NEW$ TO U(SE)

Here is a nice buy low/sell high chart.

The yield curve has been the subject of an increasing amount of chatter in recent weeks, as long-term interest rates rise and short-term rates remain low.  Some stories have suggested that the curve is at record highs, but based on the official definition from the NY Fed, while the yield curve spread is extremely high, it is not quite at a record.

According to literature from the NY Fed’s website, the yield curve is defined as, "the spread between the interest rates on the ten-year Treasury note and the three-month Treasury bill."  On a historical basis it has been "a valuable forecasting tool…in predicting recessions two to six quarters ahead."

Using the Fed’s definition of the yield curve, the chart below shows the historical spread between the yields on the 3-month and 10-year US Treasury (in basis points).  As shown in the chart below, the current level of the yield curve is nearly two standard deviations above its historical average.  The only other time that the spread got this wide was back in August 1982.

Bespoke Investment

Tax credits, low mortgage rates and, importantly, hidden supply have combined to lift prices off their deep lows. However, buyers should be aware that there is considerably more supply than what meets their eyes. For instance, there are 2.4 million underwater mortgages in California (35%), of which 1.3 million have LTVs of 125% or more. California has a 12.3% unemployment rate. Can we truly believe that San Francisco house prices could have fundamentally increased by 15%? Can we expect SF prices to hold?

Using the most recent S&P;/Case-Shiller home price data from October, below we highlight how much each city that is tracked has risen from its 2009 lows.  The 20-city composite index is currently up 5.3% from its low reached in April.  Eleven cities are up more than the composite index, while nine are up less.  Tampa and Las Vegas are the only two cities that traded at new lows in October, while Seattle and Charlotte are less than 0.5% away from their lows.  On the positive side, San Francisco and Minneapolis are both up about 15% from their lows reached earlier this year.  That’s a pretty nice rebound!

Bespoke Investment

Related post: US Housing: Economic Magic Or Illusion?

California’s existing single-family home sales decreased 5% in November on a seasonally-adjusted basis relative to October. On a year-over-year basis, sales rose 5% to a run-rate of 536,720 units. Sales activity continues to be supported by a large mix of heavily discounted foreclosure re-sales, which accounted for 40.6% of November’s re-sale transactions, according to DataQuick. Notably, however, this is the lowest percentage of foreclosure re-sales since May 2008, 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. Importantly, we believe the moratoriums and modification efforts have helped limit the supply of available inventory, especially at low-end (below $300,000), which in turn has resulted in discernible home price stabilization.

Median home prices rose 6% y/y to $304,500, marking a major milestone in California’s recovery. The home price increase was the first since August 2007. Median prices have increased sequentially in each of the last nine months and are now up 23% from the low in February 2009. 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 have noted for several months now that we believe there are clear signs of true pricing bottom in California, and data from the Case Shiller Index (measuring repeat sales transactions) continues to confirm this underlying trend.

Homes remain affordable as the typical mortgage payment buyers committed themselves to paying in October was $1,106, down from $1,249 a year ago, according to DataQuick. Adjusted for inflation, November’s monthly payment is 58% below the cyclical peak in June 2006. We would also highlight that y/y median prices in Sacramento (+2%) and San Diego (+9%) rose, while price declines in Riverside/San Bernardino (-12% y/y) and Los Angeles (+0% y/y) have steadily moderated in recent months. Notably, the October seasonally adjusted Case-Shiller index reading for Los Angeles (+0.6%), San Diego (+1.0%), and San Francisco (+1.5%) showed home prices increased in all three cities relative to the prior month with prices down 6.3%, 2.4%, and 2.7% respectively on a y/y basis.

Activity at the high-end improves. First time buyers continue to drive the overall sales volume, however, on a year-over-year basis sales in the more expensive regions of the state performed better than the more affordable ones. Specifically, on a year-over-year basis home sales in the more expensive Santa Barbara South Coast (+115%), Santa Cruz County (+50%), and Santa Clara (+46%) regions outpaced the more affordable High Desert (+0%), Riverside/San Bernardino (-14%), and Sacramento (-17%) regions. That said, the y/y comparisons can be misleading and it is important to note that 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 12.3% in November) 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 34% y/y to ~201,000 units, which on the surface represents 4.5 months of supply, down from 7.1 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 9.0 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/$3.75/Underperform), Brookfield (BHS/$7.97), KB Home (KBH/$13.82/Market Perform), and Lennar (LEN/$12.91/Outperform) have the largest exposure to the state of California.

Raymond James & Associates

Related post: US HOUSING: ECONOMIC MAGIC OR ILLUSION?

The Current Business Conditions index came in at 59.7 in December, expanding for a fifth consecutive month, albeit at a slower rate than November’s 62.9 level.

Future optimism has become very widespread a good kind of contagion. The Six-Month Outlook index broke the lofty 80 barrier for the first time since 2006, reaching 80.2 in December compared to 74.4 in November.

The news on jobs improved further, while purchasing volumes took pause. The Employment index rose to 56.9 in December from 54.8 in November. The Quantity of Purchases index eased to 50.0 in December from November’s two-year high of 55.9.

Cost pressures remained contained. The Prices Paid index was 34.7 in December versus 34.6 in November.

Business Impediments: In a sign of healing, "No difficulties" was the most popular r esponse in December. That has not happened since October 2008. Working capital shortages have become less and less of a concern, declining for a fourth straight month.

	Dec		Nov		Oct
Skilled labor shortage:	8%		13%		11%
Unskilled labor shortage	0%		6%		0%
Working capital shortage:	22%		23%		28%
Raw material shortage:	3%		4%		9%
Security concerns:	8%		10%		13%
Abnormal weather:	11%		4%		2%
"Other" difficulties:	17%		23%		23%
No difficulties:	25%		21%		23%

Full NAPM-NY release

Following a 3% decline in 2008.

comScore (NASDAQ : SCOR), a leader in measuring the digital world, today reported retail e-commerce spending for the holiday season from November 1 through Christmas Eve. During this period, approximately $27 Billion was spent online, which represents an increase of 5 percent over the same period a year ago. For the period from Black Friday through Christmas Eve, and after adjusting for the additional shopping day in 2009, sales grew by approximately 3.5 percent.

*Individual days and weekends are compared to corresponding shopping days in 2008

Full comScore.com release

Your Phone Says You’re Drunk

Economy’s Rescue Only Half Done

Lawmakers Want Fannie, Freddie Probe

Euro Zone Grapples With Debt Crisis

Russia Ends Year With 8.8% Inflation

Vietnam Economy Slows in 2009

At Decade’s Start: 308,400,408 People in U.S.

US slaps new duties on Chinese steel

With Greece Teetering, the Worst May Not Be Over for Europe

Hong Kong Prepares to Accept Chinese Accounting Standards

(…) the Nationwide Building Society said U.K. house prices rose for an eighth consecutive month in December (…).

The price of a typical home rose 0.4% on a seasonally adjusted basis to £162,103 (about $260,000) in December from a month earlier following an unrevised 0.5% increase in November.

The three-month on three-month rate of increase in home prices, which is seen as a smoother indicator of the near-term trend, rose 2.1% in December, compared with a 2.8% increase in November.

The monthly gain means the average U.K. house price has risen 5.9% from December 2008 and is 8.9% higher than the February 2009 trough. Prices remain 12.2% below their peak in October 2007. In November, prices were up 2.7% from a year earlier.(…)

Full WSJ article

Deleveraging continues:

Homeowners injected nearly £5bn of equity into their homes in the third quarter of the year as record low interest rates encouraged individuals to pay down their mortgages.

The Bank of England figures showed that the amount of money people unlocked from their homes was negative for the sixth successive quarter, although the pace at which householders were paying down their debts was slowing.

The focus of homeowners on repaying debt would continue to constrain consumer spending, analysts said. The current trend to pay down mortgages is in marked contrast with the practice of drawing on home equity to fund other purchases which helped buoy consumer spending for much of the decade.

A net £4.9bn was injected into housing equity between July and September, the equivalent of 2 per cent of post-tax income, the Bank of England said on Tuesday. That represented a decline on the £6.9bn injected in the second quarter and more than £7bn in each of the previous two quarters.

Howard Archer, chief European and UK economist of IHS Global Insight, a forecasting company, said the latest figures brought the cumulative net injection of equity to £33.9bn since the second quarter of 2008. That compared with persistent equity withdrawal between 1997 and the first quarter of 2008, which reached 6.2 per cent of post-tax income in the first quarter of 2007.(…)

Full FT article

(…) In its quarterly credit conditions survey, the central bank said the availability of mortgage loans had risen in the fourth quarter, and was expected to rise slightly over the first three months of 2010. Banks also reported an increased readiness to lend to companies, although they were less willing to make unsecured consumer loans.

However, the BOE said that "contrary to expectations," defaults on unsecured consumer loans fell in the fourth quarter. Defaults had been expected to rise in tandem with job losses. Defaults on mortgage loans were stable, and rose on company loans. Banks expected defaults on all forms of lending to increase in the first quarter of 2010.

The survey suggests that the reduced availability of credit is becoming less of a drag on the economy as it emerges from recession. (…)

Banks expected that the cost of mortgage and company loans would fall over the first three months of 2010. The survey was conducted between Nov. 16 and Dec. 4.

Full WSJ article

(…) The latest IMF numbers are a reminder of how far the dollar has slipped as the default currency for foreign reserves.

Based on 140 countries, which aren’t disclosed but probably don’t include China, the dollar’s share of allocated reserves had fallen to 61.6% by the end of September. At the end of 1999, it was 71%. Among developing and emerging countries, the dollar accounts for 57.5% of reserves, from 72%. The chief winner is the euro. Since 1999, its share of global reserves has risen to 25.5% from just under 18%. For emerging countries, which often pile up foreign reserves quickly, the euro accounts for 31.4%, from 19% a decade ago. So far, so gloomy. But Uncle Sam needn’t panic. With well over half the global total still stashed in greenbacks and the dollar the default currency for international transactions, its reserve status isn’t yet on the endangered list.

Full WSJ article

Two prime Hong Kong residential sites were sold at auction Monday for a lower-than-expected US$1.34 billion, in a sign that one of the world’s hottest property markets is cooling off.

Analysts said the sale indicated a potential end to the market frenzy that has sent prices surging about 27% this year. (…)

But the equally sized plots in a northern area of the city called Tai Po sold for a total of 10.4 billion Hong Kong dollars, well below the average HK$11.58 billion forecast of seven surveyors and analysts polled earlier by Dow Jones Newswires.(…)

The prices translate to an accommodation value of HK$7,222 per square foot based on the sites’ total maximum developable gross floor area of 1.44 million square feet.(…)

The price at the auction was about 13% higher on a per-square-foot basis than that paid by Sino Land and its partners in 2007 for their three other sites in the area, before the global financial crisis.(…)

Prices could still see upward pressure next year. DBS Vickers Securities estimated in a recent report that it expects 10,000 to 12,000 units are set to be completed each year from 2010 to 2012, compared with an average 21,000 annually from 1998 to 2008. (…)

Full WSJ article