NEW$ & VIEW$ (2 JANUARY 2014)

U.S. Home Prices Continued to Rise in October Housing prices remained on an upward trend in October, but growth may not be as strong in 2014, according to S&P/Case-Shiller.

The home price index covering 10 major U.S. cities increased 13.6% in the year ended in October, according to the S&P/Case-Shiller home price report. The 20-city price index also increased 13.6%, close to the 13.7% advance expected by economists.

Both increases are the highest since February 2006, the report said. (…)

“Monthly numbers show we are living on borrowed time and the boom is fading,” said David Blitzer, chairman of the index committee at S&P Dow Jones Indices.

Both the 10-city and 20-city indexes increased 0.2% in October from September on an unadjusted basis, slower than the 0.7% increase in the previous month.

The seasonally adjusted gain for both composites was 1.0% in October from September, in line with the gains seen in the previous month.

Auto French Car Sales Rose 9.4% in December

French car sales rose 9.4% in December following a 5.7% increase in November, underlining a return to health after the market’s protracted slide to its lowest level in two decades.

French car sales rose 9.4% in December following a 5.7% increase in November, underlining a return to health after the market’s protracted slide to its lowest level in two decades, according to registrations data released Thursday by the French car manufacturers’ association.

French manufacturers Renault and PSA Peugeot-Citroën managed to regain market share from foreign brands, together accounting for 50.6% of the overall market in December, compared with 45.4% a year earlier. Sales in the latter part of last year were given a slight lift by the approach of an increase in value-added tax that became effective Jan. 1, prompting buyers to place orders before the deadline.

Over the full year, car sales in France were down 5.7% compared with 2012, reflecting gloomy consumer sentiment amid a tougher government fiscal policy and worries over unemployment.

SENTIMENT WATCH
 
2014 outlook: Sugar high. ‘Credit Cassandras’ say demand for risky bonds is a sign of frothy markets

(…) To the sceptics, the market is experiencing the kind of frothiness seen before the 2008 financial crisis. This, too, will end in tears, they warn. (…)

Issuance of syndicated leveraged loans – those made to companies that already carry high debt loads – reached $535.2bn in 2013. That is just shy of the $604.2bn sold in 2007, at the height of the last credit bubble. Meanwhile, loans that come with fewer protections for lenders, known as “covenant-lite”, accounted for almost 60 per cent of loans sold in 2013, compared with a 25 per cent share in 2007.

Sales of “payment-in-kind” notes, which give borrowers an option to repay lenders with more debt reached $11.5bn in 2012 – a post-crisis high. (…)

Sales of “junk”, or high-yield, bonds surged to a record in 2013 as companies rushed to refinance and investors snapped up the resulting assets. Issuance of junk bonds rated “triple C” – the lowest designation – jumped to $15.3bn, surpassing the pre-crisis peak. (…)

Others cite reasons for optimism. They note that credit “spreads”, or the additional returns investors demand to hold riskier credit assets, are not yet near the historic lows experienced in the run-up to the 2008 crisis. That suggests investors are differentiating between riskier assets and relatively safe securities, such as US government debt.

In contrast to 2007, the current average junk bond yield of 5.6 per cent is far higher than the yield on offer from the five-year Treasury note, at a difference of about 423 basis points. In June 2007, this spread had narrowed to a record low of 238 bps.

The argument against a bubble forming in the market at the moment is that overall credit remains abundant, enabling companies to roll over their funding, notes Mr Koesterich. “Companies can still raise money, so there is no financing risk.”

But investors who are concerned about the warning signs simmering in the credit markets may not be able to avoid investing in risky asset classes. For many, the pressure of reaching their “bogeys” – the benchmarks used to evaluate returns – is enough to justify the acquisition of riskier credit assets, particularly given the lack of yield on safer investments. (…)

Despite continued strong sales of corporate and government bonds, the central banks’ big purchases mean annual net issuance of financial assets is hovering around $1tn – far lower than the $3tn-$4tn sold in the years before the crisis, according to data compiled by Citigroup.

Pointing up “We are removing a significant number of high-quality bonds from the system and that requires replacement, and that replacement can only be found at a higher spread and that requires higher risk,” says Jason Shoup, a Citi analyst.

Wall Street’s securitisation machine is shifting into gear to help make up for some of the lack of supply. The kind of subprime mortgage-backed securities that played a starring role in the mid-2000s housing boom have largely disappeared. But other “sliced and diced” securities have come back. (…)

De Blasio sets liberal agenda for New York
Mayor warns that city faces crisis of inequality

(…) Mr de Blasio, an underdog when he began his quest to become mayor, was voted in on a promise to pursue more progressive policies such as universal pre-kindergarten education, raising taxes on the wealthy and reducing the income disparities which have swelled under his predecessor. He becomes the first Democrat to lead the city in nearly a quarter of a century. (…)

One of Mr de Blasio’s first challenges will be the high expectations of unions who are pressing to renegotiate contracts that would boost their pay, by up to $7bn, retroactively. Mr de Blasio has also supported higher wages for more workers on city-funded projects.

Much of this is beyond the new mayor’s ability to deliver unilaterally. For example, his proposal to raise taxes on residents making more than $500,000 a year relies on the support both of Democratic governor Andrew Cuomo and the state legislature in far more conservative Albany.

Moreover, Mr de Blasio has to be careful not to erode the city’s tax base by giving more companies and wealthy residents the incentive to move to the suburbs or lower tax domiciles.

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