This past week indexes moved higher yet again. This was not the only upward move we saw. On the economic front, housing prices also showed another large upward move. This increase came as a surprise as the consensus estimate pointed to a monthly decrease. Though, with the increase in the 10-Year Treasury yield moving up toward 1.7% the expectation is that mortgage rates will also move up.

Interesting to note here is the sensitivity of mortgage rates when they move lower or higher. Historically, when treasury interest rates move lower, mortgage rates do not move down at the same rate, creating a gap. This is a result of the increased demand for new mortgages as home buyers want to take advantage of the lower rates. The converse is not so true. The benchmark 30-Year Mortgage interest rate has ticked up above 3.2%. While the 10-Year Treasury rate is sitting above 1.6%. The image below shows the spread or difference between the 30-Year Mortgage and the 10-Year Treasury. The peak in the middle is right when the Fed cut interest rates in March of 2020. After that, the gap slowly narrowed for over a year from March 2020 through early May 2021. This highlights the lagging movement of mortgage rates when treasury yields fall.

On that note, not all assets have been moving up. While equities this earnings season have mostly moved up after their earnings release, one of our holdings, Intel (INTC), fell nearly 10% this past week after releasing their earnings for the third quarter. The company beat its earnings estimates and posted revenues above its previous guidance. However, their forward guidance did not rest well with investors. Comments the company made brought the decline in the stock’s price involved supply chain problems, ultimately affecting the delivery of their products, along with higher expected capital expenditure, which is spending by the company on itself. And the expectation that their cash flow will decrease, a natural occurrence as they expect to increase their capital spending.

Not everything is as horrible as it appears on the surface. Just like a homebuyer shopping for a house, a potential homebuyer is looking to avoid paying well over the going market rate. In this respect, Intel is in the middle of a big transition. The capital expenditure is a direct investment into themselves that will help improve their production and technology capabilities down the line. In a similar sense, just as a bargain price on a house, a few repairs might be necessary, such as new electrical and plumbing. Intel’s investment in its production facilities and technology capabilities will bring value down the line. Homebuyers have long heard realtors focus on location, “location, location, location”, they say. Well, Intel has a fantastic location, given that its revenues and earnings beat both NVIDIA (NVDA) and Advanced Micro Devices (AMD) combined. Though the renovation may take a while, it will surely become a favorite based on its position. For now, there is no reason not to take advantage of this bargain find.

– Jose Rendon