by Addison Wiggin & Ian Mathias
- Unintended consequences: How a the faux-recovery will hurt the housing market
- Dan Amoss highlights a “priced to perfection” sector with a less-than-perfect outlook
- How China helped oil up to new 2009 high
- Bill Jenkins says enough is enough… his bet on a stronger dollar, below
Follow this one… how the recent rise in retail sales might bust the housing “recovery”:
“Retail sales growth is understandably proving meager and hard to regenerate,” writes our macro sage Rob Parenteau, “in a nation where private debt deleveraging is under way and net job generation has yet to return. The early read on consumer expectations for October shows a seven-point drop, which is very indicative of the hesitancy that we suspect will characterize the tentative return to higher spending by U.S. households. Too many rugs have been ripped out from underneath them over the past two years.
“The shallow recovery in the dollar level of retail sales is, nevertheless, enough to help produce a positive GDP result for Q3, with consensus estimates centering on 3.5% of late. As this will mark an official end to the severe recession, one consequence is that Treasury bond buyers may be reluctant to add to their exposures, especially with the Fed’s quantitative easing for this asset category ending in a month. The housing recovery is tentative enough that a backup in mortgage rates into year-end would undoubtedly prove problematic.”
(What would that mean for markets? Look here for Rob’s prediction.)
Right on cue, mortgage rates have abruptly spiked. The average 30-year fixed, which fell all summer, has popped from 4.8% at the start of October to 5.2% today.
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These rates (and the yield on 10-year treasuries) have risen lately, thanks mostly to the Fed, whose mortgage market manipulations, as Rob Parenteau noted, are on track to wind down soon. More on that in a minute…
And thus, as rates rise, mortgage applications fell 13% last week. The Mortgage Bankers Association said yesterday that weekly refis fell almost 17%, while applications for new mortgages declined 7%.
So put it all together… withdrawing government intervention, rising rates and falling applications… and you get this: From June 2009-June 2010, the median U.S. home price will fall another 11.3%. According to research published this week from Fiserv, home values will likely drop next year by about as much as they did this year… ouch.
The firm expects 342 out of 381 markets to record losses, with Florida, California, Nevada and Arizona leading the way (again). Value investors should check out some screamin’ deals in Detroit: Already home of the lowest median home price in the U.S. ($50,000 — not a typo), prices in Detroit are expected to fall another 9%. If you’re looking to weather the storm, check out Kennewick, Wash., the biggest winner of the survey, where prices are expected to rise almost 9% next year.
“The upcoming third-quarter earnings reports from real estate investment trusts will not be pretty,” writes Dan Amoss, whose Strategic Short Report readers are currently betting against the REIT rebound. “Second-quarter earnings for the sector were boosted by one-time gains from buying back publicly traded bonds at discounts, and taking advantage of bond investors’ newly whimsical attitude toward credit risk by floating new bond issues. Earnings were also boosted as REIT executives slashed property operating and maintenance expenses. But that can only go so far before real estate quality becomes an issue. The competitive environment to fill vacant space will squeeze REIT profits. If you’re a high-quality tenant, it will be a ‘buyers’ market’ for years.
“Sell-side analysts have adjusted their earnings estimates for REITs upward, and the bar is now higher. But same store net operating income (i.e., trends in rent pricing) is what really matters for investors’ expectations looking out several years. As rents remain depressed from tepid new business formation and slow retail sales, the supply of credit to REITs will once again tighten, which will dampen REIT owners’ expectations for future free cash flow.
“The Dow Jones U.S. Real Estate Index has tacked on a hefty 30% rally since second-quarter earnings season in July. REITs are now priced for perfection, rather than being priced for the obvious multiyear depression staring REIT owners in the face.”
Better-than-expected earnings are no longer moving the market higher by the day. Despite some beats from big names like Morgan Stanley and Yahoo, the S&P 500 finished down almost 1% yesterday. Fear appears to be coming back en vogue… most of the sell-off came in the last hour of trading yesterday, triggered by famed analyst Dick Bove’s downgrade of Wells Fargo.
Looks like much of the same today… despite earnings beats from 3M, Dow, Travelers, McDonald’s and AT&T, the DJIA and S&P both opened down.
To make matters worse, initial claims for jobless benefits rose by 11,000, to 531,000, last week. Claims had fallen five of the last six weeks… no more. On the bright side, continuing claims fell below 6 million for the first time since March.
Traders take note: An interest rate hike “is not something I anticipate happening over the next several months. Certainly not,” said Fed governor Janet Yellen yesterday, who is a voting member of the FOMC.
On the other side of the world, Chinese GDP grew 8.9% annually during the third quarter, its government claims today. That’s a full one percentage point improvement from the second quarter, and maintains China’s eerily perfect projections of 8-9% growth in 2009.
Thus, oil found another 2009 high early this morning. Light sweet crude rose as high as $82 a barrel. China might get the credit for the new high, but this isn’t helping:
The dollar hit another 12-month low yesterday and is barely higher as we write. The dollar index sank below 75 for the first time in a year yesterday afternoon, and now it’s just a tiny bit higher, at 75.3. That puts the euro up a penny, to $1.50. The real stars are commodity currencies like the Canadian and Australian dollars. Both are soaring back toward parity with the greenback, with the loonie at 95 cents and the Aussie at 92 cents.
“I am looking for a bounce in the dollar,” says our currency trader Bill Jenkins. “I thought that perhaps the fall season might be enough to bring it on. That hasn’t happened. That’s not the same as saying it isn’t in the cards. We are now in the midst of the new equities earnings season. J.P. Morgan produced stellar figures that pumped risk appetite into the market strong and hard. Other corporations may not be able to do as well.
“It seems to me that this rally is already on thin ice… the reasons why we have delineated here on many occasions. At any rate, the dollar will bounce, it will likely end up being a bigger move than most anticipate and it will be fueled by fear and short covering. Then, when the big boys have had enough, the course will be reversed, fundamentals will resume their place, and the dollar will begin its drift toward the nether regions once again.
“It is a treacherous pathway before us, but should yield us some really nice profits.”
For Bill’s precise strategies on reaping those FX profits, look here.
Gold has been bouncing between $1,050 and $1,065 all week. As we write, an ounce goes for $1,055.
Last, as you’ve likely heard, the Obama administration is going to slash executive pay at the seven biggest bailed-out companies. No official word yet on what the “pay czar” (really, what a horrible choice of monikers) Ken Feinberg will do, but the rumor is an average 50% cut for the 25 highest-paid execs at Citi, Bank of America, AIG, Chrysler, Chrysler Financial, GM and GMAC. (VP number 26 must be pretty psyched, eh?)
Of course, we’re a little miffed to see Uncle Sam telling any private business what it can or cannot pay its employees, if it’s even fair to call the companies “private” anymore. Then again, we were quite content watching all seven of these lousy companies fail, and it seems like this administration is doing all that it can to ensure that happens… just in a more excruciatingly bureaucratic way.
And we wonder… what will those companies do with that money now that they can’t pay themselves so richly? Heh, we can’t see them cutting checks to the March of Dimes.
“You asked why no one blamed the banks,” a reader writes of the strange shadow inventory of unforeclosed homes. “I think the answer is that the bank error happened a long time ago, when they made the original loan. Their situation now is to make the best of a bad situation. They, apparently, think that controlled feeding of foreclosures to the market will help to receive a higher return. They may be right, but we probably won’t know for a long time, if ever.
“I would be much more interested to know what will happen after the bank forecloses. What should happen is the couple in question should be prosecuted for fraud. If the relative actually buys a new home for them using the ‘stash,’ they’re equally guilty. In addition, if the money is given to them in lump sum just before the closing, the bank for the new loan, if any, shouldn’t allow it. If the money is being put into an account under the relative’s name, it will certainly exceed the allowable deduction for an annual gift. Therefore, a gift tax will have to be paid or at least deducted from their lifetime exclusion. The same thing applies when the house is given to the ‘real’ purchasers.
“Last, but certainly not least, after waiting for the new house to be retitled to the original mortgagees, the bank should file a civil suit to recover the back payments and any losses on the original mortgage. Hopefully, the bank will get the new house, if the fraud (and IRS) penalties didn’t get it already.
“Thanks for printing the small bit about vitamin D,” another reader writes, “and all the insight you put into this crazy world. For the past two years now, I’ve been taking vitamin D3 and have noticed a remarkable difference in shedding colds and on coming flus. There is no toxicity, so high doses can be taken. There is a mountain of information about this greatly misunderstood vitamin. Our health is the only real wealth one has.”
Cheers to that,
Ian Mathias
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