Today: U.S. housing plagued by student debt. Commodities collapsing? Yogi Berra on Draghi’s ploy. Equities out of breadth…

Student Debt Could Reduce Home Sales 8% This Year, Report Says

Higher levels of student debt will reduce U.S. home sales by around 8% this year, according to a report released Friday by John Burns Real Estate Consulting, an advisory firm.

The paper examines the impact of student debt on purchase activity for households under age 40. Those households account for around two-thirds of student debt holders. It concludes that sales of new and existing home will total 5.26 million this year, with some 414,000 “lost” households as a result of rising student debt burdens.

Higher debt burdens will defer home purchases for many borrowers while requiring others to buy a less expensive home in order to qualify for a loan or save for a down payment.

The paper estimates that every $250 per month in student loan debt reduces borrowers’ purchasing power by $44,000, and since 2005, some 3.8 million additional households have at least $250 per month in student debt.

Put differently, around 35% of households under age 40 have monthly student debt payments exceeding $250, up from 22% of households in 2005.

The typical first-time buyer can qualify for a $234,080 mortgage without any student debt, but that figure falls as the monthly debt burden rises. (The analysis assumes that the traditional first-time buyer has income of $61,000.) Mortgage lenders generally won’t extend credit to borrowers whose total debt payments exceed 43% of their gross incomes.

The analysis assumes that most borrowers with $750 or more in monthly student debt payments will be priced out of the market unless they’re making much more money than the traditional first-time buyer. For the typical entry-level buyer with $750 in monthly student debt payments, they can qualify for a $103,280 mortgage.

But the analysis finds that many borrowers with modest monthly student debt payments are also lost transactions this year. It concludes that around 57,000 households with student debt payments of less than $100 won’t be buying homes this year, and that around 127,000 borrowers with payments between $100 and $250 are lost.

College Debt Leaves Generation X Grads Less Wealthy Than Parents

Most college-educated 30- and 40-somethings earn more than their parents did at the same age, yet they’re saving less.Student debt is partly to blame.

While 82 percent of Generation X Americans with at least a bachelor’s degree earn more than their parents did, just 30 percent have greater wealth. A smaller share of workers without college education — 70 percent — have surpassed their parents’ incomes yet almost half had higher wealth, according to a Pew Charitable Trusts report released today.

Lackluster saving among the cohort, those born between 1965 and 1980, has come as student-loan balances persist into middle age. Generation X’s financial straits could come with economic aftershocks, making it difficult for parents to afford college for the next generation and forcing workers to hold onto jobs longer or lower their living standards as they age. (…)

(…) Four in 10 upwardly income-mobile college grads hold education debt, with a median balance of $25,000, according to the Pew report. (…)

People between the ages of 30 and 39 held about $321 billion in total student debt at the end of 2012, up from about $124 billion at the start of 2005, according to data from the Federal Reserve Bank of New York. Those between 40 and 49 owed $168 billion, up from $53 billion.

The average student-loan balance for the 30- to 39-year-old cohort climbed to $29,400 — the most of any age group — from about $20,000 in 2005. (…)

Canada Core Inflation of 2.1% Is Fastest Since April 2012

The 12-month core inflation rate accelerated to 2.1 percent in August from July’s 1.7 percent, faster than all 21 economist estimates in a Bloomberg survey. The total consumer price index rose at a 2.1 percent rate for a second month, matching economist forecasts.

IMF warns of emerging markets slowdown 

Emerging markets are suffering an unprecedented and broad-based slowdown that threatens the future of the global economy, researchers at the International Monetary Fund have warned. (…)

“Emerging markets as a group were growing at about 7 per cent before the crisis,” said Hamid Faruqee, a division chief in the IMF’s research department. “We now see them growing at about 5 per cent going forward.”

(…) Expansion rates in more than 90 per cent of emerging markets are lower than before the 2008 turmoil. (…)

According to the IMF research, trade links are an important reason for the slowdown, with emerging markets suffering from weaker growth in their trading partners. But there are also signs of deeper problems, with evidence that productivity improvements are contributing less to growth. (…)

According to the IMF’s estimates, a one percentage point slowdown in emerging market growth lowers growth in advanced economies by quarter of a percentage point because of reduced trade.

That means the 2 percentage point reduction in emerging market growth since before the financial crisis could mean a 0.5 percentage point reduction in growth for rich countries such as the US. This suggests the weakness in developing countries could be an important reason for the recent growth disappointments in advanced economies. (…)

It says emerging markets will need to “remove supply bottlenecks, boost productivity and move up in the value chain” if they want to sustain growth. “Otherwise they risk generating imbalances that will come back to haunt them,” the paper says.

China Commitment to Fiscal Stimulus Questioned, Markets Spooked It’s striking how much the outlook for China’s economy has become a driver of global markets.

Finance Minister Lou Jiwei said the government won’t make any drastic changes to economic policies merely because of weakness in one economic indicator, an apparent reference to the industrial production index, which last month dropped to its lowest level since the 2008 global financial crisis. Policy makers will continue to focus on a combination of growth objectives, especially employment and inflation, Mr. Lou said in a statement on the ministry’s website on Monday.

Did The Bottom Just Fall Out Of Commodities?

• Crude Price Falls on High Supply

(…) However, several events of the last days could see more bullish moves in the offing, said Tamas Varga at brokerage PVM.

These include the shut-in of a large oil field in Libya, taking supply out of the market. Libya’s El Sharara oil field, capable of supplying 340,000 barrels of oil a day, and its 120,000 barrel a day Zawiyah refinery have been out of action since missile attacks last week.

The West’s sanctions against Russia could also start to bite. Exxon XOM +0.53% is reportedly winding down its Arctic drilling operations, noted Mr. Varga, but added that this won’t affect global supplies in the short term. (…)

• U.S. Wheat Prices Pushed to Four-Year Low

• Corn Declines With Soybeans to 2010 Lows on Increasing Supplies

• Cotton hits snag as China cuts imports Global prices already damped by a bumper US harvest

• Global Stocks Drop With Commodities on China Growth Shares fell around the world and commodities tumbled to a five-year low amid speculation China will accept slower growth. Bonds rose after officials from the world’s biggest economies warned of rising financial risks.

EUROPE

“In theory there is no difference between theory and practice. In practice there is.”

This Yogi Berra quote sums up Ben Hunt’s latest piece “Finest Worksong”. A short extract:

(…) Germany off to the races, France moribund, and Italy looking like it just lost World War III. I mean … wow. More than any other chart, this one shows why I think the Euro is structurally challenged.

First, why in the world would Germany change anything about the current Euro system? The system works for Germany, and how. Alone among major Western powers, the politics of growth are alive and well in Germany.(…)

Second, why in the world would Italy accept anything about the current Euro system? The system fails Italy, and how. The system fails other countries, too, like Spain, Portugal, and Greece, but these countries are in the Euro by necessity. Their economies are far too small to go it alone. Italy, on the other hand, is in the Euro by choice. Its economy is plenty big enough to stand on its own, and with a vibrant export potential, an independent and devalued lira is just what the doctor ordered to get the economic growth engine revved up. Short term pain, long term gain.

(…) The system may fail Italy as a whole, but if you’re pulling the strings of the State and can borrow 10-year money at 2.5% to keep your vita nice and dolce … well, let’s keep dancing. (…)

In the meantime, Draghi will go forward with his ABS purchase scheme, a brilliant theory that will deliver frustratingly slim results quarter after quarter after quarter. Until the politics of growth are embraced outside of Germany, European banks will remain reticent to lend growth capital to small and medium enterprises. Until the politics of growth are embraced outside of Germany, large enterprises with plenty of cash and access to cheap loans will remain reticent to invest growth capital. Maybe a little M&A, sure, but no new factories, no organic expansion, no grand hiring plans.

The thing is, Draghi knows that he’s pushing on a string with the ABS program and that growth won’t return until the fundamental political dynamic changes in France in Italy, which is why he is calling both countries out by name to institute “structural reforms”. But in typical European fashion this entire debate is Mandarin vs. Mandarin, with almost all of the proposals focused on regulatory reform rather than something that must be hashed out through popular legislation. So long as economic policy reform is imposed from above … so long as we are engaged in modern-day analogs of Soviet Five-Year Plans … I believe we will remain stuck in what I call the Entropic Ending – a long gray slog of disappointing but not catastrophic aggregate economic growth. That’s not a terrible environment for stocks, certainly not for bonds, and the alternative – economic reform based on the hurly-burly of popular politics, is almost certain to be a wild ride that markets hate. But to get back to what we need (real growth) rather than what we want (higher stock prices) this is what it’s going to take . Elections always matter, but in the Golden Age of the Central Banker they matter even more.

ITALY: July industrial orders fell 1.5% on the month and down 0.7% on the year.

Italian industry is struggling. Industrial orders fell in June and July, driven by a particularly large drop in foreign orders but also slippage in domestic bookings. The Italian economy contracted during the first two quarters of the year. These industrial orders data don’t offer much encouragement for a recovery during the third.

SENTIMENT WATCH

Bull Losing His Breadth

The bull market that began on March 9, 2009, was 2,021 calendar days old at Friday’s close. It’s the fourth-longest in modern history and the fourth-biggest rise, at nearly 200%. Despite such happy tidings, it might surprise readers that the average S&P 500 stock is down some 7.2% from its 52-week high, according to Bespoke Investment Group, an independent market statistics research firm. In other words, the average of the movements of all 500 issues from their respective highs is negative.

For investors who wonder how this is possible with the index at record highs, the S&P 500 index is capitalization-weighted and can be heavily influenced by the largest stocks, which are significantly outperforming smaller stocks this year.

Such divergences can be produced by a combination of both size and sector, as groups go in and out of favor. A particular culprit lately is the energy sector, which has gone from the second-best performer in the first half of 2014, up 13%, to the worst in the second half so far, down 6.5%.

(…) Outside the S&P 500, numerous stocks are already in a correction or in bear-market territory, traditionally defined as down 10% or 20%, respectively. Indeed, one-third of the stocks in the Russell 2000 small-cap index are down 10% or more year to date. (…)

“Market-breadth leadership is narrowing,” notes Paul Hickey, Bespoke’s co-founder. “It’s not a particularly good sign, but you can have periods of weak breadth going for years [during a bull market],” he adds, which occurred in the two years or so before the 2000 peak. (…)

Bespoke also found the average stock in the S&P 400 mid-cap index has corrected, down 11% from 52-week highs. Among names in the S&P 600 index of small-caps, the average is down over 17%. The bear has already reached one area: The average energy stock in the S&P 1500 index—a combination of all three S&P indexes—is down 20%. Energy small-caps in the S&P 600 index are down an average, and painful, 30%.

As noted, this divergence doesn’t mean that the broad market will see a bear market or even a correction. In the past, however, corrections and bear markets have been presaged by a significant narrowing of the leadership.

More breadthtaking: Raymond James finds that the average stock in its research universe of more than 1,000 stocks is down 23.3% from its respective 52-week high.

Drought to Continue in West

Forecasters say severe drought will continue into next year across much of the West, including parts of western Utah, most of Nevada and practically all of California.

Less precipitation than usual and normal or above-normal temperatures are forecast in the week ahead, according to the National Weather Service, and experts say the three-year drought isn’t likely to be relieved in October, November and December. (…)

There’s a 65 percent chance of an El Niño developing this winter with warmer-than normal ocean temperatures that sometimes produces more precipitation than usual, Mr. Tolby said. (…)