Month: June 2014

New-Home Sales Soar in May New-home sales soared in May to their highest level in six years, the latest evidence that the U.S. housing recovery is regaining traction after an extended slowdown.

Sales of new single-family homes rose 18.6% from April to a seasonally adjusted annual rate of 504,000, a new post recession high, the Commerce Department said Tuesday. Economists surveyed by The Wall Street Journal had predicted a more modest rise of 0.5%. Sales in May were up 16.9% from a year earlier.

The eye-popping increase may reflect, at least in part, month-to-month volatility and the report’s small sample size. The 18.6% rise in Tuesday’s report—the steepest one-month jump in new-home sales since January 1992—came with a margin of error of plus or minus 17.3%.

Sales of newly built homes account for only about 10% of U.S. home-buying activity. But the upward trend in new-home sales over the past two months reinforces other evidence of growing strength in the housing market this spring. Sales of previously owned homes also rose the last two months and were up a seasonally adjusted 4.9% in May, the National Association of Realtors said Monday. (Chart from Haver Analytics)

Housing was the only major ingredient missing for a complete economic lift off. Is it for real or just a statistical “noise”, one that also could well be revised given its high volatility? The sunnier side says that:

• It jibes with ISI’s builders’ most recent surveys.
• First-time homebuyer participation has grown for three months in a row this spring, according to the latest results from the monthly Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. It may be only seasonal, however.
• Permits to build single-family homes rebounded 3.7% (-5.3% y/y) to 619,000 in May, the highest level in six months.
• It follows on the recent improvement in existing home sales.

Existing-home sales rose 4.9% in May to a seasonally-adjusted annual rate of 4.89 million, the National Association of Realtors said on Monday. That’s less than the 5.15 million pace in May 2013, but “the drop in distressed sales makes it harder to see the real trend,” says Jed Kolko, chief economist for Trulia.

Distressed sales accounted for 11% of all sales in May, down seven percentage points in the past year, according to the National Association of Realtors. Such sales peaked at 49% of all sales in March 2009, the association said. Excluding distressed properties, sales in May were 3% above the May 2013 level, says Kolko.

The cloudier side reminds us that sales were particularly weak during winter and this may just be a short-term catch up. And beware reading too much from consumer confidence…

Consumer Confidence Hits Best Levels Since 2008

Break-Even Rate Near 13-Month High Before Inflation Data U.S. inflation expectations over five years touched the highest in 13 months before data tomorrow economists forecast will show the Federal Reserve’s preferred measure of price gains rose to the most since October 2012.

US and eurozone inflation expectations diverge

The divergence between US and eurozone market expectations of inflation has reached a new peak, with investors betting on sharply differing outlooks for consumer prices on both sides of the Atlantic.

US inflation expectations, also known as break-even rates, as measured by the difference between yields on 10-year nominal Treasury notes and Treasury inflation protected securities (Tips), are at about 2.27 per cent.

By contrast, German 10-year inflation expectations have eased to about 1.34 per cent, a difference of 0.93 percentage points between US and eurozone break-even rates.

CENTRAL BANKERS WATCH

• Fed’s Plosser Not Worried About Inflation Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said he is not worried about inflation pressures, despite a recent uptick in consumer prices.

“I’m not worried about it in the short run,” Mr. Plosser told Fox Business in an interview. Key inflation indicators “have been drifting back up toward our target. We’re not there yet, but I think that’s encouraging that it’s stabilizing and moving back toward our target.” (…)

Mr. Plosser, a self-avowed inflation hawk, downplayed a recent rise in the country’s consumer-price index, saying it could be reversed. (…)

Let’s hope he’s right.

• Dudley: Fed Rate Outlook Depends on Economy

• Fed’s Williams Upbeat on Economy, Vague on Rates

• Bank of England Sows Fresh Confusion

• Yellen may be poised to rewrite Fed’s rule book on wages, inflation

• THE UNRELIABLE NATURE OF FORWARD GUIDANCE

Richard Bernstein
Frothy IPOs do not spell stocks euphoria

(…) Credit Suisse data indicate US pension funds have among the lowest equity allocations in more than 30 years and remain focused on alternatives rather than conventional equities.

A Bank of America Merrill Lynch indicator shows Wall Street strategists are recommending an underweight of equities relative to the traditional 60/30/10 stocks/bond/cash benchmark. ISI’s hedge fund survey shows hedge funds are neutrally positioned. ICI data show net outflows from US equity funds for seven straight weeks. (…)

Investors rationalised lofty valuations during the technology bubble with theories regarding the “new economy”. “Disruptor” companies are today’s rationalisation. Investors seem willing to pay outrageous valuations for disruptor companies because the companies are supposedly changing the world and have no relationship to the economic cycle, to Washington or to geopolitical events. It seems hard to fathom how an auto company, an energy company, or a limousine service is not connected to the economy, but investors nonetheless appear giddy regarding disruptors’ potential returns. (…)

Whereas the disruptor stocks sell at huge premiums to the overall market because investors believe the stocks’ successes are assured, traditional high beta stocks within the S&P 500 are selling at the cheapest relative valuations in the almost 30-year history of our data. Judging by these data, investors are historically scared about traditional market risk.

High beta S&P 500 portfolios were historically dominated by technology shares, but that is no longer the case. Currently, the quintile of S&P 500 stocks with the highest betas is a mixture of many cyclical sectors. Technology comprises only 15 per cent of today’s high beta group. Financials are 23 per cent, consumer cyclicals are 24 per cent and industrials are 15 per cent.

(…) The IPO market seems very speculative, but one must take care in extrapolating those lofty valuations to the broader market. The enthusiasm for disruptor stocks seems manic, but the lack of enthusiasm for traditional equity risk presents opportunity.

Earnings Expectations Plummeting In Europe

Analysts’ consensus earnings expectations for the EMU continued to plummet through the week of June 19. The estimates for 2014 and 2015 are down 7.0% and 5.0% ytd. Forward earnings has been flat-lining for over a year and remains well below the 2007 record high and the last cyclical peak in early 2011. Forward earnings has been flat to down for all the major core and peripheral countries of the EMU since 2011.

The rebound in the EMU MSCI stock price index since the summer of 2011 has been all attributable to an 87% increase in the forward P/E from 7.6 to 14.2. The forward P/Es are especially elevated for the Eurozone’s peripheral countries. Here’s the latest forward P/E derby: Greece (32.4), Ireland (19.2), Portugal (19.1), Belgium (16.8), Finland (16.5), Spain (15.6), Netherlands (14.6), Italy (14.5), France (14.1), Germany (13.0), and Austria (11.6).

It’s the same story for the United Kingdom: Earnings estimates have been falling sharply for 2014 and 2015. Yet the UK MSCI stock index is back at its previous two cyclical peaks. The rally since the summer of 2011 was all led by a 68% increase in the forward P/E from 8.1 to 13.6.

Deals deals deals

Global M&A volume is $1.75tn so far this year, according to Dealogic’s preliminary assessment of the first half. That compares to $1.3tn a year ago, but the heady heights of 2007, when $2.6tn of deals were struck, remain distant.

U.S. Set to Export First Oil Since ’70s The Obama administration cleared the way for the first exports of unrefined American oil in nearly four decades, allowing companies to start chipping away at the longtime ban on selling U.S. oil abroad.

Walgreen Considers Move Abroad to Cut Taxes

Walgreen Co. WAG -1.70% ‘s Chief Executive Greg Wasson on Tuesday said for the first time that the company is weighing moving outside of the U.S., as it considers buying the shares it doesn’t already own in European pharmacy Alliance Boots GmbH.

Under pressure from shareholders to use a merger with Alliance Boots to cut its tax bill through a so-called inversion, Mr. Wasson said the company is looking at how to structure its tax liabilities as part of its discussions over whether to buy the remaining 55% of Alliance Boots it doesn’t already own.