Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

NEW$ & VIEW$ (20 AUGUST 2014)

Housing is not what it used to be. Bear skin prices going up!
U.S. INFLATION SLOWS

All measures of inflation were up 0.1% M/M in July and total CPI is up 2.0% Y/Y after two months at +2.1%. Core CPI, which had accelerated all year long from 1.6% to 2.0% in May, is back below 2.0% for the second consecutive month.

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Housing Escapes the Summertime Blues

Home builders broke ground on 101,000 new projects in July, for a seasonally adjusted annual rate of 1.093 million units, according to the Commerce Department. That is a 16% improvement over June’s housing starts.

Those impressive numbers indicate the housing recovery is still on solid ground. That was thrown into doubt earlier this year by a startling plunge in housing starts. The decline took January’s starts down all the way to where they were a year earlier. (…)

So despite starting from a very low level of activity, 9.1% more homes have been built in this year’s first seven months than in the same period last year.

High five The reality is that single unit starts have been flat for 2 years. Single-family permits remain sluggish. Permits rose 1.0% M/M in July, this national average being the strange result of widely diverging regional trends: Northeast +20.0% M/M, South +3.6%, West -7.7% and Midwest -4.6%.

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The rental market continues to boom. The annualized multifamily permit run-rate surged to 382,000 units in July, up 23.6% from June. According to Raymond James, the current multi-family permitting run-rate is about 35% above the 25-year average of 284,000 units/year.

Specifically, there are now 431,000 multifamily units “under construction,” the largest backlog since 2008 (which was only surpassed by the 1987 backlog). While we expect a significant chunk of that backlog will soon be ready for initial move-in later this fall, strong demand appears ready to absorb the resulting supply surge. Therefore, it seems the better-than-expected rent improvements seen year-to-date will continue. Furthermore, we believe social and demographic shifts among the millennial generation remain skewed heavily in favor of rental housing. Moreover, student loan debt is also a major driver of the propensity to rent as many potential buyers are unable to save enough money for meaningful down payments on new (or existing) homes.

Here’s the complete long-term picture from BloombergBriefs:

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From the WSJ:

Still, the surge in apartments offers further evidence that job gains are boosting household formation and that the housing market faces a shelter shortage that will require more construction—for renting or for owning. The hope is that eventually more of these renters will buy homes.

Rising rents could eventually give potential homebuyers added urgency. A separate report Tuesday showed that rents were rising at their fastest pace in five years in July, up 3.3% from a year earlier. That compares to a 2.8% gain last July, according to the Labor Department.

The hope is that renters will, eventually, buy a house. This Canadian survey keeps that hope alive.

Survey show 80% of renters under 50 desire home ownership

Only about 20 per cent of those surveyed by real estate firm Altus Group Canada said they actually chose renting for the lifestyle or because they didn’t want the responsibility of owning a home. Two per cent said they didn’t think buying a home was a good investment. And most – nearly 80 per cent – said they would like to buy but were holding back for a variety of reasons including saving for a down payment, fears about qualifying for a mortgage, or a sense that now is not the right time to buy (about 14 per cent said they don’t think it’s a good time given the economy).

But when will they start buying? Not quite yet as this CalculatedRisk chart shows:

U.S. Home Size Levels Off, for Now at Least

The median size of U.S. homes on which builders started construction in the second quarter registered 2,478 square feet, unchanged from the first quarter but still close to the all-time high of 2,491 set in last year’s third quarter, according to Commerce Department data released Tuesday. (…)

The National Association of Home Builders forecasts that first-time buyers will account for 16% of new-home sales this year, down from 25% to 28% between 2001 and 2007.

Yet executives at builders KB Home, PulteGroup Inc., D.R. Horton Inc. andCentury Communities Inc. CCS +2.09%report that they’re seeing early signs of entry-level buyers returning to the market as mortgage standards ease slightly and job gains take hold. Sales of Pulte’s entry-levelCentex CTX -0.08% homes, priced at an average of $202,000, increased by 26% in the second quarter from a year earlier on a per-community basis, and by 29% in the first.

“The expectation will be, whenever we see an increase in first-time buyers, that will put downward pressure on the trend” of new-home sizes, said Robert Dietz, an economist with the home builders group. “Then it will be a question of whether we’ll see some actual decreases in the median as the market mix [of buyers] changes over the next two years.” (…)

Home Depot’s Profit, Outlook Rise
Lowe’s Trims Guidance as Results Top Views

The company said it now expects sales to grow 4.5% the fiscal year, down from its earlier outlook of 5%. It also trimmed its same-store sales projection to 3.5% growth from 4%. Same-store sales rose 4.4% in the most recent period, while Home Depot had posted an overall 5.8% increase Tuesday.

Interestingly, HD only raised its year guidance of an amount equal to its Q2 beat.

Germany Pays No Return on Debt Germany paid no return at an auction of a new series of two-year debt, in a sign that the search for havens remains a priority for investors.
Europe’s Brewers Hurt by Russia Some of Europe’s biggest brewers are being walloped by lower consumer spending in Russia, amid its standoff with the West over Ukraine and in the wake of Moscow’s recent drive to restrict beer marketing.

Credit derivative trading volumes

Risks of dining on a new derivatives menu New and more complex credit products are flourishing

(…) “We’ve reformed nothing,” says Janet Tavakoli, president of Tavakoli Structured Finance. “We have more leverage and more derivatives risk than we’ve ever had.”

Proponents say bespoke instruments are playing a prime role in allowing investors to “hedge”, or offset, increasingly large positions in the debt markets. But in the current environment of low volatility and meagre returns, the risk is that the strong growth in the use of complex derivatives may compound the next major market reversal. (…)

SENTIMENT WATCH

Is this capitulation? Will we ever see Zerohedge turn bullish?

Another Bear Bites the Dust One of Wall Street’s biggest bears–Stifel Nicolaus equity strategist Barry Bannister–just pulled an about-face on his views about the stock market.

Stifel Nicolaus stocks strategist Barry Bannister, who had been among the most pessimistic prognosticators on the Street, threw in the towel this week on his bearish forecast. He lifted his S&P 500 year-end price target to 2300—the highest among prominent strategists–from 1850, which had been tied for the lowest, according to research firm Birinyi Associates.

In a chat with MoneyBeat, Mr. Bannister said the five-year bull market has one final push higher left in it before the rally runs out of steam. As long as the Federal Reserve maintains its “lower for longer” monetary policies, there’s little reason why the market won’t continue rallying throughout the rest of the year and through 2015, he said.

After that, watch out.

“This is probably a finale for the market,” Mr. Bannister, a managing director at Stifel, told MoneyBeat. “This will be the big move that usually accompanies the end of bull markets…We’ll worry about 2016 when it comes.”

The 18 Wall Street strategists tracked by Birinyi Associates expect the S&P 500 to finish the year roughly around current levels. Though Mr. Bannister abandoned his earlier 1850 projection, two other strategists currently maintain year-end targets at that level. Other estimates vary, but Mr. Bannister’s new 2030 year-end forecast is by far the highest.

Throughout the past 18 months, several prominent strategists who had been bearish have since turned more optimistic as stocks have kept rallying to new records. Mr. Bannister’s call comes as the market has been in rally mode over the past several days. (…)

In a note to clients, Mr. Bannister used an illustration of Russian artist Viktor Vasnetsov’s 1887 piece “Four Horsemen of Apocalypse” to prove his point. He said the market is weathering the four horsemen – the Fed, geopolitical turmoil, risk of recession and lack of bear markets Confused smile – better than he originally anticipated. That’s why he figured now was as good a time as any to lift his forecast.

“We think this is the stage when stragglers to the bullish case take stocks higher,” he said. The past three secular bull markets that lasted more than six years apiece witnessed hiccups similar to the current one, he added, before each one moved higher.

As long as interest rates and the risk of recession both remain low, Mr. Bannister said he’ll remain bullish on stocks.

“The Fed is clearly willing to overshoot,” he said. “The risk/reward looks pretty good.”

There is a pattern here: the recent bear turncoats all keep warning that hell is not very far and will be terrible, yet they “admit” that the shorter term looks pretty darn good. After this?You must admit that it takes guts to do what they are doing… or is it that the pressure from clients and partners has become unBEARable Winking smile. Sometimes, one is better to keep one’s job…

The problem is that the public is not capitulating, not at all! Look at the pathetic volume. Can’t be only the summer.

spy

NEW$ & VIEW$ (19 AUGUST 2014)

The wavering bull and the wavering bear.
U.S. Home-Builder Optimism Rises Home builders grew more optimistic in August as an improving job market and falling mortgage rates boosted the outlook for home sales.

An index of builder confidence in the market for single-family homes rose two points to 55 this month, the National Association of Home Builders said Monday. It was the gauge’s second consecutive month over 50, a level that indicates more builders generally see conditions as good than bad.

Its measures of current sales conditions and expectations for future sales each rose two points to 58 and 65, respectively. The measure of prospective-buyer traffic increased three points to 42.

A regional breakdown of the data showed the gains were unevenly distributed with builders feeling more confident in the Northeast and Midwest but less so in the South and the West.

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Fewer Workers in the U.S. Are Worried About Job Setbacks

Fewer than one in five U.S. full- and part-time workers currently worry that they will be laid off in the near future, down sharply from 29% last year. This marks a return of worker confidence to the upper end of the range Gallup saw in the years prior to the financial collapse in late 2008. Workers’ concerns about maintaining their current level of benefits and compensation have also eased, though they remain higher than pre-2008 levels.

Workers Worried About Job Events, 2004-2014

(…)  Since 2009, Gallup has seen a heightened, persistent fear among U.S. workers about their job status, pay, and benefits, even as the economy slowly recovered — pointing to a difficult job market. This year may tell a different story — one of a more confident workforce — as seen by the large drop in the proportion of U.S. workers saying they are worried about having their benefits and wages reduced and being laid off.  (…)

(…) young workers’ fear of being laid off has not decreased from last year, whereas this year, fewer older workers say they are worried about being laid off. Younger workers also are more likely than older workers to worry that their hours will be cut back. (…)

China property slump gathers pace

Home prices fell in 64 of the 70 cities surveyed in July by the National Bureau of Statistics, the biggest monthly proportion of declines since records began in July 2005. On average, property prices fell 0.9 per cent between June and July, the sharpest tumble in three straight months of declines.

As prices fell, real estate developers pulled back from making new investments. Property investments rose 13.7 per cent in the first seven months of the year, down from 14.1 per cent in the first half. In terms of floor space sold in July, China suffered a 16.3 per cent decline, down from a 0.2 per cent drop in June.

SENTIMENT WATCH

bull-bear-fight.jpgA BULL AND A BEAR WAVERING

They are both careful not to admit an actual change of heart:

David Rosenberg (my underline because this is what bearnobull.com is all about)

Let me emphasize from the outset that this is not an official change of view as it is an expression of how the conviction level over my forecast for vibrant U.S. growth in coming quarters is not as strong as it was a few weeks ago. In this business of wealth management, where assessing risks and measuring the probabilities of outcomes are so vital for success, even shifting the goalposts a little bit – which is what this exercise is all about – is no trivial endeavor.

David is worried that the U.S. has suddenly become the only growth engine in the world and that its own engine is showing unexpected signs of weakness. He is particularly shaken by the poor retail sales numbers for July although he sees softness in “all corners”. He does not understand why the consumer is increasing his savings rate when his income is rising swiftly. He also seems to be waking up to the reality that there is no longer such a thing as THE American consumer but rather the 1-20 percenters and everybody else and that “the folks who spend the most of their incomes are those who are at the low end of the pay scale, and those in their 30s and 40s.”

No recession, mind you – just more of the same: Sluggish. Tepid. Lackluster. Mediocre at best.

Wow! And the warning that he has put himself on watch:

(…) those of you who know me well also know that while I am patient, I also have no intention of sitting on a stale view past the best-before date. (…) I feel as though my current bullish view on above-consensus second-half growth, an earlier-than-expected Fed tightening, inflation a greater threat than deflation, and a cyclical back-up in bond yields is in need of some similar scrutiny at the current time.

The same day, John Hussman (Dimes on Black and Dynamite on Red), the last true bear around, also seems to be wavering, but towards the other side, but only for the shorter term, and only maybe:

The stock market is presently a roulette wheel with dimes on black and dynamite on red. We continue to have extreme concerns about the extent of potential market losses over the completion of the present market cycle. At the same time, we have very little view with regard to short-term market action.(…)

Stocks remain strenuously overvalued, overbought, and overbullish, but those conditions have persisted uncorrected much longer in the present instance than they have historically. That doesn’t encourage us to abandon our concerns, but it does make us less aggressive about investment stances that rely on any immediate unwinding of what we continue to view, along with 1929 and 2000, as one of the three most reckless equity bubbles in the historical record.

(…) the ‘buy the dip’ mentality can introduce periodic recovery attempts even in markets that are quite precarious from a full cycle perspective.

In truth, John remains seriously bearish…but he is opening the door to short term spurts…even though he has very little view with regard to short-term action.

Not dissimilar to Jeremy Grantham, even though Grantham sees the possibility of another 12-24-month leg up to 2250.

Perhaps this is the more appropriate image:

(stocktouch)