U.S. HOUSING
Can We Really Blame the Weather For Weak Housing Numbers? Analysis Indicates Colder-Than-Average Temperatures Don’t Fully Explain Declining Housing Starts
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To assess the influence of cold weather on housing starts, we analyzed temperature data from January 1984 to February 2014 and compared it to historical housing starts data. Because the question is whether or not the abnormally cold weather influenced building activity, we compared the temperature in a given calendar month to the average temperature for that calendar month for the 30-year time span. For example, the average temperature in the U.S. in February for all years was 35.3 degrees, and the U.S. temperature in February 2014 was 32.2 degrees, making February 2014 3.1 degrees colder than normal. While this year’s winter was colder than normal for the U.S. overall, when broken out by region, it is clear that some parts of the country experienced more severe temperatures than others. Figure 1 shows the degree difference from the average temperature from November 2013 to February 2014 by Census region. The midwest region was hit particularly hard this winter, with temperatures in February at almost 10 degrees colder than average. The Northeast and South didn’t fare much better.
The housing starts data, much like the temperature data, shows very different levels of activity by region. The 13-percent decrease in January starts was not evenly distributed: Starts in the Midwest fell 55 percent, the South dropped 11 percent, the Northeast increased by 8 percent and starts in the West increased 11 percent. Since the western region had both above-average temperatures and a large increase in housing starts, can we conclude that colder-than-average temperatures caused the declines in other regions? (…)
While colder weather is a substantiated factor, clearly, the monthly change in housing starts is not entirely attributable to the colder-than-average temperatures. The 55-percent January decrease in housing starts in the Midwest cannot be completely attributed to the weather, but it is possible that the increase in February would have been bigger had the weather not been so cold. In the Northeast and South, the results are similar – colder-than-average temperatures don’t sufficiently explain the significant decline in housing starts.
Past severe winters that have negatively affected housing starts were followed by a rebound after temperatures began to rise again. This analysis indicates there should be a rebound again this spring, but it will not be sufficient enough to counteract the current weakness in the market that can’t be blamed on the weather.
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The Affordability Myth
Housing is an inherently local market that is analysed using national data. For instance, affordability looks good nationally but …
More than half the homes currently on the market in seven major American metros are currently unaffordable for local residents, and one-third of homes for sale are unaffordable by historic standards.
That’s the conclusion from a Zillow (Z) analysis of income, mortgage and home value data in the fourth quarter of 2013, which puts to question the regular industry claim that housing is more affordable than ever because of the current price and interest rate levels coming out of the housing crash. (…)
Homebuyers increasingly have to search on the perimeter of the country’s largest metro markets, as downtown properties become out of reach for buyers of typical means, the report found. (…)
More than half of homes currently listed for sale in Miami (62.4%), Los Angeles (57.2%), San Diego (55.3%), San Francisco (55.2%), Denver (52.8%), San Jose (50.9%) and Portland, Ore. (50.3%) are unaffordable by historical standards.
Nationally, Zillow found that one-third of homes are currently unaffordable, and in many metro areas, the majority of homes remain more affordable now than they have been historically for buyers making the area’s median income.
But as mortgage interest rates rise along with home values, affordability will worsen, and buyers will need to spend ever-larger shares of their incomes to buy increasingly expensive homes. (…) (Housing Wire)
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The Lack of Inventory Myth
Sales are apparently weak because there is little inventory. Look at what is happening in Phoenix, AZ., courtesy of housing economist Tom Lawler (via CalculatedRisk):
ARMLS reported that residential home sales by realtors in the Greater Phoenix, Arizona area totaled 6,712 in March, down 17.7% from last March’s pace. (…) Active listings in March totaled 29,939, up 0.9% from February and up 44.4% from a year ago. The median home sales price last month was $187,000, up 11.6% from last March. Last month’s sales were the lowest for a March since 2008.
Americans Owed Less on Their Credit Cards in February
Total outstanding consumer credit across the economy rose at a seasonally adjusted annual rate of 6.4% in February to more than $3.129 trillion, the Federal Reserve said Monday.
But outstanding revolving credit, which includes credit-card debt, fell $2.42 billion from January, representing an annualized decline of 3.4% in February. Revolving credit also fell in January.(…)
Outstanding revolving credit has increased 0.5% over the last year. But it has been an uneven climb, with seasonally adjusted revolving credit rising just six of the last 12 months. It fell three of the last four months.
Total outstanding consumer credit, including student and car loans but excluding real-estate loans like mortgages, has increased 5.6% from a year ago. The volume of outstanding federal student loans has been climbing steadily, hitting an unadjusted $764 billion in February. (…) (Chart from Haver Analytics)
EUROPE
‘Whatever it takes’ may not be enough Gideon Rachman fears eurozone still faces significant problems that are beyond the control of Mario Draghi
(…) When I asked one of Europe’s most influential economic policy makers recently whether the euro crisis really is over, he replied: “No, it’s just moving from the periphery to the core.” The argument is that while worries about Portugal, Greece, Ireland and Spain have become less acute, concerns about Italy and even France should actually be rising. The statistics for Italy, in particular, are shocking. Since the onset of the crisis in 2008, Italy has lost 25 per cent of its industrial capacity and the real level of unemployment is now, according to senior Italian officials, about 15 per cent. Italy’s scope for economic stimulus is limited by EU rules and by the fact that the country’s ratio of debt to gross domestic product is now more than 130 per cent. France’s economic statistics are less bleak but unemployment is still in double digits and the national debt is creeping up to the symbolic level of 100 per cent of GDP. (…)
A further struggle looms over whether Mr Draghi and the ECB can counter the threat of deflation with a European version of quantitative easing. Mr Draghi seems to be edging towards such a policy. But he too faces deep scepticism in Germany, whose finance minister, Wolfgang Schäuble, bluntly insists that Europe does not have a deflation problem. (…)
All of these conflicting forces mean that the political and economic situation of the eurozone remains finely poised and vulnerable to a significant external shock. A worsening of the Ukraine crisis could deliver precisely that shock. If Russian forces move into eastern Ukraine – and, unfortunately, the signs are mounting that this may be imminent – then the EU will be forced to impose tougher economic sanctions on Russia. The Russians can be expected to retaliate by using the most powerful weapon they have at their disposal: energy. Much higher energy prices would have a severe impact on Europe’s fragile economy. And a return to deep recession would almost certainly favour the radical fringes in Europe.
Unfortunately, Mr Draghi has no sway over the Russian government – and not that much influence over the domestic politics of France, Italy or Germany. Yet developments in all of these nations could yet reverse the progress in the eurozone that the ECB president did so much to engineer.
I do not doubt that Mr Draghi will try to do “whatever it takes”. I just fear that, ultimately, it may not be enough.
Ukraine at Risk of Civil War, Warns Russia Russia has warned that use of force by Ukrainian authorities to dislodge Pro-Kremlin separatists in three cities in eastern Ukraine could plunge the country into civil war.
Ukrainian officials have accused Russia of instigating the protests that began Sunday in Donetsk, Kharkiv and Luhansk—cities where ethnic Russians make up much of the population—and have vowed to subdue the secessionists. (…)
In Donetsk, protesters declared the founding of the “Donetsk People’s Republic” and demanded a referendum on independence from Ukraine. (…)
Anybody surprised?
SENTIMENT WATCH
The S&P 500 is down 2.8% but…The writing was on the wall (well, at least on this blog!) for small caps, techs and biotechs.
(…) Although the S&P 500 is down only modestly from its 52-week highs, individual stocks have seen much larger declines. The chart below and to the right summarizes an analysis from our most recent Bespoke Report, which was sent out to all clients after the close on Friday, and it summarizes the average decline for individual stocks from their respective 52-week highs. Given the declines again today, we have updated the chart to reflect prices as of Monday afternoon.
For the S&P 1500 as a whole, which encompasses large, mid, and small cap stocks, stocks are down an average of 12.8% from their 52-week highs. As you would expect, small cap stocks have seen the largest declines with an average drop of 15.8%, followed by mid caps, which are down an average of 12.5%. Large cap stocks have held up the best, as they are still within 10% of their 52-week highs.
Looking at the average declines based on sectors shows a wide variance. Consumer Discretionary stocks have seen the largest declines from their 52-week highs with an average decline of 16.1%. Besides the Consumer Discretionary sector, Technology and Telecom Services are the only other sectors where stocks are down an average of more than 15%. On the other end of the spectrum, Utilities (-5.4%) and Consumer Staples (-9.4%) have held up the best with average declines of less than 10%. While the modest decline of the S&P 500 from its high might suggest that the decline has been minor in scope, on an individual stock basis, the pain is more amplified.
Stock market investors have just taken a $275bn bite out of the world’s largest publicly traded internet companies.
The 14 companies, each worth more than $20bn – five of them in Asia, nine in the US – have, in little more than a month, lost about a fifth of their combined $1.4tn of stock market value.
While the broader equity market is still flirting with record highs, some of the planet’s best-known tech companies have suffered their biggest hit since the depths of the 2008 financial crisis. (…)
One after another, the stock market’s highest-growth sectors have cracked and fallen. A rally in the biotech sector peaked at the end of February: since then, the Nasdaq biotech index has dropped nearly 20 per cent.
A new generation of business software companies – such as cloud-based application provider Workday, big data analytics company Splunk and security group Fireye – has fallen even harder, tumbling 30-40 per cent or even more.
Most eye-catching, though, has been the damage to large-cap internet stocks. In the past month, Chinese internet group Tencent has fallen by a fifth, meaning its valuation has sunk by HK$248.3bn ($32bn) since March 6. South Korean counterpart Naver has lost 10 per cent while Japanese ecommerce group Rakuten has shed 7 per cent. Yahoo Japan has tumbled 26 per cent.
In the US, meanwhile, Facebook has fallen back by 22 per cent from its March high while Twitter and LinkedIn have retreated some 40 per cent from peaks that came earlier. Even Google is down 12 per cent in a month – double the decline in the Nasdaq over the same period. (…)
The FT then goes on trying to explain the rout. The only explanation is that valuations became excessive and needed to correct. Sometimes that process needs a specific catalyst, often it just happens. This is where the Rule of 20 valuation barometer is useful. It helps objectively assess valuations and measure risk vs reward. It will not tell you when things will actually change, only that they eventually will, because they need to. It requires discipline and patience, however.
Buffett’s two rule of investing: 1- Don’t lose money. 2- Never forget rule # 1.
As of the close today, the Internet group is down 16.5% from its high reached one month ago on March 7th, and its decline today left it below its 200-day moving average for the first time since December 2012. (Bespoke Investment)
Some people must be hurting out there!
BUT, SURELY, SOMEBODY WILL SOON BUY THE DIP!
That assumes that somebody has cash available (chart from Short Side of Long).
It will now be interesting to watch what happens with the moving averages. The S&P 500 is sitting on its 50-day m.a. with its still rising 200-day m.a. 4.7% lower (1757). Nasdaq is on its still rising 200-day m.a. Let’s hope earnings are decent.
EARNINGS WATCH
Careful what you read. Thomson Reuters yesterday, commenting on the 19 companies that have released their Q1 results:
Only 52% of the companies that have reported so far have exceeded analyst earnings estimates, which is well below average. Historically, when fewer companies than average beat estimates, the trend continues throughout the full earnings season, and vice versa. Although the last two quarters have been exceptions, the current 52% beat rate is the lowest since the Q4 2010 preseason, as seen below in Exhibit 1.
Exhibit 1. S&P 500: Earnings Estimate Beat Rates—Preseason and Full Season
Source: Thomson Reuters I/B/E/S
OK, let’s read this again before extrapolating: “Historically, when fewer companies than average beat estimates, the trend continues throughout the full earnings season, and vice versa.” Thomson Reuters does not give us much data to verify but of the 15 quarters shown here, 5 “preseasons” were below average, of which only one ended the full season below average.
(…) Fixed-income trading slid 15 percent in the first three months of 2014, analysts estimate, as the Federal Reserve slowed its bond purchases. Combine that with a drop in mortgage revenue and a $9.5 billion legal settlement, and profit for the nation’s five biggest banks probably fell 14 percent to $16.5 billion from a year earlier. Only sixth-ranked Morgan Stanley, which relies less on those businesses, is seen bucking the trend. (…)
(…) In a preliminary estimate on Tuesday ahead of detailed figures due out later this month, the South Korean company said operating profit declined for a second straight quarter.
Samsung said in the first three months of the year operating profit was Won8.4tn ($8bn), lower than Won8.8tn in the same quarter last year but slightly ahead of analysts’ predictions centred on Won8.3tn. Sales were Won53tn, little changed from a year earlier.
(…) increasing concerns about slowing growth at the higher end of the market, as well as shrinking margins across the industry as low-cost handsets account for a ever-growing share of smartphone sales. (…)
U.S. Looking Closely at Weaker Yuan
The U.S. put China on notice that it is looking closely at whether Beijing’s efforts to devalue the yuan represent a shift in policy that could start a round of competitive devaluations.
A senior official at the Treasury Department said it would “raise serious concerns” if Beijing is moving away from plans to allow market forces to have a greater impact on the yuan’s exchange rate, especially if Chinese officials are at the same time citing greater flexibility in the currency’s movements. (…)
China More Vulnerable to Corporate Defaults, S&P Says
(…) On the surface, the debt burden of China companies appears more manageable than for their Japanese counterparts. Using current data for a sample of the 2,000 largest companies in both China and Japan, S&P found that the average Chinese ratio of debt to earnings before income tax, debt and amortization was 3.61 times, compared to a 3.92 times in Japan – suggesting that Chinese companies are better able to support their debt from their earnings.
Other factors need to be taken into account. For a start, the cost of servicing debt was much cheaper for Japanese companies. The report cites World Bank estimates that the average borrowing cost for Japanese company is just 1.4%, compared with 6% in China.
Furthermore, more Chinese companies are posting losses. According to S&P, 10.3% of Chinese companies had posted negative earnings before interest, taxes, depreciation and amortization for the past two years, nearly four times the 2.6% in Japan.
The upshot is that companies in both countries are potentially vulnerable to a pick-up in interest rates. In Japan, it would hurt the ability of local companies to service their debt. In China, the result could be that it pushes some of the country’s more leveraged companies over the edge. S&P does point out the rise in China would have to be substantial, as its companies are already paying relatively high borrowing costs.
The report concludes by saying that if China fails to give the market a greater role in allocating credit – by letting unprofitable companies go out of business, instead of letting banks support them – it increases the chance of the country experiencing its own lost decade.
