president discussed lingering COVID-19 issues and other risks. The stock fell more than 5% after the close. 

Good Trading, 

JJ

@TDAJJKinahan

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Key Takeaways

  • American Manufacturing Icon Announces Plans to Split Up into Three Companies

  • Follow the Money: Breaking Down the Infrastructure Spending Bill 

  • Analyzing Who May Benefit from Infrastructure Spending 

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