NEW$ & VIEW$ (26 AUGUST 2013)


Surprised smile Rate Shock: Sales of New U.S. Homes Fall on Mortgage Costs

The reading was the weakest since October and was lower than any of the forecasts by 74 economists Bloomberg surveyed.

The median estimate of economists surveyed by Bloomberg called for a decrease to 487,000. Forecasts ranged from 445,000 to 525,000.

The actual number was 394,000.

Disappointed smile The difference between July’s outcome and the average estimate of economists surveyed was 7 times larger the poll’s standard deviation, or the average divergence between what each economist forecast and the mean. That was the biggest surprise since April 2010.

The Commerce Department also marked down readings for each of the previous three months with June’s sales pace revised down to 455,000 from a previously reported 497,000 pace.

New-Home Sales Tumble

New-home sales fell 13.4% from June to an annual pace of 394,000, the Commerce Department said Friday. The drop, the steepest in three years, pushed sales down to the lowest level since October.

Because of how new-home sales are tallied—at the signing of the contract, rather than at the closing—economists said Friday’s data could be evidence that a rise in mortgage rates from the spring is starting to pinch the housing market, a key engine of the U.S. recovery. (…)

The report also showed that June sales were lower than previously estimated, with that month’s figure now at 455,000, compared with an initially reported 497,000.

Even with the decline, sales in July were 6.8% higher than a year ago.

The slower sales pace in part caused inventory to rise and median prices to dip. The median price for a new home slipped 0.5% to $257,200. The number of new homes listed for sale, seasonally adjusted, at the end of July was 171,000. The supply would take 5.2 months to deplete at the current sales pace.

Well, it looks like higher prices and mortgage rates do have an impact after all. Welcome to the real world (see my June 25 Facts & Trends: U.S. Housing A House Of Cards?). The Raymond James housing analyst sums it up:

The 13.4% sequential drop is one of the largest on record – aside from the nearly 34% sequential plunge in May 2010 when the first-time homebuyer tax credit expired. Notably, this report stands in stark contrast to the improving July NAHB homebuilder sentiment index and suggests new home sales have been materially impacted by the recent spike in mortgage rates. While still limited, rising levels of existing home inventory may also be negatively impacting demand for new homes. (…)

Relative to June, sales fell across all four regions, with the breakdown as
follows: Northeast (-5.7%), Midwest (-12.9%), South (-13.4%), and West (-16.1%).

Here’s the “relationship” with the Homebuilders Index which everybody watches. Remember that this index measures builders’ sentiment. I have warned repeatedly that the more objective “traffic index” has been a lot more subdued so far in 2013. (Next two charts courtesy of ZeroHedge)

Yes Virginia, mortgage rates do matter to ordinary people (just about everybody excluding economists and strategists).

Also, keep in mind that 10 year Treasury rates are still rising…which normally translates into higher mortgage rates…

image(Doug Short)

…with a 97% correlation:


More on ordinary folks: Charles Hugh Smith (Of Two Minds) posted several telling charts revealing the reality of the average American:

  • The number of social security beneficiaries jumped 25% (12 million people) to 57 million Americans since 2000 while full time employment declined to 114 million.


  • Less than 59% of Americans have a job.


    • Full time employment is now only 47% of total employment and has stalled at that low level.


  • Social security payments have ballooned exponentially.


  • Here’s how tight it is on main street:


The end result, illustrated by this next Doug Short’s chart, is that median income just made it back to its 2008 peak but real median income remains 7.9% below its 2008 peak which was unchanged from its 2002 level.

Click to View

From Family Dollar Stores’ Q2 conference call:

When we look at the Nielsen data, one thing that’s pretty clear is that our customer is spending less in the overall marketplace. (…) The biggest factor for the additional weakness, in my opinion, is the consumer is just more challenged than we had anticipated. She’s making choices. Things are very tough right now.

Very tough right now! And for quite a while. Who do you think will pay for all the social benefits and government deficits when so few Americans have a job and more and more of those workers have only part-time jobs? This is main street’s reality.

And now this: U.S. Sets Stage For Bigger Syria Role

Nerd smile  Barron’s Randall Forsyth:

So, will the Fed taper its bond purchases in September with housing activity slowing sharply, more bad news from retailers about consumer spending, and global markets cracking? And ahead of another possible debt-ceiling debacle and possible government shutdown on Oct.1?

It wouldn’t be the first policy blunder.

But, bad news can be good news for some:

The massive drop in new home sales will raise an eye-brow (or two) at the September 18 FOMC meeting, and could either delay tapering or result in a tinier taper than the market currently anticipates (a reduction of around $10-15 billion in asset purchases)…unless it’s offset by stronger economic data in the weeks ahead. (BMO)

More Homes for Sale, At Last

imageThe number of new homes for sale at the end of July reached a seasonally adjusted 171,000, an increase of 28,000 from a year earlier, the Commerce Department said Friday. That’s the largest annual gain in supply since November 2006.

Clock Clock Another delay for U.S. decision on Keystone

A decision on the controversial and much-delayed oil sands pipeline to the U.S. Gulf Coast could be pushed into 2014 as a U.S. watchdog examines whether contracts tied to the Keystone XL review process were wrongfully awarded and regulatory safeguards fully adopted.

The U.S. State Department’s Office of Inspector General (OIG) is holding an inquiry into whether it was appropriate for the government to hire Environmental Resources Management, a private contractor selected to conduct an environmental review of TransCanada Corp.’s proposed pipeline. (…)

The State Department does not have to wait for the OIG’s report in order to issue its decision on Keystone XL. Mr. Obama has previously said he will make a call in 2013. (…)

Good read: Currency sell-off: Victor Mallet looks at a tragedy in three acts for emerging markets

India, 1991. Thailand and east Asia, 1997. Russia, 1998. Lehman Brothers, 2008. The eurozone from 2009. And now, perhaps, India and the emerging markets all over again. (…)

The fuse igniting each financial explosion is inevitably different from the one before. Yet the underlying problems over the years are strikingly similar. (…)

First comes complacency, usually generated by years of high economic growth and the feeling that the country’s success must be the result of the values, foresight and deft policy making of those in power and the increasing sophistication of those they govern. (…)

The truth is more banal: the real cause of the expansion that precedes the typical financial crisis is usually a flood of cheap (or relatively cheap) credit, often from abroad. (…)

Phase Two of a financial crisis is the downfall itself. It is the moment when everyone realises the emperor is naked; to put it another way, the tide of easy money recedes for some reason, and suddenly the current account deficits, the poverty of investment returns and the fragility of indebted corporations and the banks that lent to them are exposed to view. (…)

Phase Three is when ministers and central bank governors survey the wreckage of a once-vibrant economy and try to work out how to rebuild it. (…)

The FT’s Lex column seeks to taper EM fears:

(…) After all, not every emerging market has taken a fall. Just look at Argentina, Vietnam, Nigeria and Macedonia as examples. The Buenos Aires main index is up almost a quarter in dollar terms since the start of the year. And in spite of the hysteria over Brazil’s real, the Bovespa stock market index has been rallying since July, as has Russia’s benchmark index. Both are up 8 per cent over the past two months alone. Granted, equity markets in Turkey and Indonesia have fallen by more than a quarter since their peaks this year, but they are at levels seen many times during the past five years. India’s Nifty index has only slipped to its 200-day moving average, where it has been seven times in the past four years.

In any case, as far as price is concerned, emerging market equity valuations are no longer exorbitant. Russia’s Micex index trades on five times expected earnings. It has hovered at this level for the past two years, but remains 25 per cent below its long-term average. The multiple for Brazil’s Bovespa index is 15 times – above its five-year average of 12 times, but it has been to 18 times twice over that period. And with India’s Nifty index trading on 13 times expected earnings it may not be a screaming buy – it fell to 8 times in 2008 – but it is still only half as expensive as it was back in March 2010.

Sure, all bets are off if interest rates in the developed world start rising quickly. The flood of liquidity has been a big driver of emerging market equities since the collapse of Lehman Brothers. But these funds must go somewhere. Asia still has a current account surplus. And the US and Europe remain fragile.

Pointing up  Fed Officials Rebuff Coordination Calls as QE Taper Looms

Federal Reserve officials rebuffed international calls to take the threat of fallout in emerging markets into account when tapering U.S. monetary stimulus.

The risk that the Fed’s trimming of bond buying will hurt economies from India to Turkey by sparking an exodus of cash and higher borrowing costs was a dominant theme at the annual meeting of central bankers and economists in Jackson Hole, Wyoming, that ended Aug. 24.

Emerging-market stocks have lost more than $1 trillion since May, according to data compiled by Bloomberg. That’s the month when Bernanke said the Fed “could take a step down” in its bond purchases. The MSCI Emerging Markets Index has fallen about 12 percent this year, compared with a 13 percent gain in the MSCI gauge of shares in advanced countries.

Such selloffs aren’t an issue for Fed officials who said their sole focus is the U.S. economy as they consider when to start reining in $85 billion of monthly asset purchases that have swelled the central bank’s balance sheet to $3.65 trillion. Even as the Fed officials advised emerging markets to protect themselves, they were pressed by the International Monetary Fund and Mexican central banker Agustin Carstens to spell out their intentions better in the interest of safeguarding global growth.

“You have to remember that we are a legal creature of Congress and that we only have a mandate to concern ourselves with the interest of the United States,” Dennis Lockhart, president of the Atlanta Fed, told Bloomberg Television’s Michael McKee. “Other countries simply have to take that as a reality and adjust to us if that’s something important for their economies.”

Ghost Older folks like me might remember that that was exactly what Germany said in mid-October 1987. Then, it was the U.S. that was asking for more international cooperation and consideration, begging Germany to change its monetary policy in order to help the greenback. After Germany rebuked James Baker, markets realized there was actually little cooperation between central bankers and lost confidence that a solution would soon be found.

“It could get very ugly” in emerging economies as the probability of currency and banking crises grows, said Carmen Reinhart, the co-author of “This Time is Different: Eight Centuries of Financial Folly” and a professor at Harvard University. “Whenever emerging markets have faced rising international interest rates and softening commodity prices, let us not forget that it has not boded well.” (…)

Amid such concerns, IMF Managing Director Christine Lagarde warned that financial market reverberations “may well feed back to where they began.” She proposed “further lines of defense” such as currency swap lines.

“We advocate clarity, proper and well-channeled communications,” Lagarde told Bloomberg Television’s Sara Eisen in an Aug. 23 interview. “The signaling effect matters almost more than the implementation. The signal has to be very clear.”

Her call was echoed by Carstens, who urged the Fed to be more open about its strategy. “What would have the most impact right now would be to have a much better, clearer implementation of the tapering,” he said.

Adapting to advanced countries’ exit strategies is “the most pressing challenge for emerging economies,” Carstens said, noting the “turbulence in financial markets around the world once the tapering talk started.”

“It would be desirable to have monetary policy coordination,” he said. “To have the central banks of advanced economies to go in different directions, can become a source of instability.”


Bad Week for Earnings

While the unofficial end of earnings season came last week when Wal-Mart (WMT) reported, there were still 92 companies that reported this week.  And the results were not very pretty.  There were certainly a few solid reports from companies like Lowe’s (LOW), Best Buy (BBY) and Urban Outfitters (URBN), but the majority of companies that reported this week went down on their report days.  Of the 92 companies that reported, 53 saw their stocks decline on their report days, while just 39 posted gains.  Overall, the average stock that reported this week fell 1.65% on its report day, which is well below the average gain of 0.30% that stocks saw on their report days during the second quarter earnings season.

Forward guidance was notably weak as well.  Of the companies that reported, negative guidance outnumbered lowered guidance by a margin of 4 to 1. 

The above is from Bespoke Investment which tallies all NYSE companies.

The official S&P tally as of Aug. 22. reveals that 65% of the 488 S&P 500 companies having reported beat the estimates and 27% missed. Q2 EPS ended up at $26.36, up 3.7% YoY. Trailing 12-month earnings are now $99.28, up 0.9% from their level after Q1 and +0.6% YoY.

Analysts keep shaving their second half estimates but remain hopelessly optimistic. Q3 earnings are seen at $27.14, up 13% YoY while Q4 earning are estimated at $29.12, up 26% YoY.

Meanwhile, Factset reports that

For Q3 2013, 85 companies have issued negative EPS guidance and 18 companies have issued positive EPS guidance.

The number of preannouncements and the percentage of negatives are both higher than they were for Q1’13 and Q2’13 at the same stage. Actually, since Aug. 2, there have been only 2 positive preannoucements against 24 negative ones.

Bloomberg’s Rich Yamarone’s Orange Book Sentiment Index (a compilation of macroeconomic anecdotes gleaned from comments made by CEOs and CFOs on quarterly earnings conference calls) was 48.47 during the week ended Aug. 23, essentially unchanged from the 48.47 registered during the week ended Aug. 16. The Bloomberg Orange Book Sentiment Index marked its twenty-eighth consecutive week below 50. Sub-50 readings suggest contractionary conditions, while above-50 is indicative of expansion.

 High Profit Margins Point to Stock Pain


Mark Hulbert rehashes the mean-reversion risk. I humbly submit that my June 11 post Margins Calls Can Be Ruinous In Many Ways is a more complete analysis.

Wilted rose  China Rethinks Deals for Resources

(…) China has plowed $226.1 billion into outbound mergers and acquisitions to grab a slice of global resources since 1995, about a quarter of which was in the mining sector, according to data provider Dealogic. But people inside and outside the government say Beijing is taking a more careful look at projects.

“The government still encourages ‘going out,’ ” said Jin Bosong, deputy director of the Ministry of Commerce’s International Trade and Economic Cooperation Research Institute. “But now the emphasis is to make companies ask questions like: ‘Can the project make money?’ ” he said.

Mining projects are high on the list.

(…) Beijing’s barrage of iron-ore asset purchases in the last decade has yielded little. Ore imports from China-controlled global mines currently account for just 2.7% of the country’s total iron-ore imports, far below an official target of 40% set in 2011, according to data from Antaike, a Beijing-based consultancy, in June. (…)


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