NEW$ & VIEW$ (26 FEBRUARY 2014)

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Commenting on recent weekly chain store sales:

“Temperatures turned warmer from coast to coast over the past week, but sales remained subdued as consumers enjoyed outside activities rather than shopping,” said Michael Niemira, ICSC vice president of research and chief economist.

Home Depot: US comps were +4.9% with total comp growth driven ~4% by traffic and ~1% ticket, showing that HD drove traffic well despite the poor weather.

Hot Home Prices Due to Cool

U.S. prices rose 11.3% in the fourth quarter compared with a year earlier, according to the Standard & Poor’s/Case-Shiller price index. The Case-Shiller index that measures home prices in 20 major metro areas rose 13.4% during the same span. A separate index, released Tuesday by the Federal Housing Finance Agency, said prices had gone up 7.7%, also to an eight-year high. (…)

Prices rebounded strongly during the past two years as low prices and rates attracted brisk demand, first from investors and later from traditional buyers who competed over a shrinking supply. Higher prices have led investors to slow their purchases in more markets, while rising rates have dented affordability for owners who need a mortgage, especially first-time buyers. (…)

Prices decreased 0.1% in December from November in the 20-city index, the second straight monthly decline. Sales tend to slow in the winter, which can lead to softer prices, but the monthly declines during the fourth quarter were still the smallest for that period in eight years. (…)

Home builders during the past year have boosted profits by building more-expensive homes. Luxury builder Toll Brothers Inc. on Tuesday reported a 21% increase in its average sale price during the quarter that ended in January versus the previous-year period. But those price gains appear to be curbing sales volumes. Toll said new contracts for homes in the quarter fell 6% from a year earlier and it cut its forecast for total closings for its 2014 fiscal year by 4%.(…)

National builder Hovnanian Enterprises Inc. began increasing certain incentives in mid-January to boost sagging sales, J. Larry Sorsby, the company’s finance chief, said at an investor conference Tuesday. Incentives typically include free upgrades on home finishes or assistance with closing costs, which reduce builders’ profit margins. Hovnanian said Monday that its revenue increase for the quarter ending in January would be “meaningfully lower than anticipated.” (…)

Toll Brothers: Net Home Orders Down in Latest Quarter; Weather Only Partly to Blame

From housing economist Tom Lawler (via CalculatedRisk)

Toll Brothers, the self-proclaimed “nation’s leading builder of luxury homes,” reported that net home orders in the quarter ended January 31, 2014 totaled 916, down 5.9% from the comparable quarter of 2013. Net home orders for “traditional” homes (that is, excluding its “city-living” segment) totaled 865 last quarter, down 8.1% from a year earlier. The company’s sales cancellation rate, expressed as a % of gross orders, was 7.0% last quarter, up from 6.2% a year ago. Home deliveries last quarter totaled 928, up 24.4% from the comparable quarter of 2013, at an average sales price $694,000, up 22.0% from a year ago. The company’s order backlog at the end of January was 3,667, up 31.2% from last January, at an average order price of $733,000, up 10.2% from a year ago.
Here are a few excerpts from the conference call.

“The freezing, snowy weather of the past two months has impacted our business in the Northeast, Mid-Atlantic and Midwest markets, where about 50% of our selling communities are located. While it is still too early to draw conclusions about the Spring selling season, we remain optimistic based on solid affordability, attractive interest rates, growing pent-up demand and an industry still under-producing compared to both historical norms and current demographics.” “Encouragingly, our average price per home has risen dramatically, representing a combination of price increases and mix shift. Both components have helped boost our gross and operating margin.”

For “traditional” homes, net orders last quarter were down YY in the “North,” up 0.4% in the “Mid-Atlantic” up 9.4% in the “South” (which includes Texas), and off 17.4% in the “West.” The decline in the West was not weather related, but rather reflected potential buyers’ response to Toll’s unusually aggressive price increases in the region, especially California. The average net order price in the West last quarter was $944,000, up 27.9% from a year earlier. (…)

Hmmm…”solid affordability, attractive interest rates, growing pent-up demand”. If you missed it yesterday, see FACTS & TRENDS: U.S. HOUSING TO STAY COLD

Mortgage Purchase Index lowest since 1995

The Refinance Index decreased 11 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier to the lowest level since 1995. “Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pickup in purchase activity, and we are not yet seeing it,” said Mike Fratantoni, MBA’s Chief Economist.

Land Investors Brace for Slowdown Texas developer H. Ross Perot Jr. and a few other big land investors are taking some chips off the table, betting that the swift increase in prices on residential land in recent years will abate in 2014.

(…) “Unless home prices go higher, I don’t see land [prices] going much higher,” says Mr. Perot, whose Hillwood Development Co. owns 9,400 residential acres in seven states. (…) “Land’s about as expensive as it can be.”

Hillwood sold 13 residential tracts totaling 4,300 acres in the past year for $125 million, nearly double the amount it had invested in them. Hillwood also bought two tracts last year totaling 1,800 acres, but 2013 was the first year in the past 10 that Hillwood was a net land seller.

It is unusual for Hillwood to sell huge tracts of raw land. Typically, the company develops tracts into dozens or hundreds of home lots—with electricity, roads and other infrastructure—and sells them piecemeal to multiple home builders.

Another Texas land investor, Stratford Land Co., intends to complete sales of at least $400 million of land early this year after selling $100 million of land last year and $150 million in 2012. To sell, Stratford looks to double the money it spent on the land. It still holds about $1 billion of assets.

“We want to take some chips off the table,” Stratford founder and CEO Phillip Wiggins said in an interview. “It seems like we’ve timed this very well. But we have the rest of the portfolio to play a little long on, because we think there’s still some wind behind our sails for a few years.”

Investment-management firm Paulson & Co. since 2009 has amassed more than 20 residential projects spanning 30,000 lots in distressed markets. Last year, Paulson for the first time since then sold tracts in a few markets, though it intends to also keep buying and holding land in markets where it thinks prices still have room to rise. (…)

Starwood Land Ventures LLC, an arm of investor Barry Sternlicht‘s Starwood Capital Group, since 2007 has amassed a portfolio spanning roughly 17,000 lots, buying mostly at the market’s nadir in 2009 and 2010. Last year, Starwood Land posted its largest year of land sales, divesting tracts totaling 2,300 lots for $150 million. Meanwhile, it bought one tract of 675 lots for $25 million.

“The market was right and the prices were very good—in some cases above what they were in the peak years,” says Mike Moser, Starwood Land’s co-CEO. “So, it’s time to start harvesting.” (…)

Lot prices in 2013 increased more than 20% on average nationally from 2012 levels, according to housing-research and analysis firm Zelman & Associates. In red-hot California, lot prices increased in Modesto by 73% in the past year, according to land brokerage Land Advisors Organization.

But the land market lost momentum late last year as home buyers began to balk at rising prices and higher interest rates. That weakening of demand tempered home builders’ appetite for top-dollar land.

A look at the sequential, quarter-to-quarter change in land prices underscores the cooling of the market. According to Zelman’s monthly surveys of builders, brokers and developers in 55 major markets, prices of finished lots receded from their biggest recent gain—6.8% in the first quarter of 2013 from the previous quarter—to a more tepid 2.9% gain in last year’s fourth quarter.(…)

Canadian consumers keep tight grip on wallets over holiday season

The average Canadian consumer’s total debt – excluding mortgage – in the fourth quarter of 2013 increased marginally to $27,368 from $27,355 in the third quarter, according to the latest analysis of credit trends by TransUnion, released Wednesday. (…)

On a year-over-year basis, the latest TransUnion report showed that total debt fell 0.42 per cent to $27,368 from $27,485 – the highest debt level on record. (…)

“The bigger story is the continued decline observed in delinquency rates for credit cards, lines of credit and instalment loans. These are significant drops, and coupled with lower debt levels in some of Canada’s major markets, this is a good story for both consumers and lenders. When both delinquencies and debt go down, we anticipate consumers may find more opportunities to gain access to better credit offers as competition for their business increases.”

EU Forecasts Weak Growth European Union economists forecast tepid growth for most of the region through 2015, while warning that lingering debt burdens and the specter of deflation could sabotage the recovery

(…) Growth in the euro area is forecast at 1.2% this year and 1.8% next, after two consecutive years of contraction. That won’t be enough to make much of a dent in euro-zone unemployment, which is seen hovering near record highs of 12% in 2014 and 11.7% in 2015. The commission report on Tuesday forecast growth in the broader EU—buoyed by strong momentum in the U.K.—at 1.5% this year and 2% next. (…)

The commission forecasts inflation in the euro zone at 1% this year and 1.3% next, well below the European Central Bank’s target of just under 2%. Eurostat on Monday said inflation in the euro area is running at 0.8%.(…)

France has pledged to bring its deficit to under 3% of GDP in 2015, yet the commission forecasts the deficit next year at 3.9% of GDP. In Spain, the government has pledged to bring its deficit to under 3% in 2016. Hitting that target will require significant new cuts, as the budget deficit is forecast to hit 6.5% of GDP in 2015. (…) Italy’s growth prospects, however, remain dim, with the commission projecting growth of 0.6% this year.

China dismisses concern on renminbi fall Central bank says market should not over-interpret sell-off

The State Administration of Foreign Exchange, an agency under the central bank, did not acknowledge its role in guiding the currency. “The recent movement of the renminbi exchange rate is the result of market players adjusting their near-term renminbi trading strategies,” it said on Wednesday.

It added that the currency’s movement was nothing unusual: “The degree of exchange rate volatility is normal by the standards of developed and emerging markets. There is no need to over-interpret it.”

GAVYN DAVIES: Watch China’s exchange rate policy

(…) The rise in China’s real exchange rate, amounting to more than 40 per cent since 2005, has been one of the forces which has helped the global economy to rebalance in recent years, encouraging a narrowing in the US trade deficit against China, and also allowing other emerging economies to absorb the effects of the devaluation in the Japanese yen without feeling too much pain.

It has also helped China to hold down inflation, and boost consumption, which is a key requirement in its own internal rebalancing. And it has reduced the danger of a severe policy confrontation between China and the US, with the latter having largely dropped its complaints about “manipulation” of China’s exchange rate. Overall, it is one of the things that has clearly gone right in the global economy in recent times.

The benign interpretation of the sudden reversal in the spot rate since mid-January is that it is all part of China’s plan to introduce greater market forces into its economic system in the years ahead. This would include more scope for the exchange rate to be determined by the market, to which end Beijing has said that it will increase the width of the daily fluctuation band from the present plus or minus 1 per cent to plus or minus 2 per cent as soon as possible.

Until the recent reversal, the spot rate had been hugging the bottom end (ie, the strong end) of the band, and some investors had become convinced that long renminbi represented a safe, low volume trade. Capital inflows therefore increased, forcing the People’s Bank of China to intervene in the markets by $500bn in 2013 (an act of quantitative easing similar in scale to the US Federal Reserve’s QE3 programme last year).

Increasing the width of the band could have caused more inflows and a more rapid strengthening in the real exchange rate. To avoid the perception that this is a one-way trade, the Chinese central bank may have decided to mount a sharp but temporary squeeze on the carry traders.

A slightly less benign interpretation is that the PBOC has decided to call a halt to the trend appreciation in the real exchange rate for the time being. This is what the bank did when it was using all available instruments to boost gross domestic product growth in 2008-10, the only prolonged period of stability in the nominal exchange rate since 2005. The reason that this interpretation seems possible is that there has been a clear shift in interest rate policy since the start of this year, with interbank rates being guided much lower than in the second half of 2013.

If the authorities have decided to take their foot off the monetary brakes for the time being, because the deflating of the credit bubble is damaging GDP growth and financial stability, it would make sense to allow the exchange rate to fall, alongside domestic interest rates.

But this would suggest that the authorities have blinked in the face of the January bailout of a high-profile trust product marketed by ICBC. It would also indicate that the process of deleveraging in the shadow banking sector is not going according to plan. Concerns from the rating agencies that China is encouraging yet more moral hazard in the financial system, making the eventual exit from the bubble even more difficult, would then look valid. (…)

China’s Corporate Debt Hits Record $12 Trillion

From Reuters:

China’s corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults, as credit repayment problems rise.

Chinese non-financial companies held total outstanding bank borrowing and bond debt of about $12 trillion at the end of last year – equal to over 120 percent of GDP – according to Standard & Poor’s estimates.

Growth in Chinese company debt has been unprecedented. A Thomson Reuters analysis of 945 listed medium and large non-financial firms showed total debt soared by more than 260 percent, from 1.82 trillion yuan ($298.4 billion) to 4.74 trillion yuan ($777.3 billion), between December 2008 and September 2013.

While a credit crisis isn’t expected anytime soon, analysts say companies in China’s most leveraged sectors, such as machinery, shipping, construction and steel, are selling assets and undertaking mergers to avoid defaulting on their borrowings.

More defaults are expected, said Christopher Lee, managing director for Greater China corporates at Standard and Poor’s Rating Services in Hong Kong. “Borrowing costs already are going up due to tightened liquidity,” he said. “There will be a greater differentiation and discrimination of risk and lending going forward.”

Of course, there is also this:

And this:

Winking smile It’s all in the timing:

Dave Camp: How to Fix Our Appalling Tax Code

On Wednesday, I am releasing what a simpler, fairer tax code actually looks like. The guiding principle is that everyone should play by the same rules—your tax rate should be determined by what’s fair, not by who you know in Washington.

Obama to Propose Highway Program President Barack Obama will propose a $302 billion program to support rebuilding and repairing the U.S.’s roads and bridges when he travels Wednesday to a historic rail station in St. Paul, Minn.

Mr. Obama’s plan includes dedicating $150 billion in revenue to the program generated by a proposed overhaul of taxes on businesses, which would close what the White House said are “unfair” loopholes while lowering tax rates. The White House didn’t give further details on what tax loopholes it would close.

The White House said Mr. Obama will also launch a $600 million competition to get people working on transportation infrastructure projects.

Carlyle Doubts U.S. Private-Equity Tax Change Carlyle Group co-founder David Rubenstein said the U.S. is unlikely to make changes this year that could increase taxes on deal profits reaped by private-equity managers

Mr. Rubenstein, often viewed by private-equity watchers as an authority on national politics since his firm is based in Washington, said various factors would likely prevent any measures affecting buyout firms from taking hold any time soon. (…)

“It’s unlikely that will get into law,” Mr. Rubenstein said of Mr. Camp’s proposal before an audience at the SuperReturn International private-equity conference in Germany’s capital. “I don’t think there is likely to be any tax reform legislation passed by this Congress at all.”


Real world examples (see GOOD READ: THE IT THREAT), from the WSJ (J.P. Morgan Dims Its Outlook for 2014)

Another shift outlined Tuesday was a reduction in J.P. Morgan’s expansion of its branch network, which increased by more than 360 locations in the past three years. On Tuesday, executives said they don’t expect to build any net new locations in 2014 and 2015, maintaining about 5,600 branches. If any new ones are built, the branches would be smaller and staffed by fewer employees, two tellers per new branch, as compared with four previously.

Executives attributed the pullback to customer behavior as people turn to mobile and other digital means for their banking needs. Digital logins in J.P. Morgan’s consumer banking, business banking and cards business units were up 28% from 2010 to last year. Meanwhile, calls to representatives and teller transactions fell 3% and 4%, respectively, in that same period.

J.P. Morgan had previously said it planned to cut branch staff by 3,000 to 4,000 by the end of 2014. But in 2013, J.P. Morgan cut 5,500 jobs at branches, and this year the bank said it planned to cut 2,000 more jobs. J.P. Morgan expects its total branch staff to drop 20% by next year when compared with 2011 levels, up from an earlier projected decline of 13%.


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