Inflation data too good to be true, or useful?
Recapping the day's news and newsmakers through the lens of CNBC.
Is low inflation good news or bad?
Folks with pet worries can find a dark lining in any silver cloud, and that includes inflation hawks. For the compulsive hand-wringer, inflation is always too high or too low, or threatening to go too high or too low. And if inflation seems just right, the numbers are too hard to believe.
So reactions ran the gamut today when the government reported the core inflation index was up a mere 1.2 percent in the 12 months that ended July 31. It was the lowest one-year reading since November 2010. Analysts had forecast 1.4 percent, down from June's 1.7 percent.
Instead of celebrating the fact that a dollar buys virtually as much as it did a year ago, many observers invoked the dreaded deflation, which makes debts harder to bear and causes consumers and business to put off spending.
Not only that, but inflation below the Federal Reserve's 2 percent target raises a new issue in the Fed's decision about when to begin its tapering program, to wind down bond purchases that have kept interest rates low.
Many experts have expected tapering to begin in September, and uncertainty could roil the markets and upset business strategies. Atlanta Fed President Dennis Lockhart further confused the markets Tuesday by saying that economic performance is too mixed to permit a fixed tapering schedule. Stocks fell today as traders pondered all the uncertainties.
And today's low inflation figures raised another question: Just how accurate are the government's inflation surveys?
"It's three-card Monte. ... If they can't figure a way to continue the sugar buzz one way, they're going to look at the PPI numbers and the CPI numbers, and they're going to make a case that the old bogeyman of deflation is in the closet. ... I don't believe the government's calculations. There, end of the world, I've said it."
—CNBC's Rick Santelli
"As I see it, a decision to proceed [with tapering]—whether it is in September, October or December—ought to be thought of as a cautious first step. The first adjustments to asset purchases, when they occur, should be the beginning of a process."
—Atlanta Fed President Dennis Lockhart
Marching to different drums—stock-picker heaven
The millions of investors who favor index funds and ETFs tend to like things dull. They're happy when markets just march along with gains matching long-term averages.
But stock pickers like turmoil, which provides chances to jump from one hot prospect to the next. And some experts think that's the kind of market we're likely to see now.
To be technical about it, a good environment for stock pickers requires lower correlation between asset classes. There just aren't as many opportunities when stocks, bonds and commodities march in lock step, rising and falling together.
In the years after the financial crisis, correlations tended to be high, with investors rushing in and out of all sorts of assets en masse as they judged risks in general to be high or low. Now correlation measures are falling, with investors more likely to distinguish risks and rewards of one asset versus others.
A study by Nicholas Colas, chief market strategist at ConvergEx, shows that 10 sectors of the S&P 500 are at their lowest correlation to the index in many years, averaging 70 percent in July compared to 89 percent in June. High-yield bonds are only 16 percent correlated to the S&P, down from a recent peak of 67 percent.
"This would be welcome news to everyone from stock-picking analysts and portfolio managers to individual investors."
—Nicholas Colas, chief market strategist at ConvergEx
Have I got a deal for you
Why would anyone buy a 100-year bond?
To help one's great, great grandkids pay for college? Somehow, that doesn't seem likely.
Some investors may want to lock in yield, since bonds with longer maturities generally pay more. But the most likely buyers are speculators, because bonds with long maturities have bigger price gains when interest rates fall.
Unfortunately, that means things haven't worked out very well for holders of J.C. Penney's 100-year bonds, issued when the company was flying high in 1997. Now that interest rates are rising, prices on ultra-long-term bonds are in a nosedive.
And then there's the little problem of Penney's creditworthiness after multiple downgrades. As the retailer struggles, bondholders have more and more reason to wonder if they'll receive the payments promised.
Bottom line: the bonds, which initially yielded 7.375 percent, have fallen into junk status and now yield 11.38 percent. The price has fallen 21 percent since mid-May, and the bonds are trading at 67 cents on the dollar. Other firms' 100-year bonds have been hammered as well, though not this badly.
Penney's is an extreme case, but a good example of the risk that comes with tying money up for the long term. While some traders argue that low securities prices for firms like Penney's fail to consider the firms' true strength by ignoring real estate holdings, others think the market has it right—that big-box retailers are white elephants.
"In the era of Amazon.com and other online retailing, I don't think much of legacy real estate assets of the big-box stores."
—Bonnie Baha, head of global developed credit at DoubleLine
Behind the curtain: Why housing is stronger
Nationally, the housing market is hardly in what you'd call a bubble, but a few markets are decidedly frothy.
Where? Mostly on the West Coast, with six of the 10 hottest markets in California, according to Realtor.com, the website for the National Association of Realtors. That's a shift from six months ago, when eight of the 10 hottest were in Florida. Back then, foreign buyers were key, now it's the tech recovery that's driving home prices up.
Markets that were hit hardest in the housing collapse tend to be the ones recovering the fastest, following the principle of the further you fall the higher you bounce. Investors scarfing up bargains and able to pay cash helped prime the pump.
Ordinary buyers are now getting off the fence, encouraged by rising prices, still-low mortgage rates, and better job security. Also, the foreclosure crisis has peaked, leaving more people in a position to home shop, and fewer homes underwater.
"I think many of the California markets, especially San Jose and San Francisco, are getting back to that bubble level. Some markets are close to plateauing in terms of home prices but scaling back the pace of recovery to single-digit growth, which going forward is much more healthy."
—Daren Blomquist, vice president at RealtyTrac
—By Jeff Brown, Special to CNBC.com