Federal Reserve Chairman Ben Bernanke may be getting ready to sail off into the sunset as his reign as the top banker in the world is likely coming to an end.
The speculation is that it is doubtful Bernanke will decide to extend his stay as head of the Federal Reserve for a third term at the time his current term finishes at the end of the year.
While Bernanke has helped to save the economy from a deeper recession, he has also created a climate of easy money and massive debt loads that pose their own risks.
What we know is that the economy has recovered under Bernanke’s easy monetary policy.
He has helped to save the big banks, and he will be rewarded by Wall Street, which I will discuss later.
The availability of record-low interest rates by the Federal Reserve has helped to drive up the demand for mortgages and loans. The result has been a marked recovery in the housing market and consumer spending.
Of course, the problem is that the personal debt loads have surged. Recall what happened when the 30-year mortgage rates edged higher in recent weeks on speculation that the Federal Reserve would cut its bond buying at its June meeting: the stock market took a beating as capital shifted into gold and cash.
Loans to companies have been surging. There were $1.53 trillion in commercial and industrial loans in the first quarter by U.S. banks, up 12% year-over-year. (Source: McLaughlin, T., “Surge in U.S. commercial lending raises bubble worries,” Reuters, June 10, 2013.) The amount of lending is a concern given the … Read More
The debates continue on whether the Federal Reserve should or should not begin to take its foot off the money-printing pedal. We will likely find out on June 14, which is when the Fed meets.
I know those seeking income from bonds want higher yields because it’s hard to survive when you are making only about one percent from a five-year U.S. government bond.
For those who have amassed a significant amount of debt during this money-printing spree, including the U.S. government, they probably don’t want to see interest rates rise just yet.
Have you seen the national debt level recently?
It’s at $16.88 trillion and spiraling out of control. And to make matters worse, there has been no discussion on it in the media; it will likely remain this way throughout the summer months, which is scary. It’s like pushing the problem under the carpet in the hope that it will go away. Sorry, but it won’t go away—it will come back and haunt the future generations.
“We cannot live in fear that gee whiz, the market is going to be unhappy that we are not giving them more monetary cocaine,” said Richard Fisher, president of the Dallas Federal Reserve Bank. (Source: “Fed’s Fisher: We Cannot Live in Fear of ‘Monetary Cocaine’” Reuters, June 5, 2013.)
The use of the “monetary cocaine” reference is fantastic because it clearly embodies what is happening with the direction of the Federal Reserve and the money flow.
If you noticed, the current action of the stock market is largely dictated by the speculation on what the Federal Reserve might decide regarding bond buying … Read More
I just read about this doctor who made $570,000 in 2012, yet he didn’t feel rich. The article used “Jake Smith” to cover the person’s identity. In the interview, Mr. Smith said, “I think of rich as not having to worry about money, not having to worry about retirement, not having to worry about saving for your kids’ educations. I have three kids and I try to save up for their futures, and my retirement, and even with my salary I don’t feel secure.” (Source: Sachon, L., “I Made $570K Last Year, But I Don’t Feel Rich [In Fact, I Feel Worried],” The Billfold web site, May 17, 2013.)
OK, Mr. Smith is not rich like Bill Gates or the sports players who make enormous amounts of money for throwing a baseball or making a dunk, but at $570,000 a year, Mr. Smith should not feel worried.
Maybe he is caught in his own little world of self pity, but heck, there are tens of millions of Americans struggling on the other side of what has become a widening income gap. These people are not worrying about cars, fine dinners, college education funds, 401(k)s, or planning their next vacation—they’re struggling each day just to put some food on the table only to then have to worry about the next meal.
The federal minimum wage is $7.25 per hour, and could rise to $10.10 by 2015 if the Obama administration gets its way. That’s $15,080 per year based on a 40-hour week, and I doubt there are any benefits, medical coverage, or retirement plans involved.
So while Mr. Smith ponders his … Read More
The housing market continues to vault ahead. We are seeing strong housing starts and the flow of building permits in the pipeline. Home prices are also steadily moving higher.
The S&P/Case-Shiller Home Price Index, comprising the 20 largest U.S. metropolitan cities, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices.
Looking at the chart below, notice the S&P/Case-Shiller index is currently at its highest point since late 2008, when the subprime credit crisis was in full bloom. Home prices remain well below the levels we saw in 2006, prior to the housing market meltdown.
You can thank the Federal Reserve for creating the ideal environment for the hot housing market via its strategy of record-low, near-zero interest rates and the continued buying of $85.0 billion monthly in bonds to drive down the financing rates.
Chart courtesy of www.StockCharts.com
You can feel the housing market is ready for a bubble, but the trend continues to point higher, albeit at a slower rate and with interest rates inevitably going higher. You need to be careful; but for the time being, the housing market is where it’s at.
I would be hesitant to touch the homebuilder stocks, due to their already massive gains. The chart of the S&P Homebuilders Index below shows the steady upward trend since December 2012, as indicated by the parallel blue lines. Yet also notice that prices have been rising higher without any major adjustment back to the bottom support line since late April. Look at the area marked by the red oval: this is the downside risk to which you are exposed. As … Read More
Home prices are heating up, as the flow of new homes and permits continue to steadily increase and the attraction of historically low mortgage rates motivates buyers.
The buyers that are driving up the housing market are not only the buyers of principal homes, but also the investors who are attracted to the relatively lower home prices and cheap financing.
What is interesting is that we are seeing major buying from not only the smaller investor who may dabble in an investment property, but also the large institutions and hedge funds that are getting into the swing of things, gobbling up hundreds and thousands of properties at lower prices.
The S&P/Case-Shiller index, comprising the 20 largest U.S. metropolitan cites, increased a better-than-expected 9.3% in February, representing the 13th straight up month for prices.
While the housing market is far better than it was a few years ago, when the sub-prime mortgage crisis crushed the housing market and left a trail of destruction, my view is that there may be a bubble building as much of the current surge in prices is due to the cheap money.
Just consider the S&P/Case-Shiller index and notice the major jump in home prices in the housing market. For example, home buyers in the Phoenix housing market saw home prices surge 23% year-over-year, while those living in San Francisco reported an 18.9% surge in home prices.
My problem is that much of the buying in the housing market is being triggered by low-financing costs that can inevitably get homeowners in trouble once interest rates begin to ratchet higher—and they will go higher. For instance, carrying … Read More
Stocks are at their record highs, driven by a soaring stock market rally. The housing market is well off its lows, with sales and home prices edging higher.
The end result is that the overall wealth and optimism in America is higher.
According to the “CNBC All-America Economic Survey,” 33% of Americans felt the price of their homes will ratchet higher, up nine points since the previous survey in November 2012 and the high point since December 2007. The survey in March also suggested 48% of Americans believed it was a good time to invest, given the stock market rally; this number is up from 31% in November and it’s the highest since December 2009. (Source: Liesman, S.,“CNBC, American Dream Is Back; CNBC All-America Economic Survey,”CNBC, March 26, 2013.) So all is good, right?
As I previously commented, the stock market rally has made more people rich. A total of 300,000 newly minted millionaires werecreated from the current multiyear stock market rally, according to Spectrem Group. (Source: Frank, R., “CNBC, US (and Booming Market) Adds 300,000 New Millionaires,” CNBC, March 14, 2013.)
But hold on. The reality is that there continues to be a mass of Americans collecting food stamps, around 48 million, according to USDebtClock.org, and they don’t care about the stock market rally.
While the media’s headlines are commenting on how America is becoming richer, it’s a myth, of course—unless you don’t care about the other 95% of Americans who are just getting by and the bottom rung of this group who are considered America’s poor, making minimum wage.
In my view, the growing disparity between the rich … Read More
The housing market has clearly reached a bottom and is turning higher. After years of dismal sales, increasing foreclosures and short sales, and declining home prices, there’s strong optimism, which has resulted in sizzling demand for homebuilder stocks.
Yet the recovery in the housing market has been helped in a great part by heavy buying by both retail real estate investors and major institutions. According to the National Association of Realtors, cash buyers and large investors account for about 32% of home purchases across the country. (Source: Timiraos, N., “Investors Pile Into Housing, This Time as Landlords,” Wall Street Journal March 25, 2013.)
Institutional buying in the housing market has been significant. One of the major buyers has been the The Blackstone Group L.P. (NYSE/BX), which has $57.0 billion in real estate holdings and another $11.0 billion available to invest. (Source: The Blackstone Group L.P. web site, last accessed March 26, 2013.) The company started a unit called “Invitation Homes” to acquire distressed single-family homes and eventually lease them.
What is happening is that, with the major contraction in home prices being driven by foreclosures, short sales, and cheap financing rates, we are seeing a heavy flow of investors headed into the housing market, taking advantage of the homeowners who were squeezed out by the subprime credit crisis, losing their homes.
While the overall housing market has strengthened, if not for the inflow of investment money, I wonder if the housing market would have recovered at the same pace.
The housing market, especially in warm climate regions such as Florida and Arizona, has also been triggered by the inflow of … Read More
The Federal Reserve may be responsible for the biggest financial meltdown yet to come. In fact, this meltdown could be even bigger than the subprime mortgage crisis in 2008.
Let me explain. We all know the Federal Reserve has created an artificial economy that has been built on the availability of easy access to cheap money due to near-zero interest rates. There is no argument here. Via its aggressive quantitative easing programs, the Federal Reserve has produced an economy that is dependent on cheap capital.
Some would argue the Federal Reserve didn’t have a choice; if they didn’t introduce monetary policy, the housing market and banking system may have collapsed. I agree to that extent, but with the economy now in recovery, you kind of wonder why the Federal Reserve continues to allow the flow of easy money.
Recently at its January Federal Open Market Committee (FOMC) meeting, the Federal Reserve suggested that it would have to review the possible stoppage or slowing of its $85.0 billion in monthly bond purchases. The market reacted by selling stocks. Federal Reserve Chairman Ben Bernanke then came out and said that the central bank was committed to its monthly bond buying as long as the economy and employment remain fragile. So which is it? The Federal Reserve needs to really think about reining in its easy monetary policy and reducing the amount of the M2 (all money in circulation, plus savings deposits, time-related deposits, and market-money funds) money supply in the system.
Here’s the dilemma:
The climate of historically low interest rates has driven a false sense of comfort. Consumers are buying more … Read More
The Dow Jones Industrial Average is firing on all cylinders, trading at a record high. The S&P 500 is also close to its all-time record. Technology and small-cap stocks are blazing along. The amount of new stock market wealth created in the first week of March and in 2013 has been great. Add in the better-than-expected jobs numbers and a decline in the unemployment rate to 7.7%, and you would think that the U.S. economy is back, loaded and ready to go. But we may be closer to a financial crisis than most think.
Here’s the problem: the creation of stock market wealth is heavily weighted with the institutional money and the top one to five percent of the wealthiest Americans. (I use the wider range of the top earners, since you have to be doing fairly well to be in this group.)
There’s an old saying—“Money makes money.” But let me put it another way: making money on $1.0 million is a lot easier than making money on $1,000. Earn two percent on $1.0 million, and you’d have an extra $20,000. Make two percent on $1,000, and you only have $20.00, just enough for a dinner for two at McDonald’s Corporation (NYSE/MCD). All I’m saying is don’t be fooled by the new headlines talking about how well America is doing, as a financial crisis is still possible.
The housing market is booming, but we all know that the rally in prices is partially due to rich investors and institutions buying cheap properties from those who had to sell or be foreclosed on due to a lack of funds to … Read More
Today, all eyes will be focused on the February non-farm jobs numbers report. I will be keenly watching to see if the economy can churn out jobs in spite of the somewhat sluggish recovery in America and the weak demand from the European and Chinese economies.
The private Automatic Data Processing (ADP) Employment Change, which is more closely correlated with the more important non-farm jobs numbers reading, was positive at 198,000 new jobs created in February, but not overwhelming versus the upwardly revised 215,000 in January. The number beat the Briefing.com estimate of 150,000 jobs, but it was the lowest reading since October 2012. In fact, the ADP jobs numbers have declined in the last three straight months, which is not exactly a good sign.
The market needs to see the jobs numbers steadily improve. While we likely are far away from the 500,000 or so new jobs needed each month that indicate a healthy economy, we still need to see jobs growth to continue at close to the current level and for the unemployment rate to hold below eight percent in order to offer any hope of a sustained jobs recovery.
Chart copyright Lombardi Publishing Corporation 2013; data source: Automatic Data Processing web site, last accessed March 7, 2013
Yet the reality is the jobs numbers are not good. There are roughly 22.3 million or so Americans looking for work that are unemployed or underemployed and about 12.3 million fully unemployed. The fact is that these are not good jobs numbers, as many of these people are taking minimal wage jobs just to fight off the creditors and put … Read More
Recently in these pages, I talked about how the government, the Treasury, and the Federal Reserve were creating an artificial economy that was supported by cheap money and low interest rates.
One of the major benefactors of this cheap money was the housing sector, which is now sizzling hot. The median price of an existing home in the U.S. was $173,600 in January, up 12.3% from an average of $154,600 a year earlier. (Source: United States Census Bureau web site, last accessed February 27, 2013.)
Driving the renewed buying in the housing sector has been the environment of near-zero interest rates. The Federal Reserve has been injecting additional liquidity into the economy and mortgage market via its $85.0 billion in monthly bond purchases. The problem is that the low interest rates and easy money have driven the excess buying of homes and investment properties, as speculators jump into the housing sector, looking for deals and driving up home prices.
My concern is that the buying may be creating another potential bubble in the housing sector. You may not believe it, but I view this as a possibility. Housing starts in January showed some stalling. And now, with the sequestration budgetary cut set to take effect tomorrow, the automatic $85.0 billion in annual budget cuts (the planned sequester will total $1.2 trillion over the next decade) could have a widespread impact on the country and the economy, including program cuts, job losses, and economic chaos. The Congressional Budget Office (CBO) has warned that the U.S. economy could contract by 1.3% in the first half of this year if the sequester is … Read More
The money printing presses appear to be in jeopardy. The amount of liquidity that has been pumped into the U.S. economy and other global financial systems has been superlative; and as I’ve said before, it would only be a matter of time before the massive national debt levels accumulated by the governments in the U.S. and Europe would wreak havoc with the economic recovery.
Yet, it may have finally clicked for the Federal Reserve, as comments made Wednesday questioned the central bank’s $85.0 billion in monthly bond purchases and suggested that the buying be reduced or stopped to avoid facing losses. Could you imagine losses for an already cash-strapped central bank, given the national debt?
What has been happening is the Fed’s bond-buying provided the mechanism to pump hundreds of billions of dollars of liquidity into the economy; it was meant to keep it going and avoid a worsening of the recession, but it added to the national debt. Not isolated to the U.S., other central banks around the world have been pumping cash into the fragile global economy. In the financially distressed eurozone, the European Central Bank (ECB) bought bad debt and provided easy monetary liquidity, in order to avoid a financial Armageddon. But this added to the national debt of the countries. Yet here we are: Greece is in shambles; Spain, Portugal, and Italy are broke; and the eurozone’s two powerhouses, Germany and France, are struggling with their own growth issues.
The problem is that the super loose monetary easing in the U.S. created an artificial economy that has been supported by the free-flow printing of money and … Read More
The national debt ceiling debate was initially expected to be resolved by January 1; but when that date came around, it was extended to May 18, as the two sides continue to debate the budgetary cuts, the deficit, and the increase in the debt ceiling above the $16.4-trillion legal limit.
While something needs to be done, President Obama and Congress must also understand that major cuts in fiscal spending to lower the deficit, at this point, could hurt the current economic recovery, which has been showing encouraging signs over the past year. The housing market is hot, with rising construction and sales and home prices that are edging higher. The Federal Reserve’s buying of mortgage bonds and the existence of near-zero interest rates together were the catalyst.
The combination of fiscal and monetary policy is clearly helping the economy, so it would be a grave error to cut spending at this critical time. Taxes for those earning over $400,000 have jumped. Those earning less are also seeing some increases in taxes. The end result was a decline in the consumer confidence reading to 58.6 in January, well below the 61.0 estimate by briefing.com and the 66.7 reading in December. The numbers suggest that consumers may become more hesitant in wanting to spend, given the tax increases.
For the government, the current debt limit will be reached soon. Without the extension of the debt ceiling deadline, the government would have run out of money to pay its employees, support programs, and cover other key spending items.
Nobel Prize economist Paul Krugman is not in favor of cutting spending to curtail the … Read More
It was extremely difficult times for homeowners following the subprime mortgage implosion that helped to drag down the global economy in 2008. I recall how easy it was to get a mortgage without even having to provide an income or work history to the lenders. When an entry-level worker at McDonalds Corporation (NYSE/MCD) can get a mortgage with no questions asked, you have to wonder how long it might be before a housing bubble surfaces.
Luckily, after several years of the housing market being dragged through the mud, the current situation has vastly improved to the point where housing stocks are hot.
The declining mortgage rates have helped. The $40.0 billion in mortgage-buying by the Federal Reserve each month has driven down the cost of interest rates to record lows.
More people are working now, and with the jobs picture improving (albeit, at a slow pace), I expect the housing market will continue to strengthen.
Wherever you live, it’s clear the housing market is displaying much-improved industry metrics. We just saw another strong housing starts and building permits reading.
In December, there were an impressive 954,000 annualized starts, which is above the Briefing.com estimate of 880,000 and November’s 851,000.
Also lending support to the housing market recovery was a strong building permits reading of 903,000 in December, beating the Briefing.com estimate of 880,000 and September’s 900,000. The strong reading indicates that builders are expecting a good flow of buying in the housing market, and this could only bode well for homebuilder stocks.
Home prices, representing another key piece of the housing market, are edging higher, with the S&P/Case-Shiller U.S. Home … Read More
China is beginning to show renewed growth. The country is driving stimulus spending and easy monetary policy to get its economy back on track and drive consumers to spend.
And while there has been talk of an asset bubble in China’s housing market, my view is that the short-term risk is high, but there’s also excellent long-term growth potential in the Chinese housing market.
Investment in the country’s housing market surged 61.7% from January to November, according to the National Bureau of Statistics in China.
The conditions bode well for the country’s housing market. Consider that there are over 300 million middle-class consumers in China, and as a group, they are hungry for a lifestyle like we have in the West. Real estate investments are a key goal for the Chinese.
Standard & Poor’s analysts believe the housing market in China is stabilizing with buyers returning while home prices are stabilizing.
Moreover, in an ironic twist at a time when California’s housing market is struggling, the state’s California Public Employees’ Retirement System (CalPers), a pension fund, announced it would be investing about $530 million in two new China real estate funds managed by ARA Asset Management, which is positive longer-term.
To play China’s housing market, you can take the more conservative approach and buy the Guggenheim China Real Estate (NYSEArca/TAO) exchange-traded fund (ETF) with a year-to-date return of 58.8% as of December 30, 2012. The fund holds mainly large value-oriented Chinese real state stocks.
Chart courtesy of www.StockCharts.com
To take a more speculative and potentially higher return opportunity, an emerging small-cap Chinese real estate company that I like longer-term is … Read More
One of the most important sectors of the economy is the housing market. The housing market is crucial for several reasons. First, the housing market employs a lot of people, both directly and indirectly. This includes the direct employment of people in the housing industry, such as tradesmen and homebuilders, and the indirect employment of people in related industries, such as the automakers that build pickup trucks to be used by tradesmen and homebuilders.
Another crucial factor is the direction of home prices. We’ve now seen continued strength in home prices, which is a positive for the homeowner. Considering a house is the largest property many citizens own, to see its value continually decline is mentally and emotionally difficult. However, with month after month of steady gains, this will help alleviate some concerns about the future.
According to the latest report from research and analytics firm CoreLogic, Inc. (NYSE/CLGX), in October 2012, home prices, including distressed sales, jumped up 6.3% nationwide. This is the largest increase for home prices since June 2006. This was not a one-time jump for the housing market, but the eighth consecutive month of year-over-year nationwide increases in home prices. (Source: “CoreLogic Home Price Index Marks Eighth Consecutive Month of Year-Over-Year Gains,” CoreLogic, Inc., December 4, 2012.)
In regards to homebuilder sentiment for the housing market, which is correlated with home prices, confidence continues to rise. According to the National Association of Home Builders (NAHB), confidence by homebuilders in December rose for the eighth consecutive month. This is the highest level of confidence by homebuilders since April of 2006. (Source: “Builder Confidence Continues Improving in December,” … Read More
The Federal Reserve is busy looking at what to do next to try to keep the economic renewal on track, as the central bank meets for the last time this year. The Fed also understands its impact will be hindered by the ongoing battle in Congress regarding the pending fiscal cliff.
The Federal Reserve is speculated to continue its third quantitative easing (QE3) program of buying mortgage bonds each month. The effect will see the Fed increase its holdings of mortgage bonds to nearly $4.0 trillion, according to a Bloomberg survey. (Source: “Fed Seen Pumping Up Assets to $4 Trillion in New Buying,” Yahoo! Finance via Bloomberg, December 11, 2012.)
The bond buying has helped to ease financing rates and drive the housing market higher.
The Fed has spent $40.0 billion a month to buy mortgage-backed securities and, in theory, lower the financing rates. The yield on the 10-year Treasury stands at 1.6% versus 1.8% prior to the establishment of QE3—so it’s working.
For the Fed, as the QE3 works its way through the system, job creation is expected to be a major benefactor.
The Federal Reserve recognizes that the jobs market continues to be problematic and needs to be addressed, despite the unemployment rate falling to 7.7% in November. There are still over 21 million Americans looking for work.
To date, the super-low interest rates at between zero and a quarter of a percent have helped to prevent the country from falling into the abyss. If not for the low rates, the carrying cost of the $16.0 trillion in national debt would be suffocating and making the situation worse, … Read More
We have all heard the recent news that the housing market recovery is well on its way off the bottom. With home prices continuing to move up, many are questioning the long-term strength of the housing market. While there is no question that home prices have hit the lowest point and won’t return to those levels again, many are worried that they missed the housing market recovery, as prices have already risen significantly. I think there’s a few more years left for price appreciation in the housing market.
It’s been another month, and there’s more news that home prices continue to move upward substantially. CoreLogic, Inc. (NYSE/CLGX), a research and analytics firm, reported that. in October 2012, home prices jumped up 6.3% nationwide, including distressed sales. This is the largest increase for home prices since June of 2006. Another sign that shows the strength of the housing market is that this is the eighth consecutive month of year-over-year nationwide increases in home prices. (Source: “CoreLogic Home Price Index Marks Eighth Consecutive Month of Year-Over-Year Gains,” CoreLogic, Inc., December 4, 2012.)
Not only was October a good month for the housing market—the eighth month in a row of strength in home prices—but also CoreLogic is indicating that, for November, home prices including distressed sales will be up by 7.1% year-over-year. Excluding distressed sales, the firm expects November home prices nationwide will jump 7.4%.
The president and CEO of CoreLogic, Anand Nallathambi, stated, “We are seeing an ongoing strengthening of the residential housing market. Reduced inventories and improving buyer demand are contributing to stability and growth in home prices which is essential … Read More
Investors were pretty excited last week when it was announced that both existing- and new-home builds were up quarter-over-quarter and year-over-year.
U.S. builders broke ground on homes in October at a seasonally adjusted annual rate of 894,000, up 3.6% over September and the highest rate since July 2008. New housing starts are also 87.0% above the annual rate of 478,000 in April 2009, the recession low. (Source: “US new home starts jump to fastest pace in 4 years,” Bloomberg Businessweek, November 20, 2012.)
Keep in mind, new-home sales only account for 20% of the housing market sales. So how did existing-home sales do?
In October, sales of existing homes, which investors tend to love, increased 2.1% month-over-month to a seasonally adjusted annual rate of 4.8 million. Existing-home sales are up 10.9% from a year earlier, representing the 16th consecutive month of year-over-year home-sales gains. (Source: “Existing-Home Sales Rise in October with Ongoing Price and Equity Gains,” National Association of Realtors, November 19, 2012.)
All evidence suggests the housing market recovery is in full swing! But not so fast—a recovery of some sort is in the oven; I’m just not sure it will benefit those who want to own a home.
In October, the median existing-home price was up 11.1% year-over-year at $178,000, marking the eighth consecutive monthly year-over-year increase. This is bad news for potential first-time homebuyers who face stricter lending rules from tight-fisted banks. And the cracks are beginning to show. First-time homebuyers accounted for just 31.0% of October purchases, down from 32.0% in September and 34.0% a year earlier.
While the number of existing homes on the market … Read More
One of the most often talked about parts of the economy is the real estate market sector. Because real estate is such a large and important part of the economy, naturally, many eyes are focused on whether or not this market sector can and will rebound from its deep decline.
While we have certainly seen a strong bounce off the bottom, there are still many concerns for the future of both the real estate market sector and housing stocks, specifically. Investors in housing stocks are definitely ahead of the curve, as many housing stocks have increased substantially. With gains in excess of 100%, the question on many people’s minds is: will the real estate market sector continue its upward trajectory, or are housing stocks teetering on the edge of a massive decline?
The Department of Commerce just released the number of housing starts for October. As I expected, housing starts exceeded estimates, coming in at an annual rate of 894,000, up 3.6%. This is the fastest annual rate since July 2008. Many estimates taken by Bloomberg in a survey are still far too low, coming in at 780,000–873,000. (Source: “Housing Starts in U.S. Increase to Four-Year High,” Bloomberg, November 20, 2012.)
The reason why publicly traded housing stocks are doing so well and driving housing starts is that they are able to take advantage of extremely cheap financing. Essentially, private homebuilders are not able to borrow funds as cheaply as publicly traded housing stocks. Because investors are looking for places to park their money due to the low-interest-rate environment, this is giving housing stocks so much excess funding that they’re … Read More
There were extremely difficult times for homeowners following the subprime mortgage implosion that helped to drag down the global economy in 2008. I recall at that time how easy it was to get a mortgage without even having to provide an income or work history to the lenders. When an entry level worker at McDonalds Corporation (NYSE/MCD) could get a mortgage with no questions asked, you had to wonder how long it would be before a housing bubble would surface.
Luckily, after several years of the housing market being dragged through the mud, the current situation has vastly improved to the point where housing stocks are hot.
The declining mortgage rates have helped. The $40.0 billion in mortgage-buying each month by the Federal Reserve has driven down the cost of interest rates to record lows.
There are more people working, and with the jobs picture improving, albeit at a slow pace, I expect the housing market will continue to strengthen.
Wherever you live, it’s clear that the housing market is displaying much-improved industry metrics. We just saw another strong reading for housing starts and building permits.
In October, there were an impressive 894,000 starts, according to the U.S. Census Bureau, which is above the Briefing.com estimate of 815,000 in October and the 863,000 starts in September.
Also lending support to the housing market recovery was a strong building permits reading of 866,000 in October, albeit short of the Briefing.com estimate of 900,000 and the 890,000 reading in September. The strong reading indicates that builders are expecting a good flow of buying in the housing market, and this could only bode … Read More
The crash in the housing market was a devastating hit to the U.S. economy, as millions of people were affected, wiping out massive amounts of wealth. This is why the recovery in the housing market is extremely important. The Federal Reserve has since stepped in and offered unprecedented monetary policy action to try and stem the decline.
While we can argue about whether or not this is an appropriate action, we can’t argue against the fact that the housing market has definitely begun its slow climb back up. A recent report by the S&P/Case-Shiller Home Prices index for 20 cities showed that home prices increased in August by two percent year-over-year, which represents the largest increase in two years. (Source: “Home Prices in 20 U.S. Cities Rise by Most in Two Years: Economy,” Businessweek, October 30, 2012.)
However, while the effort by the Federal Reserve has indeed created some upward momentum in the housing market, there are still many impediments to overcome before we see even more price appreciation.
In a recent report by a Federal Reserve survey, while mortgage applications are rising, 90% of banks stated that for prime or low-risk mortgages, they were maintaining their tight lending standards. (Source: “Banks See Mortgage Requests Rising,” The Wall Street Journal, October 31, 2012.)
According to the data, there is a significant rise in demand for home mortgages over the last several months. However, banks are maintaining extremely tight lending standards, which could be preventing even higher price levels for the housing market.
The banks that are very active in the housing market are leery of overexposing themselves. While I can … Read More
I recently discussed the upcoming key holiday shopping season that officially begins with the critical Black Friday on November 23 and its importance to the retail sector.
Discounter Target Corporation (NYSE/TGT) reported a slower rise in sales in October and will be betting on the holiday shopping season when some retailers can generate up to 40% of the company’s total annual sales. (Source: AP, “Target October sales figure rises,” Yahoo! Finance from The Associated Press, November 1, 2012.)
Consumer spending drives the retail sector, economy, and gross domestic product (GDP) growth.
Retail sales for October, excluding drugstores (comprising of 18 national retailers polled by Thomson Reuters), surged a better-than-expected 4.7% versus the estimate of 4.3%. (Source: “Retailers Report an Upbeat October,” The New York Times, November 1, 2012.)
The pickup in the retail sector is encouraging; and with the current decline in gasoline prices, the pickup in jobs, and the growing strength in the housing market and prices, retail sales could be strong.
I believe the department stores and some of the specialty retailers will fare well; the key for success in the retail sector is selective picking.
My advice is to continue to stick with the leading discount bellwether retail stocks. In the large-cap retail sector area, the top companies are Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).
Costco reported a seven-percent jump in its key same-store sales reading in October, as reported on its web site. The results continue to show steady growth; but for that extra bit of growth, you should look at the smaller discount companies in the retail sector.
Costco, … Read More
Technology and small-cap stocks have the best potential but are also more vulnerable when the overall market moves lower. The tech-laden NASDAQ is tops with a 14.8% advance this year, but it is now leading the losers, with declines of four percent in October and 3.3% since the end of the first quarter. The small-cap Russell 2000 is down 2.5% in October and 1.7% since the end of the first quarter.
In 2011, small-caps underperformed. You would have done better investing in a Treasury Bill versus small-cap stocks, which were negative in 2011 after advancing 25.3% in 2010. Yet the encouraging signs of the economy’s recovery from the 2008 Great Recession in manufacturing, the housing market, and the jobs market are helping to attract buying to small-cap stocks, which generally perform better as the economy recovers from a recession.
I continue to favor small-cap stocks, as the valuations are more attractive and may be worth a look for aggressive long-term investors.
And while I view the holding of large-cap stocks as an integral part of your portfolio, for added overall portfolio returns, I like small-cap stocks. These stocks add to the risk component of your portfolio, but you are compensated by a higher overall expected return from your investments. You can increase the expected return of a portfolio by simply adding more risk. This is the advantage of adding small-cap stocks.
A standard and simple measure of stock risk versus the market is a beta—a quantitative measure of systematic or market risk that cannot be diversified away and generally moves in relation to the S&P 500 or another market/benchmark.
A … Read More
One of the most-discussed topics right now is the housing market. The housing market is integral to the economy, so naturally many people have a vested interest in seeing this sector rebound. From its peak in the last decade, which was artificially boosted by cheap money, the housing market tanked severely. The rebound has been extremely slow, as a large number of foreclosures have been making their way into the housing market, keeping prices down.
However, there is a large body of evidence that, in some areas, the housing market is definitely coming back. The qualifier is that we won’t see prices rebound to the same levels as last decade for many years; but homebuilder stocks are certainly seeing the benefits of increased activity.
A recent report by real estate firm Zillow, Inc. stated that U.S. home prices increased by 1.3% in the third quarter, although it was an uneven increase across the country. This represents the largest increase since the first quarter of 2006, when the housing market experienced a 1.5% increase. (Source: “U.S. Home Values Jump the Most Since 2006, Zillow Says,” Bloomberg, October 23, 2012.)
Zillow Chief Economist Stan Humphries stated, “The housing market is on the mend, but the housing bottom will be a protracted one.” This is similar to the position I’ve stated in that the price achieved in the middle of the last decade for the housing market was artificially high. People should not be buying real estate based on the belief that those prices will be achieved anytime soon. However, it is clear that for many parts of the housing market, the bottom … Read More
You can still buy cheap homes in America if you don’t mind living in cities like Detroit, Pittsburg, Rochester, Memphis, or Cleveland. Unbelievably, in Detroit, you can even buy a home for under $100.00 if you don’t mind living in an area that is extremely depressed.
On the other end of the housing spectrum, there’s New York City, but to live there, you would need to dip deep into your pocketbook, as the median home price was $1.1 million for the period between July and September 2012, according to Trulia.com (source: www.Trulia.com, October 18, 2012).
Wherever you live, it’s clear the housing market is displaying much-improved industry metrics. We just saw a blow-out in housing starts and building permits on Wednesday.
In September, there were an impressive 872,000 starts, 13.5% above the 768,000 estimate and the upwardly revised 758,000 in August. Also lending support to the housing market recovery was an equally strong building permits reading of 894,000 in September, well above the 815,000 estimate and the revised 801,000 in August. (Source: Yahoo! Finance with data supplied by Briefing.com.) In my view, the strong readings indicate that builders are expecting a good flow of buying in the housing market.
Moreover, representing another key piece of the housing market, home prices are edging higher, with the S&P/Case-Shiller index, comprising of the 20 largest U.S. metropolitan cities, increasing a better-than-expected 1.2% in July; this represented the sixth straight month of increases.
The improvement in the housing market is also showing in the results of numerous homebuilder stocks.
Homebuilders are continuing to deliver better results. Toll Brothers, Inc. (NYSE/TOLL) blew away the consensus … Read More
Elections are important, maybe even the cornerstone of a democracy; but sometimes voters are just too busy to listen to everything being said by the Obama or Romney camps. Thank heaven sound bites can sum up everything we think we need to know.
Here are some recent tidbits from Capitol Hill:
The U.S. Department of Labor recently said that unemployment plummeted in September to 7.8%—the first time the rate dropped below eight percent since February 2009. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, October 5, 2012.)
Auto sales rose in September by 13% from a year earlier to nearly 1.2 million. (Source: “September 2012 Auto Sales,” Automobile Magazine, October 9, 2012.) U.S. home sales jumped to their highest level in two years, and builder confidence has reached its highest level in more than six years. (Source: WRAPUP 2-U.S. new home sales dip, but prices scale 5-year high,” Reuters, September 26, 2012.) Consumer confidence jumped in September. (Source: “Consumer Comfort in U.S. Stayed Near Three-Month High Last Week,” Bloomberg, October 11, 2012.)
Yup, everything is rosy. The U.S. economy is picking up steam, the housing market is turning around, and the U.S. is creating jobs. The economic turnaround is in full swing, and Americans are happy.
But if you believe the economy is getting better, you must truly be the world’s greatest contrarian, despite the overwhelming evidence to the contrary.
I think it’s all about perspective.
The so-called “encouraging” news reminds me of that scene near the end of Titanic, where a deckhand fires off a rescue flare into the night; people onboard the sinking ship or in the lifeboats … Read More
With yet another month of data, we’re seeing the continued recovery in the housing market. Research firm CoreLogic, Inc. (NYSE/CLGX) just reported that August home prices were up 4.6% from a year ago. This big increase in year-over-year home prices is the largest in six years.
Don’t get me wrong; the housing market will not reach the highs of the past decade anytime soon. But we are clearly off the bottom and that is a crucial development. To buy such a large asset, buyers need to feel somewhat secure that home prices won’t keep dropping. While no one is looking for massive returns, having a stable housing market is extremely important in this economic recovery.
While many believe the housing market is flooded with properties, the opposite is true; we’re seeing shortages of properties driving up home prices, not only in this report, but from the homebuilders themselves. That’s why homebuilder stocks have had massive moves this year, being one of the strongest equities to own.
According to the National Association of Realtors, the number of listed homes for sale was down 18.0%. I think this is partially due to the fact that the homeowners are seeing home prices increase; so they hold off until home prices get high enough for them to sell their properties. At that point, the housing market will reach some sort of equilibrium between supply and demand. For now, demand is clearly outpacing supply in many parts of the country.
When we add what the Federal Reserve just announced—keeping rates low for some time—they’ve certainly helped the housing market. Now that potential buyers are seeing … Read More
The latest release of the S&P/Case-Shiller Home Prices Index is out, measuring data through July 2012. For the third consecutive month, all 20 cities recorded monthly gains in home prices. The 20-city average year-over-year gain was 1.2%. The numbers also show that single-family homes are in demand, which isn’t new, as I’ve discussed the strength in homebuilders such as Toll Brothers, Inc. (NYSE/TOL) before.
In fact, the reports I’ve seen show that, in many markets there’s a shortage of new homes, as the homebuilders are seeing multiple bidders and price improvements. These are all great signs that the housing market is starting to regain a solid footing. Note: this does not mean we will retake the peak in home prices anytime soon. In fact, I have argued in the past that home prices were artificially pumped up during the last decade, and it will take many years before the housing market overtakes those high levels.
What is important is that buyers feel secure that home prices won’t collapse. In fact, we’re seeing many markets experience strong gains in home prices. The Case-Shiller reports that San Francisco is up 20.4%, Detroit is up 19.7%, and Phoenix is up 17.0% from their respective lows.
As they say, the housing market is all about location. In areas of the country where the jobs market is growing, such as the high-tech or even the automotive sector, we’re seeing a resurgence in home prices. The housing market in San Francisco is up almost five percent since last July, with Detroit up 6.2%.
These are not aberrations, but they are a sign that the housing market … Read More
The retail sector is showing some strong results as pent-up consumer spending is showing some encouraging signs of release. Yet, as a retail sector investor, do you stick with the discount and big-box stores, or should you invest your capital in high-end retailers?
The key is to buy the retail stocks that show growth along with the economic recovery, whether they are big-box stores, discounters, or luxury retailers. Investors want growth.
On the cheap end, I favor the leading discount bellwether retail stocks, as I feel consumers will continue to look for bargains regardless of the improving market conditions.
This includes large-cap stocks Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST).
For added growth, you should look at the smaller discount companies in the retail sector.
With superior growth to Costco, small-cap PriceSmart, Inc. (NASDAQ/PSMT) operates 29 warehouse clubs in 12 countries in Central America and the Caribbean.
A big winner last week was large-cap Dollar General Corporation (NYSE/DG), an operator of over 10,000 stores across 40 states. Dollar General beat on earnings for the fifth straight quarter. The stock has reasonable valuation and above-average, long-term price appreciation potential, a positive for investors looking at the retail sector. Currently, Dollar General is up nearly 50% from its 52-week low.
In the low-end area, I like Dollar Tree, Inc. (NASDDAQ/DLTR) and Family Dollar Stores, Inc. (NYSE/FDO).
And with the housing market ramping up, I expect spending in the retail sector to continue to increase, especially on non-essential goods and services reflected by durable goods. My favorites in the retail sector remain the discounters and big-box stores. The … Read More
While there are still many pockets of weakness in the housing market, there are now some positives beginning to emerge. We’ve seen plenty of companies reporting that the higher end of the housing market is certainly rebounding strongly. Last week, Toll Brothers, Inc. (NYSE/TOL) reported quarterly earnings that were the highest since 2008. The company’s CEO stated that it is currently seeing the most sustained demand since 2008.
Many are worried about the market sentiment for the lower end of the sector, the distressed housing market. With millions of homes left to be foreclosed, will prices continue to drop? It appears not, as investment funds are scooping up real estate at an exceedingly fast pace.
RealtyTrac Inc. reported that the prices of homes in the process of foreclosure are seeing the biggest annual increase since 2006. In a related story, Bloomberg interviewed many in the housing market industry who essentially said that there is not enough supply in many markets, which is pushing up market sentiment and prices. Market sentiment is clearly shifting in the housing market; the key point is that it’s not coming from the individual home buyer. This is where many analysts are getting it wrong, looking at such metrics as consumer confidence. Most of the buying is actually coming from institutions, large investors, and hedge funds.
One of these funds is The Blackstone Group L.P. (NYSE/BX). The Bloomberg article noted that Blackstone, along with several other funds, is planning to deploy several billion into the housing market. The way funds work is that, if they see firms making money, other funds will step into the space. … Read More
I was just reading a Wall Street Journal article on real estate and was shocked to discover that the average list price of a house in Detroit is a mere $21,000 at this time. After seeing this, you may think of hauling your belongings to the auto epicenter of the U.S.; however, given that you may have a tough time finding adequate paying work, it may not be a good idea. Although, yes, you can probably work at minimum wage and buy a house in Detroit.
What I’m getting at is there are numerous places (maybe not as bad as the situation in Detroit) in America where the housing market is dirt cheap.
The media will tell you how the housing market is ramping up. That’s true as far as housing starts and building permits go, which have improved significantly since the subprime crisis in 2008, but the reality is home prices continue to be dogged by high home foreclosures and short sales. In my view, this factor will continue to cast a cloud over the housing market.
While the housing market has clearly improved from last year and the start of the subprime housing crisis in 2008 that led to the worst recession since the Great Depression, I still feel that the optimism is somewhat high and that there will continue to be hurdles ahead.
We have seen an uptick in homebuilder stocks as the optimism picks up.
The chart of the S&P Homebuilders Select Industry Index (NYSE/XHB) shows the upward trend from the October 2011 bottom to the May peak. We are currently witnessing some stalling on the … Read More
The latest data coming from the S&P/Case-Shiller index showed several surprises in the housing market. Home prices in some markets are clearly rebounding, while in other parts of the country, home prices continue to languish. The truth is that the housing market is not one monolithic entity, but rather consists of pockets of strength and weakness for home prices across the nation.
A notable housing market area is San Francisco, where home prices are up 16.0% on an annual basis over the three-month span ending in April. Other notable moves in home prices during the same time span include Phoenix up 26.0% on an annual basis, Seattle up 12.0%, Tampa up 11.0%, San Diego up 8.3%, and Miami up 8.2%.
There are also reports from the homebuilders of extremely strong demand in the housing market for certain parts of the country. Home prices are clearly rebounding, as long as one is very particular about the cities and neighborhoods. In many of the housing market areas of high demand, inventory is extremely low and is driving home prices up significantly.
The takeaway message from this resurgence in home prices is to focus on homebuilders in a specific housing market. The new home sales are clearly rebounded as the homebuilders are only constructing in the housing market that has the highest demand. Take a look at the stocks of Toll Brothers, Inc. (NYSE/TOL) and Lennar Corporation (NYSE/LEN); they’ve had a tremendous run from the lows of last year. Lennar itself has almost tripled in price.
While many worry that home prices will remain stagnant due to the overhang of foreclosures, there is … Read More
I’ve penned articles recently describing how the European debt crisis began. Too much debt needs to be paid back. Not only do the southern countries in Europe not have any money to pay it, but also the global economic slowdown is reducing government revenue, moving up the timetable of the European debt crisis to today.
One month after denying that Spanish banks would need a bailout, Spain’s leaders asked the European Central Bank (ECB) for money. The bailout currently stands at 100 billion euros. It is not going to be enough, as the European debt crisis deepens.
Spanish banks hold 400 billion euros in mortgage-backed securities (MBS), but the value of those securities is diminishing fast. The bailout of 100 billion euros might be sufficient if Spain’s economy grows again and the housing market stops falling. Of course, the housing market has a greater distance to fall, because, like the U.S. housing market, prices reached lofty levels that were completely unsustainable.
With the European debt crisis, there is no chance Spain’s economy will stop falling and magically start growing again. As a matter of fact, the economic contraction in Spain will only get worse, because the European debt crisis is deteriorating—and fast.
The unemployment rate in Spain is currently 24.3%. That is one-in-four people in the country who are unemployed. Youth unemployment is over 50%: one-in-two young people are unemployed. Just-released figures showed that the poverty levels in Spain have continued to worsen. Twenty-five percent of the population lives below the poverty line, as the European debt crisis prevents job creation and growth.
With this backdrop and the continued European … Read More
The European debt crisis will affect the U.S. economy and the U.S. stock market. There are those who believe that our trade with Europe is so small that the European debt crisis will not weaken our economy. It’s true that our exports to Europe are a small portion of our total exports; however, our large multinational corporations derive a significant portion of their revenues from Europe.
Roughly 40% of all corporate profits in the S&P 500 come from overseas, and just a glance at the headlines of the latest earnings reports of those companies illustrate how much the European debt crisis is affecting their bottom line.
Secondly, China’s largest export market is Europe. Since the European debt crisis, China’s economy has slowed considerably. China’s growth affects the rest of Asia, which will impact the U.S. considerably.
Therefore, for these reasons, I would argue it is important to understand the European debt crisis.
Before the European debt crisis and before the 17 countries came together under one currency, Greece, Portugal, Ireland, Spain and Italy ran their own countries. The interest rates paid on the debt issued by these countries were very high as compared to countries like Germany, Austria, and the Netherlands, because southern Europe was not as efficient as northern Europe.
The money Greece, Portugal, Ireland, Spain and Italy were able to borrow was limited by high interest rates and by the amount of debt they carried. The bond market made sure of that when these countries were independent, which is why there was no European debt crisis.
When these countries entered the euro, they suddenly had access to a … Read More