Sunday, January 25, 2015

Your Weekly Update

Doing true justice to the past week in world finance and economics would mean occupying more space herein than I can in good conscience ask you to take in. I appreciate that while you (who are our clients) have matched my commitment to not bombard your inbox (with written material anyway)---to the extent I have in the past---with your commitment to spending a few minutes each weekend taking in my updates (right?), you, nevertheless, have other stuff going on, I'm assuming.

Therefore, in the following I'll simply touch on what's mattered most of late. Which would be the recent actions of the world's central banks, particularly the European Central Bank, the action in oil and the state of the U.S. consumer.

Starting with central banks:

Over the course of the past few days the European Central Bank (ECB), the Bank of Japan (BOJ), the People's Bank of China (PBOC), the Reserve Bank of India (RBI), the Swiss National Bank (SNB), the Danish Central Bank (DCB) and the Bank of Canada (BOC) all engaged in either introducing a bazooka of a quantitative easing program (ECB), reducing benchmark interest rates (RBI, SNB, DCB, BOC) or expanding the scale and access to various liquidity programs (BOJ, PBOC). In essence, the whole outside world, virtually, is engaging in major monetary stimulus while here at home the Fed is gauging the when, the how and even the why of getting interest rates off of the zero lower bound.

So what's it all mean? It means the outside world is worried about inflation, the lack thereof that is, while the U.S. economy is sitting pretty, relatively speaking that is. What's it all do? Well, for starters, it makes the dollar the king of currencies. I.e., international investors/traders buy the currency that they believe will appreciate the most against their own (and, today, given a growing economy and higher relative interest rates, the dollar would be the one to buy). For example, trade 1 euro for a $1.20, then watch the euro's price drop to, say, $1.12 and viola!, you've just made a cool 7% on your money (as your $1.20 would then buy you 1.07 euros)---not counting any interest, dividends or capital gains you may have made on whatever you stuck that $1.20 into.

So why would a country allow a practice that would likely serve to make its currency worth less in the global marketplace? Well, to help its exporters. Think about it. If yesterday it cost $1.20 to buy 1 euro's worth of goods and today the euro dropped in value to $1.12, then that $1.20 buys you more stuff from Euro Zone exporters. Which you'll indeed do. Then, in theory, the exporting economy benefits as profits rise and companies hire and citizens become happy, and spend. Sounds awesome, doesn't it? Well, sure, except when we consider what it does to the international buying power of said citizens. While---in a rising dollar environment---the U.S. consumer enjoys an increase of affordable goods from abroad, the foreign consumer experiences the opposite. I.e., in my example 1 euro bought him/her $1.20 worth of U.S. stuff yesterday, while today it only buys $1.12 worth. And, thus, the U.S. exporter is none too happy about the rising dollar.

Without getting too involved in the pros and cons of money debasing, the question is, as investors, should we own shares of Euro Zone exporters in this environment? Well, yes, I believe we should (albeit in modest quantity). But we have to initially temper our expectations a bit to compensate for the negative effect of the rising dollar. Remember, per my example, $1.20 invested yesterday, is worth only $1.12 today. Meaning the growth in the price of the Euro Zone stocks we buy have to go up more than the decline in the dollar value of the euro to book a profit. Which explains why, Friday, when Euro Zone markets rallied, the share price of many U.S.-traded Euro Zone focused exchange traded funds (ETFs) actually declined.

Now look further down the road. If greater liquidity, easier lending standards and increasing exports lead to an improving economy, or if for whatever reason(s) the Euro Zone economy begins to brighten, the Euro will find a bottom and---in this optimistic (but not guaranteed) scenario---you get the best of both worlds: a bump in the currency exchange rate along with a bull market in your Euro Zone stocks. Which are, by the way, presently priced noticeably cheaper relative to earnings than are U.S. stocks---in the aggregate in both cases that is.

If you doubt the Euro Zone's potential as a profitable long-term investment destination---given structural issues that desperately need attention---you have good reason, and you're not alone. Which, by the way, is the reason the area's equities are trading at a relative discount (and keep in mind, to trade at a discount to U.S. equities in terms of price to earnings ratios means the companies in question have earnings [attractively so when compared to their share prices], despite the structural issues). If everyone saw an opportunity, well, there'd be no opportunity. Things are never cheap when everyone's after them.

I can't leave the Euro Zone topic without offering a word or two about this Sunday's election in Greece. The far-left Syriza party looks to have the election in the bag. The question is, will they receive enough votes to form a majority of their own or will they have to form a coalition government? In any case, they'll win---to whatever extent---because they've promised to end the pain of reforms that came as the strings attached to Greece's bailout. The next question is, will the Troika (the European Commission, the International Monetary Fund and the European Central Bank) be willing to renegotiate the terms and continue pumping in the money? And what happens if they don't? Even though a Syriza victory is widely anticipated, I wouldn't be at all surprised to see markets sell off on the news. More on this to come...


The Saudi King's passing on Friday saw oil prices spike momentarily, only to resume their decline and finish the day in the red. His successor said there'd be no change in strategy going forward. Per my weekly economic highlights at the bottom, last week saw the biggest build in crude oil inventories in 14 years. Clearly, the forces that have forced oil to present levels have yet to run their course. Make no mistake, however, oil will ultimately find its bottom as the present price per barrel will do a number on production. In fact, oil rigs in the U.S. are already dropping like flies. Here's from Friday's Bloomberg article "Oil Rigs in U.S. at 2-Year Low as Bakken Drillers Bail".
Oil rigs have dropped by an unprecedented 258 in seven weeks, threatening to end the surge in domestic oil production that has turned the U.S. into the world’s largest fuel exporter. The booming production, out of shale formations across the country, has OPEC and other foreign suppliers fighting to preserve their market share. Eight hundred rigs may be pulled out of U.S. fields during the first half of 2015, Penn West Petroleum Ltd. (PWT) Chief Executive OfficerDavid Roberts said at a conference Thursday.

The U.S. Consumer

According to the surveys, it's a good time to be a U.S. consumer. Along with an improving employment picture, the low cost of fueling an automobile is---as you'll see in the highlights below---fueling confidence among the populace. I do like consumer discretionary stocks these days.

As you've read of late, I particularly like home builders, and related companies. While I've received a little pushback on this from folks who are concerned with the negative impact the present oil situation is having on producing states, namely Texas (whose total oil and gas jobs account for less than 3% of the state's employment by the way), the fact that 98.6% of the nation's gas-guzzling workers work outside the gas industry suggests that, absolutely, low gas prices are an unambiguous plus for the U.S. economy.

Here's yet another spiel on why I like housing-related companies (albeit, as with everything else in a well balanced portfolio, in modest quantity) going forward.

I keep track of a number of key macro indicators that assist me in making specific sector recommendations. Here are my most recent notes on housing inventories:
Inventory of new single family homes: 214,000 as of 11/20/14. Up 70k from 2012, but much lower than the long-term average--and way off the 570,000 peak in June 2006. This is bullish for home-builders and related companies. Housing starts are currently running at a 1.089 million annual pace; the latest reading on household formations (folks making homes for themselves) was 809,000. The number of teardowns per 1 million starts is typically 200,000. Therefore, current housing starts are running right with household formations. Which, by itself, suggests no build up or draw down of inventories in the near future. Should the recent consumer optimism result in more household formations we should, all things being equal, see inventories come in and production ramp up, which would be another bullish signal for home builders and related companies.

Total existing homes for sale: 2.09 million. Which is right at the long-term normal reading. The number peaked at 4+ million in July 2007. Along with the low new home inventory and potential for a pickup in household formations, this is bullish for all things housing.

I’ll leave you here with a reminder that sane stock market investing is all about seeing the forest through the trees; in believing that, in the long-run, ingenuity and innovation will make major success stories out of smartly-run, globally-focused companies. As for the near-term, my optimistic tone on some sectors/areas notwithstanding, I expect 2015 to bring us a level of volatility that will challenge the resolve of many a short-term investor. Present valuations in U.S. stocks, while not extreme in my view (considering present inflation), virtually have to make for a jittery market as the Fed looks to “normalize” interest rates, as other central banks look to ease their economies’ to prosperity (could inspire upward volatility), and as any number of unforeseen events unfold in the year to come.  And, of course, like every year, how the markets ultimately fare in 2015 is anybody's guess---which is why long-term investors do not gauge their success in single-year increments...

Here are last week's U.S. economic highlights:

JANUARY 20, 2015

THE NAHB HOUSING MARKET INDEX continues to show real optimism among home builders. From Econoday's commentary:

Home builders continue to report solid conditions with the housing market index at 57 in January vs an upwardly revised 58 in December. January is the 7th plus-50 score in a row. January's strength is led by the most heavily weighted component, present sales, which held steady at 62. But the second most heavily weighted component, traffic, remains weak, down 2 points to 44 and reflecting a significant lack of first-time buyers in the new home market. The final component, future sales, did fall 4 points but remains very solid at 60. A look at regions shows the West well ahead at 65 with the South, which is by far the largest region for new home sales and roughly double the size of the West, at 55. The two smallest regions, the Midwest and Northeast, are at 60 and 43.

JANUARY 21, 2015

MORTGAGE APPLICATIONS are showing wild week to week readings. After jumping 24% last week, new purchase apps declined 3% while refinances increased by another 22%. On a year over year basis new purchase apps are up 3%, which is an improvement but nothing to write home about. I believe the best for the current expansion is yet to come for housing.

HOUSING STARTS exceeded expectations, coming in at 1.089 million versus the 1.041 consensus estimate and nicely above the 1.028 prior month reading. Starts are up 5.3% on year over year basis. Offsetting the good news, however, was decline in building permits: coming in at 1.032 million versus 1.06 estimate and 1.035 prior. The trend, therefore looks basically flat (although the decline in permits was concentrated in the multi-family space). Thus, the shift toward the single-family home component can be taken as a positive going forward. Here's Bloomberg on the subject:
Builders broke ground in December on the most single-family homes in almost seven years, propelling an unexpectedly large gain in U.S. housing starts that signals construction will contribute more to economic growth in 2015.

Work began on 728,000 houses at an annual rate, a 7.2 percent increase from November and the most since March 2008, a Commerce Department report showed Wednesday in Washington. Total housing starts, which include apartments, climbed 4.4 percent to a 1.09 million pace.

The improvement in single-family construction at year-end signals the industry is beginning to focus on the biggest part of the market, perhaps encouraged by gains in employment and consumer confidence that make Americans more likely to marry and have children. Historically low borrowing costs and more access to credit would raise the odds that a household will decide to buy a property rather than rent.

“The strength is where you’d like to see it, in single-family housing,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who had forecast starts would rise to 1.07 million. “It bodes well for residential real estate. It’s another thing going in the right direction for the economy.”

Permits, a proxy for future construction, declined 1.9 percent in December to a 1.03 million pace. They were depressed by a setback in multifamily projects, which can be volatile from month to month. Applications for single-family homes increased to a seven-year high.

Builders began work on 1.01 million homes in 2014, the most since 2007. The construction boom peaked at a three-decade high of 2.07 million in 2005, before plunging to a record-low 554,000 in 2009.

The rebound in residential real-estate since the recession has been mainly driven by gains in multifamily projects, including apartment buildings, as Americans soured on homeownership and opted to rent instead. A more solid recovery in construction of single-family homes would signal the industry is on sounder footing.

Single-Family Share

Single-family houses accounted for 64 percent of all housing starts in 2014, the least since 1985.

“Looking out to 2015, we think that a stronger labor market may support a pickup in household formation, which in turn may underpin further gains in housing construction,” John Ryding, chief economist at RDQ Economics in New York, said in a research note. “We also think that with housing still relatively affordable and with households increasingly employed and feeling that economic conditions are more normal, that single-family housing will carry more of the gains in housing construction in 2015.”

Sentiment in the industry is hovering close to a nine-year high. While the National Association of Home Builders/Wells Fargo builder sentiment gauge fell to 57 in January from 58 the prior month, readings greater than 50 mean more respondents report market conditions are good, according to figures from the Washington-based group on Tuesday.

THE JOHNSON REDBOOK RETAIL REPORT came in at a disappointing 3% year over year rate. Versus a 3.8% last week. Since 3.5% plus is your typical pace during economic expansions, this one bears close monitoring going forward. That said, January is typically a volatile month for department stores as they unwind and clean out winter inventories in preparation for the spring. I expect better readings beyond January given other consumer-related data.

JANUARY 22, 2015

WEEKLY JOBLESS CLAIMS dropped 10k last week. But they remain north of 300k, at 307k. The current 4-week average sits at 306,500, which is up 6,500 from the prior week's reading. Continuing claims, which are reported with a one week lag, rose 15,000 to 2.443 million, with the 4-week average up 9,000 to 2.427 million. The unemployment rate for insured workers remained at 1.8%. While the week over week number improved, and the present level should not spark recession worries (300k is a historically average number), the trend of late bears close monitoring. My best guess, given robust sentiment reads of late, that the trend will reverse going forward and that the recent uptick will be blamed on seasonal factors. We'll see...

 THE FHFA HOUSE PRICE INDEX points to improvement in the housing sector (as I've been expecting of late). Home prices gained .8% in November, after a .4% October increase, while the consensus estimate was for a .3% increase. Year over year prices are up 5.3% from a 4.4% gain in Ocober.

THE BLOOMBERG CONSUMER COMFORT INDEX continues to tell of a very optimistic U.S. consumer. Which, given that consumption is two-thirds of GDP, speaks positively about the U.S. economy going forward. Here's Bloomberg's press release:
American Consumers Most Optimistic About Economy in Four Years

By Michelle Jamrisko

(Bloomberg) -- Americans’ expectations for the economy improved in January to reach the highest level in four years as the cost of gasoline continued to fall and the job market strengthened.

A measure tracking the economic outlook rose by 2 points to 53, the strongest since January 2011, data from the Bloomberg Consumer Comfort Index showed Thursday. Thirty-six percent said the economy is getting better, up from 32 last month and the second-largest share since 2002. The weekly sentiment index eased to 44.7 in the period ended Jan. 18 from 45.4.

Gasoline prices approaching a nationwide average of $2 a gallon and the lowest unemployment rate since mid-2008 are making households more upbeat about the expansion. Stronger wage growth would help to further propel sentiment and spark bigger gains in consumer spending.

The weekly comfort measure “has rallied impressively, improving at least numerically in all but three of the past 12 weeks,” Gary Langer, president of Langer Research Associates LLC in New York, which produces the data for Bloomberg, said in a statement.

More Americans than forecast filed applications for unemployment benefits last week, a sign of lingering holiday turnover, another report showed. Jobless claims decreased by 10,000 to 307,000 in the week ended Jan. 17, the Labor Department said. The median forecast in a Bloomberg survey called for 300,000 claims.

Stocks Advance

Stocks climbed as European Central Bank president Mario Draghi announced an expanded asset-purchase program to spur growth and counter deflationary pressures. The Standard & Poor’s 500 Index advanced 0.4 percent to 2,039.92 at 9:34 a.m. in New York.

The brighter outlook for the world’s largest economy was paced by gains among women, full-time workers, 18- to 34-year-olds, residents in the West and Democrats. Married adults and those with at least some college education also registered advances.

While the weekly measure of confidence dropped, it was the second-strongest in seven years. The comfort index averaged 44.8 in 2007, the last year of the past expansion.

All three sub-indexes cooled last week. A gauge on the current state of the national economy decreased to 38.9 from 39.1. A measure of personal finances fell to 56.6 from 57.4, and the buying climate index declined to 38.5 from 39.9.

Gasoline Prices

Lower energy prices and job gains are underpinning sentiment. The cost of a gallon of regular gasoline fell to $2.04 as of yesterday, the lowest since April 2009, according to figures from AAA, the largest U.S. auto organization. About 3 million more Americans found work in 2014, the most in 15 years, and unemployment in December dropped to 5.6 percent, Labor Department data showed.

Comfort gauges for almost every income group showed a decrease last week, with confidence among those making less than $15,000 a year at its lowest in five weeks. Sentiment among Americans earning $100,000 or more advanced from the prior period.

NAT GAS INVENTORIES declined another 216 bcf last week. Despite the reduced inventory, the price has come off of its December high of 3.23, at 2.90 as I type (up 2.1% from yesterday however)...

CRUDE INVENTORIES jumped by a huge 10 million barrels last week. That's the biggest weekly build in 14 years. Prices of course dropped on the news. In response to big wholesale supplies of gasoline and distillates, refineries have cut production, which limits gas and distillates inventories (up .6 m and down 3.3 m respectively). The present low prices will absolutely lead to reduced production over time and, hence, higher prices. The question is, over what period of time?

THE KANSAS CITY FED MANUFACTURING INDEX for January softened month over month, while producers' expectations for future activity in the 10th district remained at elevated levels. The weakest activity occurred in Oklahoma, an energy-dependent state.

 THE FED BALANCE SHEET dropped by $3.1 billion last week, after increasing $16.6 billion the week before. Total assets sit at $4.513 trillion.

JANUARY 23, 2015

EXISTING HOME SALES IN DECEMBER jumped 2.4% to an annual rate of 5.04 million. The gain, as reported in Wednesday's housing starts number, was led by single-family homes. The full-year results, however, were negative. Here's Bloomberg on the numbers and the prospects going forward:
Home-Sales Fall in 2014 Has U.S. Waiting for This Year: Economy

By Shobhana Chandra

(Bloomberg) -- A three-year winning streak for sales of previously owned homes in the U.S. ended in 2014 as some investors stepped out of the market and first-time buyers failed to fill the void.

Purchases totaled 4.93 million last year, down 3.1 percent from the 5.09 million houses sold in 2013, figures from the National Association of Realtors showed Friday in Washington.

The share of American homebuyers making their first purchase dropped in 2014 to its lowest level in almost three decades, according to the Realtors group. At the same time, employment gains, growing consumer confidence, mortgage rates at historically low levels and government efforts to lower purchasing costs probably will help bolster demand in 2015.

“Demand has been pretty sideways,” said Jay Feldman, an economist at Credit Suisse in New York. “There are various positives and I don’t see any big negatives for housing. The improving labor market and low mortgage rates will support the housing recovery.”

Stocks dropped after a four-day rally as weaker-than-forecast results at companies from United Parcel Service Inc. to Kimberly-Clark Corp. offset confidence that central banks will support global growth. The Standard & Poor’s 500 Index fell 0.2 percent to 2,058.85 at 1:20 p.m. in New York. The S&P Homebuilding Supercomposite Index declined 0.7 percent.

Survey Results

Purchases climbed a less-than-forecast 2.4 percent in December from the prior month to a 5.04 million annual rate, the report showed.

The median forecast of 76 economists in a Bloomberg survey called for sales of previously owned homes to rise to a 5.08 million pace in December. Estimates ranged from 4.93 million to 5.25 million. The November reading was revised down to 4.92 million from a previously reported 4.93 million.

First-time buyers accounted for 29 percent of all purchases in December, down from 31 percent a month earlier, the report showed. A separate survey from the group showed they made up 33 percent for all of 2014, the fewest since 1987.

“First-time buyers are still missing in action,” Lawrence Yun, NAR chief economist, said at a news conference today as the figures were released. The market in 2014 was “mildly disappointing.”

Falling interest rates, more jobs and higher levels of confidence indicate “pent-up demand continues to build,” he said. “2015 should be a better year.”

Supply, Prices

A lack of supply and rising prices are probably among reasons younger and first-time buyers have yet to enter the market. Those issues are also driving out investors, who led the early stages of the recovery.

The median price of an existing home advanced 6 percent in December from the same period a year earlier, to $209,500, the Realtors’ report showed. In 2014, it was the highest in seven years.

The number of previously owned homes on the market fell to 1.85 million, the second-smallest reading for any December since 1999.

Investors made up 17 percent of all buyers in December, down from 21 percent in the same month in 2013.

Another report Friday showed prospects for economic growth were improving. The Conference Board’s index of leading indicators, a gauge of the outlook for the next three to six months, increased 0.5 percent in December, after a revised 0.4 percent gain in November, the New York-based group said.

An improving job market and plunging gasoline prices continue to support consumer spending that makes up almost 70 percent of the economy. A strong domestic market is buffering the U.S. against global weakness as Federal Reserve policy makers prepare to meet next week to discuss if and when to raise interest rates.

Rosier Outlook

It’s “more or less consistent with our expectation for continued expansion as we turn the corner here into 2015,” said Tim Quinlan, an economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who’s among the top LEI forecasters over the past two years, according to data compiled by Bloomberg. “If there’s something that has shifted over the last year or so, it’s that the consumer spending outlook is a little bit brighter.”

More jobs and a drop in mortgage rates will help. The labor market is coming off its best year since 1999, with almost 3 million jobs added and an unemployment rate of 5.6 percent, a more than six-year low.

The average rate on a 30-year fixed mortgage was 3.63 percent in the week ended Jan. 22, according to data from Freddie Mac in McLean, Virginia. It reached a low of 3.31 percent in November 2012.

Easier Credit

Credit conditions continue to ease. The proportion of banks reporting loosening standards for prime mortgages in the past two quarters was the highest since the Fed began record-keeping in 2007, according to the central bank’s October survey of senior loan officers.

The federal government is also trying to make it cheaper to buy. President Barack Obama unveiled a plan earlier this month aimed at boosting homeownership for borrowers with lower credit scores by reducing the premiums they pay on Federal Housing Administration mortgages. The agency’s loans are meant for lower-income borrowers, who have been largely shut out of the housing recovery. The move, which will go into effect on Jan. 26, would help the typical first-time homebuyer save about $900 in their annual loan payment, according to the FHA.

Minneapolis-based U.S. Bancorp, the nation’s largest regional lender, is among companies encouraged by the recovery in housing. Chief Executive Officer Richard Davis said the outlook for the mortgage business is “really nice,” in part because Americans are putting money into home improvements.

Home Improvements

“People who have houses now feel that they’re no longer under water and they’re willing to invest in them,” he said during an earnings call on Jan. 21. “People who have houses that are now above water are willing to use it as collateral for something else, like a small business, and housing prices slowly but surely are recovering.”

While increasing property values hurt affordability for some prospective buyers, they give homeowners the ability to sell their dwellings, which will help boost supply.

MARKIT'S FLASH MANUFACTURING PMI INDEX came in at 53.7. While in expansionary range (above 50) this index has trended down to its lowest readings in a year. The slowing in oil and gas activity and lower exports get the blame. However, those lower oil prices are a big plus in terms of input costs, which this report shows declining for the first time in 2 1/2 years.

THE CHICAGO FED NATIONAL ACTIVITY INDEX showed December as being a weak month for the U.S. economy, at minus .05. The three month average, however, remains in the green, at plus .39. The production and consumption, and housing components came in at minus .12. The employment remains nicely positive , at .16.

THE INDEX OF LEADING ECONOMIC INDICATORS shows strength in the U.S. economy. Let's say the result was good, but not great, as Econoday points out below:
The index of leading economic indicators rose a solid 0.5 percent in December in what, however, is a somewhat shallow gain reflecting the Fed's zero interest-rate policy, a policy that looks to be shifting higher, and the report's credit index that has long been signaling strength in lending activity that has yet to be confirmed by other data.

Otherwise, the month's strength is mostly negligible though a decline in unemployment claims is the third largest factor, but here too claims so far this month have been on the rise. A clear negative reading in the report is a decline in building permits.

This report is ambitious by its definition and, in December's case at least, unconvincing


  1. […] clicking the play button, please read the closing paragraph from the written version of this week’s […]

  2. […] devoted much of last week’s commentary to this topic, I’ll leave it here for […]

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