Home Sales Fell in February Amid Tight Supply, Rising Mortgage Rates Sales of previously owned homes declined 7.2% as higher interest rates and a shortage of homes for sale made it difficult for buyers to compete.
Existing-home sales fell 7.2% in February from the prior month to a seasonally adjusted annual rate of 6.02 million, the National Association of Realtors said Friday. February sales fell 2.4% from a year earlier. (…)
The median existing-home price rose 15% in February from a year earlier, NAR said, to $357,300. (…) The typical monthly mortgage payment in February rose 28% from a year earlier, Mr. Yun said. The average rate on a 30-year fixed-rate mortgage was 4.16% as of Thursday, up from 3.09% a year earlier, according to Freddie Mac. (…)
The share of first-time buyers in the market fell to 29% in February, down from 31% a year earlier. (…)
A large number of cash buyers are pushing buyers using mortgages out of the market, she said.
About 25% of February existing-home sales were purchased in cash, up from 22% a year earlier, NAR said.
The typical home sold in February was on the market for 18 days, down from 19 days the prior month, NAR said. (…)
The right chat above illustrates the bifurcated U.S. housing market. The South is where most of the action is. The South is now 45.3% of the market from 42.9% in 2019 and 39.3% in 2011. The South is home to 38% of the U.S. population.
In fact, since 2016, existing home sales jumped 22% in the South compared with 8% in the Midwest, 6% in the West and 3% in the Northeast.
U.S. Industrial Production Rises in February
Industrial production increased 0.5% (7.5% y/y) during February after surging an unrevised 1.4% in January. The latest gain matched expectations in the Action Economics Forecast Survey. Manufacturing output surged 1.2% (7.4% y/y) in February after edging 0.1% higher in January. Utilities output fell by 2.7% (-1.2% y/y) following January’s 10.4% surge due to cold weather. Mining output edged 0.1% higher (17.3% y/y).
The February production increase was held back by a 3.5% decline in motor vehicle output which was unchanged y/y. Output of computers & electronic products offset the decline, strengthening 1.8% (8.9% y/y). Machinery production rose 0.8% (8.3% y/y) in February and electrical equipment & appliance production rose 0.5% (5.7% y/y). (…)
In the special factory classifications, factory output less the high technology sector rose 1.1% (7.4% y/y) in February while factory production excluding both high tech and autos rose 1.5% (7.9% y/y).
Capacity utilization rose to 77.6% last month from 77.3% in January. A 77.9% rate had been expected. Utilization in the factory sector rose to 78.0%, the highest rate since September 2018.
Remarkably, durable goods IP is up 7.2% YoY (+6.1% a.r. in the last 3 months) even though Motor Vehicles & Parts is unchanged (-21.1% a.r. in the last 3 months).
Also remarkable is that total manufacturing capacity utilization, at 78.2% is back to its mid-2018 high even though vehicle manufacturers are operating at only 66% of capacity, down from 80% in 2018. As the chip shortages abate, the U.S. manufacturing industry will be humming very profitably.
ECB’s Lagarde Plays Down Concerns About Euro-Zone Stagflation
(…) Asked about the risk of stagflation, Lagarde said that “even in the bleakest scenario, with second-round effects, with a boycott of gas and petrol and a worsening of the war that goes on for a long time — even in those scenarios we have 2.3% growth.”
“We are not seeing elements of stagnation now,” she said. (…)
Some people are more concerned:
Gas Prices Upend Small Business Rising fuel prices are taking a toll on small businesses, prompting owners to trim services and revise contracts as they try to soften the financial hit.
(…) Fifty-two percent of small-business owners said that higher energy prices were affecting their businesses, according to a March survey of more than 780 small businesses for The Wall Street Journal by Vistage Worldwide Inc., a business coaching and peer advisory firm. (…)
“I am absolutely raising all my prices across the board and I am doing so aggressively,” said David Hastings, chief executive of Hastings Water Works Inc., a 30-year-old swimming-pool service, maintenance and management company.
Mr. Hastings expects to spend as much as $110,000 on gasoline this year, up from $50,000 in 2021. Pay for lifeguards employed by the company has climbed to as much as $17 an hour, up from $11 in May 2021. The cost of pool chemicals has increased by an average of 20% since November and is continuing to rise almost weekly, Mr. Hastings said.
The Brecksville, Ohio, company increased commercial rates by about 15% this year and residential rates by 10%. Mr. Hastings also has asked some customers in the middle of three-year contracts to accept interim price increases of as much as 20%. (…)
But don’t think larger companies are not suffering as well. Goldman Sachs says that “the outlook for ROE is more challenging in 2022 due to margin pressures from rising input costs and wage inflation.”
The only tool that Fed has ever had to bring down inflation is to raise the federal funds rate until it causes a credit crunch and a recession that brings inflation down. That’s the lesson of history. Inflation has always declined as a result of recessions, i.e. hard landings. If the plan is to slowly raise interest rates to gradually slow demand resulting in a soft landing, then good luck with that!
The yield curve spread tends to signal that monetary tightening is sufficient to cause a recession and bring down inflation when it inverts. The traditional yield curve spread between the 10-year bond and the federal funds rate is still widening. It is one of the 10 components of the Index of Leading Economic Indictors, which remained near its recent record high during February. The yield curve spread between the 10-year and 2-year Treasuries, on the other hand, has narrowed significantly so far from over 150bps at the start of this year to only 21bps on Friday.
Odds are that the Fed will tighten gradually. That reduces the risk of an imminent recession and increases the risk of higher-for-longer inflation.
MEGA CAPS AND MEGA P/Es
Ed Yardeni last week:
The MegaCap-8 (i.e., the eight highest-capitalization stocks in the S&P 500) accounted for much of the outperformance of the S&P 500 since 2017, especially during the pandemic years of 2020 and 2021. Now they are accounting for its underperformance.
The market capitalization of the MegaCap-8 fell 18.2% from the start of this year through March 11. Over the same period, the market cap of the S&P 500 with and without the MegaCap-8 fell 11.7% and 9.4%.
And over the same period, the collective forward P/E of the MegaCap-8 fell from 33.8 to 26.5, while the forward P/Es of the S&P 500 with and without these eight stocks fell from 21.4 to 18.1 and from 19.1 to 17.3.
So we have 492 stocks, 71.5% of the S&P 500 index, that are selling at 17.3x forward EPS, below their 17.9 median since 1990 and in line with the 1957-1972 average of 17.4.
The problem is the period between 1972 and 1989 when P/Es ranged between 6 and 15 and averaged 10.9. That period’s average inflation rate was 6.5% compared with 2.9% and 2.4% for the other two periods respectively.
The counterpoint is interest rates, both short and long. Ten-year Treasuries yielded 4.9% and 4.3% on average during the two higher P/E periods and 9.5% between 1972 and 1989.
The bet is thus that equity investors will keep discounting earnings at near current interest rates which really are where they are because of massive central bank manipulations since 2011. The Fed just stopped its bond purchases and will embark on its QT program in May, the details of which will be laid out when the Fed releases its minutes in mid-April.
We know that the FOMC is focusing on slowing inflation through higher interest rates. It is likely that the Fed will seek to lift both short and long term rates in order to keep the yield curve positive. When investors realize that capital gains on their bond holdings are now a thing of the past, they will become more demanding on their real yields.
Watch inflation and LT rates.
Another way to incorporate interest rates into the valuation equation is through the Equity Risk Premium. Unfortunately, there are many ways to estimate the ERP and none of them offer stable long-term readings.
NYU Professor Aswath Damodaran has a 144-page article on ERP which I tried to summarize as follows:
The equity risk premium is the price of risk in equity markets, and it is not just a key input in estimating costs of equity and capital in both corporate finance and valuation, but it is also a key metric in assessing the overall market. Given its importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. (…)
The first and most critical factor, obviously, is the risk aversion of investors in the markets. (…)
The risk in equities as a class comes from more general concerns about the health and predictability of the overall economy. Put in more intuitive terms, the equity risk premium should be lower in an economy with predictable inflation, interest rates and economic growth than in one where these variables are volatile. (…)
A related strand of research examines the relationship between equity risk premium and inflation, with mixed results. (…)
Reconciling the findings, it seems reasonable to conclude that it is not so much the level of inflation that determines equity risk premiums but uncertainty about that level, and that some of the inflation uncertainty premium may be captured in the risk free rate, rather than in the equity risk premiums. (…)
When investing in equities, there is always the potential for catastrophic risk, i.e. events that occur infrequently but can cause dramatic drops in wealth. (…) While the possibility of catastrophic events occurring may be low, they cannot be ruled out and the equity risk premium has to reflect that risk. (…)
Do central banks affect equity risk premiums? While the conventional channel for the influence has always been through macroeconomic variables, i.e., the effects that monetary policy has on inflation and real growth, and through these variables, on equity risk premiums, increased activism on the part of central banks since the 2008 crisis has started on a debate on whether central banking policy can affect equity risk premiums. (…)
Peng and Zervou (2015) argue that monetary policy rules can have substantial effects on equity risk premiums and that an inflation-targeting policy will create more volatility in equity risk premiums and a higher equity risk premium than alternate rules that generate more stability. (…)
This is his chart on Implied ERP with the red dot at his March 1 5.37% estimate.
Here’s Goldman Sachs’ rendition of its ERP:
What have we got currently?
- rising inflation with very little confidence where it will be one or two years hence;
- an increasingly hawkish Fed looking to raise rates across the yield curve;
- rising uncertainty on the economic outlook;
- a war in Ukraine and confrontation between all major powers.
What’s your risk aversion today?
EARNINGS WATCH
Q1’22 is almost over. Only 3 S&P 500 companies offered guidance last week, all negative. Of the last 25 pre-announcements, 18 were negative and 4 positive, a 4.5 N/P ratio.
It had no effect on analysts however: Q1 earnings are still seen up 6.5% (vs 7.5% on Jan. 1). Full year 2022: +8.7% (vs 8.4% on Jan. 1).
Smaller caps are getting the shaves:
TECHNICALS WATCH
My favorite technical analysis service says its core indicators are not showing the preconditions that would suggest a solid and durable recovery beyond the recent rebound. The strengthening in demand has not been accompanied by a decline in selling pressures other than in smaller caps. Long-term trends remain negative and inconsistent with historical market lows.
The 13-34 EMA chart failed to confirm the “cyclical bear” signal of earlier in the week:
China Says Housing Prices Are Stable, but Developers See Significant Falls One main reason for the diverging picture is the composition of the country’s official data, economists and property analysts say.
According to government statistics, China’s housing market has cooled from its hot gains of years past but is still ticking along. The average new-home price rose 1.7% year over year in January and 1.2% in February.
Yet financial filings, marketing materials for apartments, property agents and analysts tell a different story: Debt-burdened developers are selling apartments at falling prices and in some cases providing big discounts to get cash in the door.
Since last summer, most residential real-estate developers in China have reported steep drops in contracted sales. Many have also disclosed substantial declines in average selling prices this year, according to a Wall Street Journal analysis of their monthly stock-exchange filings.
Industry giant Country Garden Holdings Co. , one of China’s financially stronger developers, reported a 14% decline in its average selling price in January and February from the same months in 2021. A midsize developer, Logan Group, said its average selling price tumbled close to 40% year over year in the first two months of 2022. (…)
Earlier this month, Soho China, a developer of mixed-use commercial and residential buildings, said it would sell nine projects in Beijing and Shanghai at a 30% discount and use all the proceeds to pay off its debts. (…)
Some developers have been offering big discounts to draw buyers. On social media, an apartment from China Vanke Co. —another stronger developer—that was listed at 21,500 yuan per square meter, roughly equivalent to $314 a square foot, last July, was recently marketed by agents at about a 19% discount. Some local home buyers, meanwhile, complained online last month about similar discounts being offered on a Country Garden project in Zhengzhou, saying that had a negative effect on the value of apartments they had recently purchased. (…)
The national index surveys property prices in 70 out of China’s nearly 700 cities, and the largest and richest cities like Beijing, Shanghai and Shenzhen have registered stronger price gains. (…) Those that have seen the biggest price drops are often not in the index. (…)
The government’s home-price data also serves as a measure to influence the market, and officials have an interest in smoothing out the data and keeping it relatively stable, some analysts say. Big price drops in the official numbers could make people even less eager to buy homes, which would worsen conditions in the property market. (…)
Unsold homes are piling up in tier-three and tier-four cities. According to a recent report from Shanghai E-House Real Estate Research Institute, the number has been growing for nearly 40 months.
To bring in sales, some developers have been giving out free cars, parking spots, decorations or household items to home buyers when they can’t lower their apartment prices, according to Chinese state media. (…)
Mega cities like Beijing, Shanghai and Shenzhen, where property values have risen the most, have imposed price limits and taxes to curb the prices. There are also cities that in recent months have imposed minimum prices to stop home prices from falling further. (…)
Still want to invest in China? Real estate supports about 25% of the economy there…
EU Set to Line Up With Biden to Warn China Against Helping Putin
China Will Work to De-Escalate War in Ukraine, Diplomat Says
Last Friday’s meeting between Xi and Biden
offered no apparent breakthrough nor indication of whether Mr. Xi is considering reassessing ties with Moscow. Mr. Xi, however, sought to present China as a neutral party to the conflict, and one that can facilitate negotiations to bring it to an end. (…) Beijing has now settled on a clearer strategy: It won’t oppose Russia, and it will support Ukraine—what is described in China as “benevolent neutrality.” (…)
And he [Xi] criticized Western sanctions against Russia, saying that “the ordinary people are the ones who suffer,” according the Chinese Foreign Ministry.
This is way beyond ridiculous. Why the sanctions, again? Did Xi criticize Russia for the unprovoked and indiscriminate bombing of Ukraine, the thousands of people killed and the millions forced to leave their homes and their country?
Interesting chart:
U.S. Covid-19 Infections Likely to Rise Again, Fauci Says The BA.2 subvariant of omicron is driving up cases in Europe and Asia.
- Katelyn Jetelina from Your Local Epidemiologist
(…) BA.2 now makes up 23% of cases in the U.S. and we expect this to increase to 100% over time. We don’t know what BA.2 will look like in the U.S. We could see a second hump, like Europe, or no overall increase, like South Africa. Or, perhaps we may see an increase in only some states. (This is exactly what happened with Alpha and has my vote.)
BA.2 makes up the highest proportion of cases in the Northeast (see pie charts below; pink=BA.2; purple=BA.1). So, if we do see an uptick in cases, it would be in the Northeast first. (…)
New York is the only state that has an increasing case trend, with a 15% increase in the past 14 days. It’s an increase from a very small number to another small number, but we should keep an eye on it. (…)