Today: U.S. housing not taking off, Back-to-School sales pretty good, FX risk and sentiment bumping against Bob Farrell’s rule # 9.
U.S. HOUSING NOT TAKING OFF
New home sales during July fell 2.4% (+12.3% y/y) to 412,000 following June’s decline to 422,000, initially reported as 406,000. The figures compare to May’s peak of 454,000. Consensus expectations had been for 428,000 sales in the Action Economics Forecast Survey.
The median price for a new home declined 3.7% to $269,800, +2.9% y/y. Prices have fallen 5.9% from the peak two months ago which was revised higher to $286,600. The average price of a new home improved 2.1% (2.8% y/y) to a new peak of $339,100.
Sales declines in July reflected a 30.8% drop (-43.8% y/y) in the Northeast; sales in the West were off 15.2% (-3.3% y/y). Sales in the Midwest declined 8.8% (-1.9% y/y) but sales in the South improved 8.1%, up one-third y/y.
The inventory of unsold homes increased 4.1% (19.9%) to the highest level since August 2010, up 44.4% from the 2012 low. The months’ sales supply of new homes rose to 6.0 months, its highest since October 2011 (the 40-year historical average months’ supply is 5.7 months). The length of time to sell a new home of 3.5 months was up from 2.9 months last August but down from 14.0 months at the end of 2009.
Raymond James adds this:
Finished spec inventory was up 4.3% compared to June and now represents 4.7 months of supply, up from 4.0 last month. Increased spec inventory – coupled with the significant jump in existing home inventory – could be a major headwind for homebuilders into 2H14 given the current 25% pricing differential between new and existing homes.
BACK-TO-SCHOOL SALES PRETTY GOOD
Up against weak sales last year but so far, so good:
The biggest threat to the portfolios and peace of mind of investors may not be the stretched prices of equity and bond markets bolstered by hyperactive central banks. Instead it may come from a foreign exchange market that, judging from recent policy and technical signals, may well be on the verge of exiting a historically unusual phase of low volatility.
After a prolonged period of monetary policy alignment, advanced economies are embarking on increasingly contrasting paths. This “multi-track” world of central banks reflects notable divergence in underlying economic performance. (…)
So far, all these divergences have been reflected primarily in growing interest rate differentials. As an example, the gap between market rates on US 10-year government bonds relative to their German peer widened to almost 145 basis points at the end of last week, compared with 93 basis points a year ago and 108 basis points at the beginning of 2014.
This is quite a gap. Further widening from here is more likely to be accompanied by pronounced currency moves, including a continued strengthening of the dollar versus the euro and, to a lesser extent, the yen – bringing them closer to technical breaks, a realisation that many hedge funds are setting themselves for. (…)
Knockin on 2000′s Door As the S&P 500 flirts with 2000, Wall Street has come to consensus: The rally is far from over.
One economist blasted a note to clients on Monday with a simple subject line: “Buy Equities.” A money manager said investors should celebrate the S&P near 2000 and “expect many more happy returns.” A strategist praised the market’s “amazing resilience” and said the rally has “further room to run.”
The S&P 500 closed at another all-time high on Monday, its 29th of the year, and rose above 2000 on intraday basis before finishing slightly below. With the milestone in sight, investors are using the big, round number as a chance to step back, take stock of the recent gains and look at what potentially will keep driving the market higher.
Right now, the outlook is overwhelmingly bullish.
“I believe the stock market will continue to go up until we get a recession,” said Torsten Slok, chief international economist at Deutsche Bank. “And we are nowhere near entering a recession.” (…)
The 18 Wall Street strategists tracked by Birinyi Associates expect the S&P 500 to finish the year a little below current levels, but strategists have recently been ratcheting up their forecasts as the rally has gained steam.
Jack Ablin, chief investment officer at BMO Private Bank, sees another rally of 5% to 7% over the next 12 months. That comes after the S&P 500 has already gained 8.1% in 2014 on top of last year’s 30% surge.
“Reaching significant market milestones reminds us that the equity markets reward investors given an adequate time horizon and patience,” Mr. Ablin told clients. “Let’s celebrate a market milestone. If history is a useful guide we should expect many more happy returns.”
“We believe the stage is set for a move higher on the broader market,” said Craig Johnson, technical market strategist at Piper Jaffray. “The Dow Jones Industrial Average and the S&P 500 are in well-defined uptrends…This rally has further room to run.”
Bob Farrell’s rule # 9:
9. When all the experts and forecasts agree — something else is going to happen
Manufacturers Lose Ground in the U.S. America’s shale boom has raised hopes of a revival in U.S. manufacturing, in part fueled by cheaper energy. But U.S. factories still are losing ground to rivals in Asia and Europe.
Much of the problem stems from steel, trucks, car parts, industrial machinery and furniture.
The U.S. deficit on trade in goods swelled in the first half to $371.59 billion from $354.64 a year earlier. Imports rose 3.3%, while exports increased 2.6%. Manufactured exports, excluding petroleum and coal, rose just 0.8%—far below last year’s modest 2.1% gain.
Without a strong, sustainable increase in exports, U.S. factories are unlikely to have the kind of resurgence forecast by some pundits. But achieving that growth is difficult as China and other countries have pursued aggressive export strategies and the U.S. has lost manufacturing skills and suppliers after shifting production overseas. China isn’t the only country winning the battle. U.S. trade gaps with the three largest members of the euro zone—Germany, France and Italy—all increased in the first half.
Some economists say it is just a matter of time before the U.S. starts to make gains in international trade. IHS economist Michael Montgomery says lower energy costs, the narrowing wage gap and other factors have a slow-motion effect that isn’t yet visible in the trade balance.
And imports of steel and industrial machinery in many cases are investments in the U.S. manufacturing base, something that will bolster the U.S. energy industry and factories in ways that should help spur exports down the line. (…)
Steel is a big part of the expanding trade deficit. Mill capacity and raw-material supplies were cut so much during the recession that there isn’t enough to meet rising demand. U.S. steel production was 95 million tons last year, while demand was 107 million tons, according to the American Iron and Steel Institute. (…)
The pendulum is poised to change direction again, though as billions of dollars in new plants in the U.S. come online in the next few years.
Mr. Scianna says he plans to distribute steel pipe and tube made at a plant that Austria-based Benteler Steel & Tube is building in Shreveport, La. It will open next year and lower Sim-Tex’s percentage of imports to 80%, Mr. Scianna says.
“If you go around the world and talk to people, the United States is the new emerging market” for steel products, he says.
Buffett Enters Tax Fray With Burger King Investment Investor Warren Buffett is helping finance Burger King’s planned takeover of Canadian coffee-and-doughnut chain Tim Hortons in a surprise twist that thrusts the billionaire into a debate over U.S. taxes.
Berkshire is expected to provide about 25% of the deal’s financing, one of the people said. (…
The investment would also thrust Mr. Buffett, known for championing American companies like Coca-Cola Co. KO +0.71% and for advocating that wealthy individuals pay their fair share of taxes, into an uncomfortable position at the center of a spirited debate over U.S. tax policy. The deal is to be structured as a so-called inversion that would move the new company’s headquarters to Canada. Such deals, which can help companies sidestep taxes, have drawn stiff opposition in Washington.
President Obama may find it difficult to say that Warren Buffett lacks economic patriotism…
Maybe this will accelerate the U.S. income tax overhaul.