California’s existing single-family home sales increased 6% in October on a seasonally-adjusted basis relative to September. On a year-over- year basis, sales rose 1% to a run-rate of 562,520 units. Sales activity continues to be supported by a large mix of heavily discounted foreclosure re-sales, which accounted for 41.2% of October’s re-sale transactions, according to DataQuick. Notably, however, this is the lowest percentage of foreclosure re-sales since May 2008, down considerably from levels earlier this year when foreclosure re-sales
comprised 60% of all sales. Overall, we believe the recent moderation in sales activity can be attributed to a decline in the pace of foreclosure sales, which have been affected by various statewide foreclosure moratoriums and efforts by servicers to modify loans.The rate of price declines in California moderated for the eighth consecutive month in October as median prices decreased 3% y/y.
Notably, this is the smallest y/y decline since September 2007. Importantly, however, monthly median prices can be heavily skewed by the mix of homes sold, and we believe part of the upturn in median prices may be the result of an increased number of sales at the high-end of the market. Earlier this year, we suspect that tightened underwriting standards for jumbo mortgages, higher availability of FHA financing, and interest in the federal and state new home buyer tax credits all helped skew the median price downward. Conversely, seasonal increases in the number of non-distressed sales and jumbo transactions, as well as the lagging effect of foreclosure moratoriums, have likely helped skew the median price calculation upward in recent months. That said, we believe there are clear signs of a pricing bottom in California, in particular at the low-end price range ($0-300,000), where months of supply (2.8 months) remains well below the state average (4.0 months).Homes remain affordable as the typical mortgage payment buyers committed themselves to paying in October was $1,097, down from
$1,362 a year ago, according to DataQuick. Adjusted for inflation, October’s monthly payment is 58% below the cyclical peak in June 2006.Sales at the high-end showed signs of life as sales of homes priced over $1 million rose y/y for the first time since July 2007, according to the California Association of Realtors. Notably, on a year-over-year basis sales in the more expensive Santa Barbara South Coast (+11%) outpaced the more affordable High Desert Region (-1%). That said, the majority of homes being sold continue to be low-priced entry level homes or foreclosures and mortgage availability at the high-end of the market continues to be constrained.
As of September 30, over 2.4 million mortgages were "underwater" (35% of total) in California, of which ~1.3 million loans had loan-to value ratios (LTVs) of 125% or more, according to First American Core Logic. Unfortunately, we believe the staggering number of homes in negative equity combined with weak employment trends (statewide unemployment at 12.5% in October) may result in more foreclosures
and/or distressed sales, which, in our view, could prevent home prices from materially appreciating for an extended period of time.California single-family listed inventory declined 33% y/y to ~187,000 units, which on the surface represents 4.0 months of supply, down from 6.1 months a year ago. Very importantly though, we believe banks and mortgage servicers have continued to extend the foreclosure process for millions of homeowners this summer and, accordingly, have not materially accelerated any liquidations or property repossessions from the foreclosure backlog. This, in turn, has kept the amount of active real estate-owned (REO) inventory in the market at unusually low levels. Nevertheless, a significant amount of distressed "shadow inventory" (REO homes, seriously delinquent loans, and recent foreclosures) not actively listed in statewide MLS systems continues to obfuscate the true inventory situation, in our view. For reference, according to Mortgage Bankers Association data, as of September 30, more than 800,000 California mortgages were either in foreclosure or seriously delinquent. Even assuming a 50% workout rate on those loans, we estimate this implies an additional eight months of supply statewide above what is currently being reflected in the realtor data.
As a percentage of estimated total 2008 unit closing volumes, Standard Pacific (SPF/$3.14/Underperform), Brookfield (BHS/$5.49), KB Home (KBH/$13.62/Market Perform), and Lennar (LEN/$12.86/Outperform) have the largest exposure to the state of California.
The cost of money is so low that no matter what view an investor may have, there is enough money around to be right over the short term.
Players that are deploying a defensive investment strategy either by buying deflation related trades like bonds or inflation related trades like gold are winning. I argued, last week, that gold is due for a 20% price reduction. By the same token, treasury yields are subject to a similar upward correction.
As of November 27, 2009 ten year US treasuries were yielding 3.25%. A decomposition of this rate reveals that the US economy is not likely to increase much more than 1.25% per year on the long term with an inflationary factor of 2.00%. As an historical rule, US treasury yields have for most part averaged 80% of the growth of nominal GDP. It’s interesting to note that nominal GDP should decrease 1.55% in 2009 and increase by as much as 4.00% and 4.25% respectively in 2010 and 2011. Accordingly, actual treasury yields are bang on with fundamental, equilibrium and fair value.
However, investors are receiving absolutely no compensation for any fiscal risks. The Treasury market is priced for perfection believing that the ’sweet spot’ created by the quantitative and near zero monetary policies of the central bank plus the collapse of credit demand by the private sector and benign inflation will last for a long time. Like gold, there is a huge disconnect here.
Forward-looking bond participants are not considering the possibility that strong headwinds of large debt burden, huge deficit financing and un-relented currency depreciation could bring about responsive money management and/or earlier rate hike by the FRB. Investors cannot hope on huge household savings, albeit much better than it has been for years, to bail out the government.
Based on the recent performance of leading indicators, a 5.00% increase in nominal GDP is not out of the question. A circumstance that would certainly stop QE, raise bank credit demand and increase target rates a few notches forcing yields on ten year treasury notes toward 4.25%. Defensive plays like the purchase of treasuries are good insurances against deflation, but current premiums are expansive for they are not automatically "risk free’. The FED may not believe that an exit strategy is yet warranted. Nevertheless, investors should have one because it may come sooner than expected and it would then be too late to smartly react.
We will always hold bonds for insurance in all of our funds but a lot less than we used to own. Keep a close watch on the weekly ECRI Leading index. It increased to 128.8 for the week ended November 20 for an annualized growth rate of 24.1%. A significant improvement since the bottoming out of last March. The Great Recession ended in late July.
Hubert Marleau, Chief Investment Officer, Palos Management Inc.
Gulf markets, which had been closed since Wednesday’s late announcement due to the Muslim Eid al-Adha holiday, fell sharply on Monday. Asian equity markets rebounded but European markets were more cautious as investors worried about renewed banking sector problems.
The Dubai Financial Market, which trades in local currency, slumped more than 7 per cent in early afternoon trading, and the Abu Dhabi Stock Exchange, the third bourse in the United Arab Emirates, lost more than 8 per cent in heavy trading.
The United Arab Emirates central bank said Sunday it would make fresh funding available to local banks if needed, but didn’t offer specific support to Dubai, raising worries of a rift between the struggling city-state and the U.A.E.’s federal government.(…)
The central-bank move appeared aimed at boosting confidence in the country’s banking sector, which has large exposure to Dubai debt, before Monday, when banks and stock markets reopen after a long Muslim holiday.
The central bank said it "stands behind" U.A.E. banks and would make available funds to local institutions, including local subsidiaries of foreign banks.
But the statement pointedly didn’t mention Dubai, disappointing many market observers. Spokesmen for the Dubai government and the federal government in Abu Dhabi declined to comment Sunday.
Global fundamentals, however, have not changed from Wednesday. Dubai’s woes may dent the odd bank, but aggregate corporate earnings will barely be affected. Consumers around the world could not care less. Nor does trouble in the Gulf affect other influential themes of the day such as western public and private sector indebtedness, or growth in China.
So why the panic? There are sensible explanations. The first is that after a too-quick-to-be-true recovery from the biggest meltdown for generations, Dubai is a reminder the world is not out of the woods. A large default in some faraway land reinforces the sense that another shock can come from anywhere. Second, the news is slapping investors out of their silly belief that emerging markets deserve risk premiums barely above developed ones. Finally, Dubai is a warning not to assume investments are always state-guaranteed, even in this age of government largesse.
From articles in the WSJ and the FT, including FT Lex
From Dennis Gartman:
We tend to disagree that all shall be right with the world, for we think much damage has been done to the psychology of the global capital market, but we also agree with the notion that even if Dubai were to wholly collapse and all of its debts were to be rendered worthless this many tens of billions of dollars is really not much more than mote in the eye of the global economy. Abu Dhabi, and to a lesser extent, Sharjah, Ajman, Umm al-Quwain, Ras al- Khaimah and Fujairah… the other members of the UAE (once known as the Trucial States for those with a sense of history)… will pay Dubai’s debts. They’ve really no choice. But they will do so when their flashy, glitzy, super-modern, a-bit-too-westernized “sister” state has been properly humiliated publically, has apologized for its modernity, has swallowed its pride and has properly asked for help.
David Rosenberg:
Perhaps the most obvious one is that there is still so much debt that is still being supported by questionable collateral as well the cash flows required to service them. The current Dubai debacle is just one example but is particularly iconic insofar as the ‘Las Vegas of the Middle East’, as it had come to be known, is such an oxymoron (indoor ski area and all).
And it’s not just Dubai World. In the past week, we have seen Russia and Switzerland intervene in the foreign exchange markets, with Japan probably not far behind. Mexico was just downgraded to BBB and the EU is trying to figure out what to do with Greece. In addition, Vietnam devalued its currency (the Dong) and dramatically raised interest rates in a classic beggar-thy-neighbor policy that conjures the memory of the Thai Baht devaluation of mid-1997, which at the time did not make front page news, but inevitably was the launching pad for the Asian meltdown. One must wonder how China will fit into all this, with a dramatically undervalued exchange rate, a property market heading further into a bubble, and a banking sector that is now being forced to improve its depleted capital ratios.
So the odds increasingly favour that the head-first dive into risk assets over the past eight months was just a bear market rally that could end in tears.
Strong performance in manufacturing and services helped India’s growth to shatter growth forecasts in the quarter to the end of September, raising the prospect of an early rise in interest rates.
Gross domestic product grew 7.9% from a year earlier in the July-September period, accelerating from a 6.1% expansion in the previous quarter and marking the fastest growth since the January-March quarter of 2008, the Central Statistical Organization said Monday.
The reading was higher than even the most bullish forecast in a Dow Jones Newswires poll of 13 analysts, where the median estimate was for a 6.3% rise.
The government didn’t release quarter-on-quarter figures, but according to HSBC calculations, GDP grew at a sizzling 13.9% annualized pace from the previous quarter, likely the fastest since the government started releasing GDP data every three months in 1996.(…)
The data underscore India’s smart rebound from the deep global downturn last year, and provides more evidence that Asia is leading the recovery.(…)
(…) The European Union’s statistics agency, Eurostat, said Monday the flash estimate of the consumer price index in the 16 countries that use the euro rose 0.6% on a year-to-year basis in November. In October, the CPI declined 0.1%.(…)
"The breakdown is not yet available, but the surge was probably propelled by a sharp rise in annual energy inflation — oil prices in euro terms were down sharply in November of last year," said Martin van Vliet, euro zone economist for ING Bank.
Although the flash release doesn’t include a breakdown of the data, economists say core inflation may have resumed a downward trend in November and this is set to continue, giving the ECB room to keep interest rates at the record low rate of 1% while exiting its other policy support measures.(…)
The data follow mixed reports from Germany and Spain last week. In Germany the preliminary CPI measure rose 0.3% on the year in November–a smaller-than-expected increase–while in Spain the flash measure of consumer price inflation rose 0.4% after economists were expecting a 0.1% decline.(…)
U.K. consumer credit posted its biggest net drop on record in October as consumers paid back more than they borrowed for a fourth consecutive month, Bank of England data showed Monday.
U.K. consumer credit dropped by a net £579 million ($953.7 million) in October following a £299 million fall in September, the biggest net decline since records began in April 1993, the BOE said.
Total net lending to individuals increased £343 million in October following a downwardly revised £599 million gain in September.
Mortgage lending was slightly stronger than in September, reflecting the gradual recovery in the housing market from the credit crisis.
Net mortgage lending increased £922 million in October following a £898 million gain the previous month. The number of mortgages approved rose to 57,345 from 56,205 in September, the highest level since March 2008.
Net lending to businesses remained weak and was flat during October, and down by 3.2 per cent over the year.
The EEF manufacturers’ organisation reports on Monday an easing of credit conditions for the first time in more than a year. In a survey of 410 manufacturers, 33 per cent said the cost of finance had increased in the past two months – down from 47 per cent in the third quarter. Just one in five reported a decline in availability of new borrowing, down from one in three.
Banks insist they are willing to lend to viable businesses and the problem is lack of demand – companies repaying loans rather than increasing leverage.
US consumers maintained their cautious mood over the post-Thanksgiving holiday shopping weekend, with industry analysts on Sunday estimating total sales at the ritual start of the holiday shopping season only slightly up from last year.
Roughly 195 million consumers shopped in stores and online over the Black Friday weekend, up from 172 million last year, according to the National Retail Federation. But average spending dropped to $343.31 per person from $372.57 a year ago.
Overall sales for the four-day weekend totaled $41.2 billion, up marginally from $41 billion last year, the NRF estimated. (…)
The good news for retailers was that consumers opened their wallets for some discretionary items, albeit cheap ones. Shoppers not only bought gifts, but also took advantage of low prices to replace old household sundries, like irons, toasters and sheets. The NPD Group found that pent-up demand led some 63.8 percent of consumers to shop for themselves over the weekend.(…)
Shoppers’ greater-than-expected turnout over Black Friday weekend pushed up analysts’ estimates for November sales, which will be reported Thursday. Thomson Reuters, which surveys analysts, now predicts an increase of 2.5% in November over the same month last year, up from a previous estimate of 1.8%. (…)
The National Retail Federation said shoppers’ destination of choice appeared to be department stores, with almost half of holiday shoppers visiting at least one, a nearly 13 percent increase from last year. Discount retailers were also top choices, attracting some 43.2 percent of shoppers. (…)
As for online sales, comScore, the Internet research company, said retail e-commerce spending for the first 27 days of the holiday season, this year Nov. 1 to 27, rose 3 percent, to $10.57 billion, compared with the period last year. Online sales on Friday were $595 million, up 11 percent from last year. (…)
Coremetrics Inc., a Web analytics company that tracks shopper behavior on the sites of more than 500 U.S. brands, said that online consumers continued to buy more on Saturday—and spend 29% more per order—compared to a year earlier.(…)
Anecdotal evidence suggests that many shoppers are sticking to budgets and lists. To entice shoppers off of their plan for the remainder of the holiday, retailers are armed with promotions. But unlike last year, when a sharp drop in consumer spending forced stores to offer deep discounts early in the season, this year’s markdowns have been planned, and worked out with suppliers, in order to maintain profitability.(…)
Taubman Centers Inc. said stores located in the 24 shopping centers it owns or manages around the country reported sales that were flat or slightly up Saturday on average.
Shoppers continued to pay with cash or debit cards (…)
My sense is that will be but a tempest in a bucket of sand.
Amid concerns that markets in the Gulf will be hammered when they reopen on Monday – and that pressure will mount on banks with exposure to Dubai – investors are looking to Abu Dhabi, the main financial powerhouse in the United Arab Emirates federation, to calm nerves. The crisis has undermined the assumption that Abu Dhabi and the federation would bail out Dubai. So far there has been no statement from the federal government or Abu Dhabi.
Since the economic crisis struck, Abu Dhabi officials have repeatedly talked up the strength of the union and insisted they would not allow another member of the family to fall.
Bankers also say that it would damage Abu Dhabi if Dubai – just a 1½ hour drive from the capital – imploded, particularly given the exposure of Abu Dhabi entities, investors and banks to Dubai. Abu Dhabi officials have previously said support for Dubai would be forthcoming if needed.
But there is risk
Perhaps Dubai’s financial problems are much bigger than have been assumed so far. Perhaps Dubai’s debt includes sizeable off-balance sheet liabilities that imply a total debt burden well above the US$80-90bn in debt that the markets have estimated so far. This could imply that the debt issued by Dubai in recent weeks (see above) is indeed insufficient so meet upcoming redemptions. The government may have concluded that increasing delinquencies and defaults would pose an ongoing threat to many banking and property companies and that just addressing near term balance sheet debt would mean tackling just the tip of the iceberg. The repercussions of this scenario may reverberate beyond Dubai and into other Gulf regions.(UBS)
At the other end of the spectrum, one cannot rule out—as a tail risk—a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s. We think this would clearly be a very serious outcome—which again remains only a tail risk at this stage—but the implications would be indeed quite severe in our view. These would include a sudden stop of capital flows into EM, more fragility for foreign banks exposed to the Middle East, possible contagion into global developed markets, and eventually a major step back in the path to recovery out of the global financial crisis.(BoA Merrill Lynch)
Dubai’s troubles resonate far beyond the desert fantasyland that its borrowing created, fueling concerns that financially stretched nations like Greece and Hungary may struggle to pay off debts.
Here’s a nifty breakdown of global banks’ exposures to the United Arab Emirates, via Reuters on Friday.
According to the Bank for International Settlements, banks have claims totalling $123bn on debtors in the UAE, $88bn of which are held by European banks and $50bn by UK banks alone.
UPDATE: The eagle-eyed head of web communications at the BIS points out Taipei, with $1.63bn in exposure, ought to have made it into Reuters’ list.
From articles in WSJ, FT and FT Alphaville
Related post: DUBAI AND FINANCIAL MARKETS
A key concern in recent months has been that the run-up in markets and commodities was speculative in nature. Fortunately, it is accompanied by a strong resumption in global trade flows. According to data just released by the CPB Bureau of Economic Policy, global volume trade surged 5.3% in September, the biggest increase on record. Interestingly, the resumption in global trade flows was widespread across regions covered by the CPB. In particular, imports from industrialized countries increased 4% in September and are up a whopping 20% on a quarterly annualized basis.
As today’s Hot Chart shows, this was the first quarterly rise in six
quarters. This development is a confirmation that demand from industrialized countries is firming up. With such an improvement in global trade, we believe that global growth will be above trend in 2010, as also suggested by the unprecedented growth of the OECD leading indicator.
We must be wary of these YoY rates of change, 
considering the hugely depressed comps last year. For example, the Port of LA’s total October traffic was down 8.3% YoY, a big improvement from previous months’ 15-25% drops. Yet at 647,000 TEUs, it compares poorly with October 2007 (735k) or October 2006 (800k).
Also, the US is obviously an important part of the global trade flow. Since the Ports of LA and Long Beach combined handle 40% of the US container traffic, I fail to see where the global recovery comes from given that port traffic remains weak.
