Weighing the Week Ahead: Will a Sluggish Housing Sector Derail the Economy?
- Housing is a leading component. It is not responding to interest rates as expected, and those good times may be ending. (New Deal Democrat).
- Nearly ten million Americans have underwater mortgages. These are concentrated in low-priced homes (30%). Some of the least expensive homes were purchased by investors and are now rental properties. This leads to poor prospects for entry-level buyers and also interferes with those wanting to “move up.” Many others lack real equity that allows them to trade up or trade to move to a new job. (Various accounts of the Zillow story. See Erin Carlyle of Forbes).
- Home affordability is challenging, especially given sluggish income growth. (MarketWatch).
- Big investors are betting against housing. Bill Miller disagrees. (MarketWatch).
- Expect sideways movement and gradual progress. (Calculated Risk).
It all seems pretty negative. As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information. Last Week’s Data Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
- It is better than expectations.
The Good There was little news, but it was mostly good.
- Car sales are looking strong, up seven percent according to private research firms in a strong spring selling season.
- Forward earnings estimates rose for the sixth consecutive week. (Via Brian Gilmartin).
- Leading economic indicators rose 0.4%, beating expectations. Doug Short has a complete analysis. This chart (typical of his skill in bringing data to life) tells the story:
- Mortgage rates near a seven-month low. (Via Calculated Risk).
- New home sales beat expectations, but this is a noisy series. I am scoring this as “good” on the monthly improvement and the market reaction, but it is a close call. Calculated Risk notes that the first four months of 2014 are down 2.6% from last year. John Lounsbury and Steven Hansen reach a similar conclusion, after viewing the data in various ways.
The Bad There was a little bad news as well.
- Immigration reform is stalled again. Nearly all of the economic studies show the benefit of more immigration and also reassure that immigrant labor is a complement to native-born workers. This explanation is from a liberal source, but many conservative leaders (former Speaker Dennis Hastert, for example) take a similar position. This is one of many economic issues that has become politicized.
- Jobless claims increased by 28K, worse than expectations.
- Existing home sales missed growth expectations.
- Tensions between Russia and Ukraine remain high. Mark Mobius of Franklin Templeton Investments discusses the sanctions and the economic effects.
The Ugly Penny stocks, a market that is once again seeing a lot of action. (Via WSJ). The SEC is acting against the worst frauds. Cody Willard often warns investors at Scutify.com about these dangers (especially in pot stocks), harkening back to his excellent 2011 article. The Humorous If you missed the video interviews with NYU grads about Janet Yellen’s commencement speech, take a minute for a few chuckles. While some have a general idea of who she is, others were wondering and would have preferred a different choice. (Tina Fey?) The Silver Bullet I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. Think of The Lone Ranger. Last week there was no award. This week I have two great candidates. I’ll save one for our next installment. This week’s award goes to Barry Ritholtz for The Truth About Auto Sales and also Jalopnik on the same theme. When things get a little slow on the bad news front, some sources are happy to recycle old stories as if they were current. I wonder how many readers looked carefully at the pictures of the cars. Quant Corner Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here. Recent Expert Commentary on Recession Odds and Market Trends Georg Vrba: Updates his unemployment rate recession indicator, confirming that there is no recession signal. Georg’s BCI index also shows no recession in sight. For those interested in hedging their large-cap exposure, Georg has unveiled a new system. RecessionAlert: A variety of strong quantitative indicators for both economic and market analysis. Doug Short: An update of the regular ECRI analysis with a good history, commentary, detailed analysis and charts. If you are still listening to the ECRI (2 ½ years after their recession call), you should be reading this carefully. Bob Dieli does a monthly update (subscription required) after the employment report and also a monthly overview analysis. He follows many concurrent indicators to supplement our featured “C Score.” One of his conclusions is whether a month is “recession eligible.” His analysis shows that none of the next nine months could qualify. I respect this because Bob (whose career has been with banks and private clients) has been far more accurate than the high-profile TV pundits. Blaine Rollins at 361 Capital always has some interesting ideas, with good charts and data. This week he cites an analysis from JP Morgan comparing current conditions to past market peaks – quite different! The Week Ahead We have a lot of data stuffed into a short week. Here is what to watch for. The “A List” includes the following:
- Initial jobless claims (Th). Best concurrent read on employment.
- Michigan sentiment (F). Information on spending and employment that you cannot get elsewhere.
- Personal income and spending (F). April data. Important read on the consumer and the economy.
- Durable goods (T). April data, but a component for GDP.
The “B List” includes the following:
- PCE prices (F). This is the inflation indicator the Fed watches. Whether or not you agree with this choice, you should pay attention.
- Pending home sales (Th). All things housing are of great interest.
- Chicago PMI (F). I do not place much emphasis on regional results, but this one is a good predictor of the national ISM index – a major indicator. I am especially interested when a weekend separates the two releases.
- GDP second estimate. Everyone knows this will be very weak, possibly a decline of 0.5%. As usual with GDP releases, we are so far into the next quarter that interest will be modest. It does provide the baseline, showing how weak things were at the start of the year.
- Case-Shiller home prices (T). This index has the brand name value, but is actually a bit slower to pick up changes. Expect the Professor to do some interviews with a worried look and a cautious take!
Ukraine remains a wild card. There will be a little FedSpeak but also possible hints about ECB policy from a European conference. Negative rates in store? I don’t care much about the regional Fed surveys. How to Use the Weekly Data Updates In the WTWA series I try to share what I am thinking as I prepare for the coming week. I write each post as if I were speaking directly to one of my clients. Each client is different, so I have five different programs ranging from very conservative bond ladders to very aggressive trading programs. It is not a “one size fits all” approach. To get the maximum benefit from my updates you need to have a self-assessment of your objectives. Are you most interested in preserving wealth? Or like most of us, do you still need to create wealth? How much risk is right for your temperament and circumstances? My weekly insights often suggest a different course of action depending upon your objectives and time frames. They also accurately describe what I am doing in the programs I manage. Insight for Traders Felix has lost enthusiasm for the market. Few choices in our ETF universe qualified as fresh buys. (We use a rating of 20 or higher and exclude sectors in the penalty box). The broad market ETFs look a little worse than last week. The overall picture is neutral – with the Q’s (QQQ) slightly positive and the Russell 2000 (IWM) slightly negative. We are still fully invested for Felix trading accounts, but the ratings are marginal holds. We will probably have reduced positions and might even be completely out by next week unless there is some improvement. Those who want to follow Felix more closely can check us out at Scutify, where he makes a daily appearance to join in vigorous discussions about trading. Insight for Investors I review the themes here each week and refresh when needed. For investors, as we would expect, the key ideas may stay on the list longer than the updates for traders. The current “actionable investment advice” is summarized here. We had enough volatility to do some additional buying, replacing some enhanced yield positions lost at options expiration. Those trying out our Enhanced Yield approach should have enjoyed yet another good week in a sideways market. Bespoke illustrates this in the current market: The time decay in last week’s slow trading was dramatic but rather predictable. It is always satisfying to make money when nothing is happening. To do so it is important and helpful to own value stocks that pay dividends and add some hedging via short calls. I have written several times about examples that you can try on your own. It reduces your risk. Start small and get the sense of how to do it. This week on Scutify I responded to a reader question about IBM. I explained that I traded it versus the JUN 190 calls. This has been a rinse, lather, repeat position for us. The stock does not seem explosive to the upside. We have collected dividends and call premiums and played the trading range. Today the stock moved a little higher while the calls actually declined in anticipation of the long weekend. You won’t read that in any book about option deltas! Here are some key themes and the best investment posts we saw last week: Summer melt-up? I am not necessarily predicting this, but we all need some balance in our reading. It seems like the pundits and the media are very negative. The emphasis on top-calling makes the risk/reward seem out of balance. The source expects a final surge and then does the obligatory crash prediction. Sheesh! (BAML via Business Insider). Time to avoid small caps? The noisy sources emphasize the dire implications of the small cap weakness. Our programs hold these stocks only in our “Aggressive Program” and even then in small allocations. The entire Russell 2000 is equal to about six stocks in the S&P 500. There is big reward, but also big risk. If you are worried about risk, choose larger stocks. Here is a nice analysis showing the distinction between small and mid-caps. Be careful with ETF choices and trading. Many investors treat ETFs as a cheap substitute for mutual funds with the advantage of more liquidity. There are some problems with that liquidity. Sometimes the ETF holds illiquid holdings, preventing a fair settlement price. On other occasions there are too many sellers hitting the exits at the same time. I regularly trade in ETFs and I am not warning against the entire asset class. You just need to use caution in your choices and trade timing. Tracy Alloway at the FT has a good post on the subject. Watch out for slick salesmen selling yield. Josh Brown already warned you about brokers and incentives in his excellent book, which I reviewed here). Josh knows the pitch and shares it with the authenticity of an insider. This time he flips it with a conversation you will NEVER hear. I cannot do justice to this with a quote, so you need to read the entire post. Conclusion: Someone selling you an amazing yield is probably exaggerating and collecting a big fee. Maybe you suspected that… Want to know the most popular stocks owned by big hedge funds? They must reveal the holdings and you can see the list in this article by Steven Russolillo of the WSJ. Pretend that you are playing Family Feud and try to guess stocks from the top 5. Answer at the end of the post. Barry Ritholtz seems to have a new great theme each week in his BloombergView column. This time he discusses risk, using odds of death to provide an out-of-the box challenge to investors. We all over-estimate the odds of dying from terrorism rather than mundane causes like heart disease. The same story is true for investors who exaggerate the odds of market crashes. Read the entire post. Leon Cooperman, Chairman and CEO of Omega Advisors spoke at Columbia Business School. His chart-packed presentation illustrated the improved financial situation for both households and businesses, as well as catalysts for near-term action. Here is one of the many good charts, leading to his conclusion that “treasuries and corporate bonds are uninteresting and unattractive.” If you are obsessed about possible market declines, you have plenty of company. This is one of the problems where we can help. It is possible to get reasonable returns while controlling risk. Check out our recent recommendations in our new investor resource page — a starting point for the long-term investor. (Comments and suggestions welcome. I am trying to be helpful and I love and use feedback). Final Thought I was surprised at the traction from the Zillow story about underwater mortgages. Everyone’s focus was on the 18.8% rate with little comment that this is much better than the 31.4% rate from only two years ago. The stories also characterize the market in terms of simple stereotypes. This makes for a compelling story, but it is not good economic analysis. Markets actually reflect a distribution of participants with different price points and motives, A real economic study would take note of a few factors:
- If 30% of low-cost homes are underwater, then 70% are not. It reduces the supply, but does not end it.
- Many homes are still purchased without 20% down via mortgage insurance.
- If low-cost existing homes are in short supply, builders can provide new ones. (And they are).
- If there is real demand for low-cost homes, those purchased for investments can be offered for sale.
To summarize, if you view housing as a market instead of a few stereotypes it is easier to see how some progress could be possible, progress that includes new construction. Economic growth would be better if we simply had some relief from the housing “drag” of the last several years. Top Hedge Fund Stocks Top five include Google (GOOG), Apple (AAPL), General Motors (GM), American International Group (AIG), and Time Warner Cable (TWC). How many did you guess? How many do you own?