NEW$ & VIEW$ (31 DECEMBER 2012)

HAPPY NEW YEAR!

US budget talks falter as clock ticks down  Parties blame each other for failing to reach fiscal cliff deal

“The government is not working,” said Steve Bell, senior director of the Bipartisan Policy Center, who was a senior budget adviser to Senate Republicans for many years. “There is no doubt that the policy-making apparatus in this town has collapsed.” (WSJ)

U.S. Consumer Spending Surges During Pre-Christmas Weekend

Americans’ self-reported daily spending surged to $119 during the pre-Christmas weekend spanning Dec. 21-23, easily the highest three-day average for the holiday season and for the year. This is also the best pre-Christmas showing since Gallup began daily tracking of consumer spending in 2008.

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The eleventh-hour surge may help boost retail sales figures that had been largely viewed as disappointing to date this holiday season. Indeed, the $119 daily average for the 2012 pre-Christmas weekend was easily the highest of December; the previous high was $100 for the days spanning Dec. 19-22. Prior to that, the previous highs for both the holiday season and the year were $103 for Nov. 25-27 and $102 for Nov. 27-29 — the days following Thanksgiving, during which Black Friday and Cyber Monday sales lured bargain-hungry shoppers.

More broadly, the surge in Americans’ spending during the pre-Christmas weekend marks a return to spending levels not seen since 2008, when Americans regularly reported daily spending well into the triple digits.

U.S. HOUSING

New-Home Sales Rise to Highest Level in Two Years  New-home sales hit their highest level in more than two years in November, the latest in a string of positive reports showing a steady housing recovery.

New single-family home sales increased by 4.4% last month from October to a seasonally adjusted annual rate of 377,000, which is the highest level since April 2010, the Commerce Department said Thursday. Sales were up 15.3% from November 2011.

The number of new homes listed for sale, adjusted for seasonal factors, at the end of November was 149,000, a supply that would take 4.7 months to deplete at the current sales pace. The median price for a new home in November was $246,200, up 3.7% from a month prior.

Don’t get too impressed by the “highest level in two years”. Still scraping the basement floor as this CalculatedRisk chart shows:image

New home construction will be rising for several years as household formation rises and affordability remains high.

The NAR calculates that mortgage payments on the typical resale home consumed less than 13% of median family income in October. That’s near the lowest levels in at least three decades and almost half the peak prior to the 2006 bust. Still, first-time buyers continue to punch well below their weight, capturing a 30% share of transactions versus a normal 40%
or more. With household formations on the rise, imagine the upswing in sales when job growth improves and mortgage lending standards ease. (BMO Capital)

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People wishing to buy a house now are faced with precious little visible inventory of new houses (chart from CalculatedRisk)…image

…and of existing houses:

Pending Home Sales Climb

[image]The National Association of Realtors said Friday the index of pending home sales, reflecting sales that have gone into contract but haven’t yet closed, rose 9.8% last month from one year ago and by 1.7% from October. (…)

In the past five years, the Realtors’ index has been higher only in two other months, both during periods in which a home-buyer tax credit stoked a flurry of sales. The index has returned to levels that prevailed in 2002, before the housing bubble began in earnest. (…)

What got less media attention is this:

Total housing inventory at the end of November fell 3.8 percent to 2.03 million existing homes available for sale, which represents a 4.8-month supply at the current sales pace; it was 5.3 months in October, and is the lowest housing supply since September of 2005 when it was 4.6 months.

Listed inventory is 22.5 percent below a year ago when there was a 7.1-month supply. Raw unsold inventory is now at the lowest level since December 2001 when there were 1.89 million homes on the market. (NAR)

From BMO Capital:

Median U.S. existing home prices have sprinted up 10.1% in the past year, the fastest increase since the start of 2006 (i.e. seven long years ago). And the run-up is no fluke. With the supply of unsold homes dropping to its lowest level (4.8 months) since late 2005, there is still plenty of room to run for prices. A balanced market is generally seen as about 6 months, so the U.S. suddenly finds itself very much in sellers’ market terrain. It’s a whole new world.

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Rising demand, lower inventory = rising prices = rising demand = rising inventory = higher sales …eventually higher construction activity = …

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…higher employment:

Construction Jobs Set to Build

Despite rising home prices and more home construction, one crucial piece of the real-estate equation—construction jobs—continues to lag behind. But that could change soon.

Building permits for single-family homes, a barometer of future construction activity, jumped to an annual rate of 566,000 in October from 452,000 in January, according to Moody’s Analytics. And construction workers already on the job are putting in longer hours. The average workweek for production and nonsupervisory construction workers was 39.4 hours in November and October, the highest level since December 2006. The data hint that companies will need to hire soon.

Tenants Feel Pinch of Rising Rents

Record-low mortgage rates mean that homeowners have a smaller financial burden for their residences than at any time since the early 1980s. But rising rents are squeezing many families and leaving them with less to spend.

Across the U.S., “effective” monthly rent—which means the final amount paid including discounts—averaged $1,044 in October, up 3.7% from a year ago, according to Reis Inc., a real-estate data firm. Landlords no longer have to “pony up in order to entice tenants,” said Victor Calanog, Reis’s chief economist. He added that rising vacancies suggest rents are “approaching equilibrium,” but aren’t likely to fall soon.

In the third quarter, the ratio of rent to after-tax mortgage payments was 107.8%, according to Deutsche Bank. A rent-to-mortgage ratio above 100 means mortgage payments are cheaper than rent for the median homeowner. The ratio was down from an all-time high of 120.7% in the first quarter, but well above an average of 85% since 1991.

The rising cost of renting is putting pressure on tenants at a time when many are still grappling with slow or falling income growth. In the third quarter, renters spent 24.12% of their disposable income on financial obligations—things such as rent, debts and auto leases. That was the highest level since early 2010, according to the Federal Reserve.

This contrasts with living costs for homeowners, which have fallen steadily in recent years amid record low interest rates. During the third quarter, homeowners, including those who don’t have mortgages, spent 13.9% of their disposable income on financial obligations, the lowest share since 1984, according to the Federal Reserve.

Yes, the shadow inventory remains, but here’s how its impact is constrained and delayed:

Las Vegas Housing Update: Existing Sales Remain Constrained by Tight Inventory

Las Vegas existing single-family sales fell 15% y/y in November, an accelerating decline relative to the 4% y/y decrease in October. Notably, this marks the sixth consecutive month sales have declined y/y following 16 months of positive sales comparisons. Overall, we believe the recent sales slowdown is reflecting the increasingly constrained inventory situation in Las Vegas, driven by an unusually slow replenishment rate of distressed homes [foreclosures, real estate owned (REO), and short sales] to the market.

Pointing up Last October, Nevada passed a state law (AB 284) requiring lenders to include notarized affidavits proving loan ownership before foreclosure, with failure to comply including felony charges. Not surprisingly, the rate of foreclosure processing in Nevada has stalled dramatically. As a reminder, in addition to AB 284, last year the Las Vegas City Council also passed an ordinance requiring banks to maintain vacant foreclosed properties and increased fees once a notice of default has been filed. Not surprisingly this lead to a sharp drop-off in notice of default filings and foreclosures.

Las Vegas new home sales rose 55% y/y in October according to Dataquick, and several public homebuilders have highlighted strength in the Las Vegas market. Overall, there still remains a significant overhang of vacant/distressed homes across the Las Vegas market (in excess of 30,000 units by our math), which we expect will persist for several years. However, at least near term, we think the recent price and inventory trends are encouraging, indicating that Vegas remains on its long road to recovery.

Total listings fell 23% y/y to 19,299 units, marking the 17th consecutive y/y decline. The non-seasonally adjusted months’ supply of condos and single-family homes for sale currently stands at 5.9 months, down from 6.5 months last year. Of the total units listed for sale, a whopping 74% had pending but unaccepted contract offers (primarily short sales), up from 53% a year ago. Meanwhile, the total number of units listed without offers has decreased 57% from year-ago levels, leaving just a 1.5-month supply of inventory without an existing offer. (Raymond James)

ELSEWHERE

Euro Zone Set to Contract Again

The Centre for Economic Policy Research and the Bank of Italy said on Friday their Eurocoin indicator improved to -0.27% in December from -0.29% in November. (…)

The euro-zone economy shrank for six straight months to the end of September and the negative Eurocoin reading suggests it will shrink again in the final quarter of the year, even if the pace of decline appears to have slowed a little in December. CEPR and the Bank of Italy said the small improvement this month reflected an easing of tensions in financial markets, as well as business surveys that were less negative than in previous months.

Portugal braced for ‘fiscal earthquake’
Income tax to rise more than a third on New Year’s day

Lisbon plans to lift income tax revenue by more than 30 per cent, raising the effective average rate by more than a third from 9.8 to 13.2 per cent. Anyone receiving more than the minimum wage of €485 a month, including pensioners, will also pay an extraordinary tax of 3.5 per cent on their income. (…)

(…) in Portugal, where the average monthly wage is about €800, taxpayers described as “high earners” tend to be middle-class professionals rather than business tycoons.

A couple in which each partner earns about €3,500 a month – two senior university professors, for example – could now find themselves in the top tax bracket, when previously they would have had to earn more than €6,000 a month each to pay the top rate.

The highest income tax rate is be increased in January from 46.5 to 48 per cent and will apply to couples earning more than €80,000 a year, compared with €153,000 previously (income tax in Portugal is levied on family units). They will also pay an additional 2.5 per cent “solidarity tax” on their income. (…)

Egyptian pound sinks to record low  Devaluation fears prompt Egyptians to buy dollars

EARNINGS WATCH

Q4 guidance update from Factset:

For Q4 2012, 80 companies have issued negative EPS guidance while 30 companies have issued positive EPS guidance. As a result, the overall percentage of companies issuing negative EPS guidance to date for
Q4 2012 stands at 73% (80 out of 110). If this is the final percentage for the quarter, the Q4 2012 quarter will tie the Q4 2011 (73%) as the quarter with the second-highest percentage of companies issuing negative EPS guidance since FactSet began tracking guidance data in Q1 2006. The Q3 2012 quarter has the record for the quarter with the highest percentage of negative EPS guidance (74%).

At the sector level (with a minimum of five companies issuing quarterly EPS guidance), the Information Technology has the highest percentage (91%) of companies issuing negative EPS guidance for the quarter. Over the past five years, the average percentage of companies in the Information Technology sector issuing negative EPS guidance is 56%. If 91% is the final percentage for the quarter, it will mark the highest percentage of companies issuing negative EPS guidance for a quarter in this sector since FactSet began tracking guidance data in Q1 2006. The current record of 76% for the Information Technology sector occurred in three quarters: Q3 2012, Q1 2009, and Q1 2007.

Of the 32 companies in the Information Technology sector that have issued EPS guidance, 29 have issued negative EPS guidance and only 3 companies have issued positive EPS guidance. (…) Not only are more companies in the Information Technology sector issuing negative EPS guidance, but these same companies are also issuing guidance below EPS estimates by the widest margins of any sector. On average companies in the Information Technology sector have issued EPS guidance that was
14.4% below the mean estimate.

For the S&P 500 on average, companies have issued EPS guidance that was 6.5% below the mean EPS estimate. This percentage is actually
slightly better than the trailing 5-year average for the index of -7.7%.

Excluding IT, 51 (65%) of S&P 500 companies issued negative guidance for Q4 and 27 issued positive guidance.

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Analyst estimates are revised downward:

Since the start of the fourth quarter, analysts have reduced earnings estimates for companies in the S&P 500. During this time frame, the bottom-up EPS estimate for the fourth quarter has dropped 6.2% (to
$25.23 from $26.89), while the price of the index has dropped 1.6% (to 1418.10 from 1440.67).

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But that would still leave earnings up from Q3’s $24.38 and +6.3% Y/Y.

EQUITIES

The S&P 500 Index has declined 3.8% from its Dec. 18 1455 level and is now sitting on  its 200 day m.a. (1392). John P. Hussman (Aspirin for a Broken Femur) explains the importance of that level:

(…) it’s worth noting that since 1940, the S&P 500 has achieved an average annual total return of 14.5% in weeks where it was above its 200-day moving average as of the prior week’s close, and just 4.4% when it was below its 200-day moving average (only slightly more than the 4.2% average Treasury bill yield during that time, and with deep drawdowns usually concentrated in this partition).

However:

By contrast, since 2009, the S&P 500 has achieved an average total return of just 5.4% annually when it has been above its 200-day average, versus 36.7% when it has been below. Put another way, advancing trends above the 200-day average have repeatedly failed, making limited net progress overall, but declines have been halted and often breathtakingly reversed with each intervention. This pattern also reflects an unfinished cycle, the completion of which is likely to significantly damage the appeal of reflexively “buying the dip.”

I would have liked Hussman to do the same exercise but segregating the results when the moving average is trending up or down. Currently, the 200 day m.a. is trending up (same with 100 day m.a.), providing for a more solid base.

Winking smile  TIME TO EXERCISE!

 
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