Recovery in the housing market is on the verge of stalling (is a double-dip near?)

A summary from various news sources:
· With the expiry of an $8,000 tax credit for first-time homebuyers on April 30, new single-family home sales in the U.S. crashed in May.
· Commerce department figures showed on Wednesday that new home sales dropped by 32.7 per cent from April to May to an annual rate of 300,000.
· The monthly fall was also a record, and was nearly twice as severe as Wall Street analysts had predicted.
· Compared with the same month a year ago, new home sales are off by 18.3 per cent.
· Additionally, home prices have now fallen for the past six months, according to the Case-Shiller home-price index.
· Foreclosures have been running at a rate of over 300,000 filings a month for the past 15 months.
· By some estimates, it will take more than eight years of normal sales to clear the stock of houses now held by banks.
· Bloomberg reported that mortgage securities with U.S.-backed guarantees traded at record high prices on speculation homeowner refinancing will fail to accelerate and as supply of the bonds remains limited.

Thoughts:
With the government stimulus drawing down, we now have a reminder of what the housing situation is really like. Other than low interest rates, there are few factors that will provide a boost to the housing market at the moment. This is why the fed has opted to keep interest rates low and will continue to do so (probably at least until early 2011).

Housing will continue to be one of the most important indicators for our economy. Many economists argue that the housing market never really recovered in the first place. The rebound that we saw was largely due to artificial support from the government and low interest rates from the fed. Therefore, the best investors and buyers can hope for is a slow and steady improvement in the coming months. The stock market and the entire economy are likely to follow the same slow and steady growth if they are to improve.

Being that housing and labor markets go hand in hand. An improvement in employment and incomes is needed to raise home demand and lift house prices. Poor jobs data in the past month is another sign that the recovery in the housing market is stalling.

Conclusion:
The drop in homes sales is likely a correction, due to the expiring tax credits. I do not expect a double dip in the housing market. However, I do see a long and drawn out recovery that will take years to play out. What will it take in order to see improvements in employment (which will aid housing)? Businesses will need easier access to credit and stronger confidence from consumers.

Daniel A.
Summer Analyst
Analyze Capital LLC

The Economist: Fear returns

On the cover of its latest issue, The Economist featured a shark sneaking underwater. Barely a month ago, its front page read "Hope, finally". How sentiments change so quickly in the wake of a recession is nothing less than remarkable. So what do we do to “avoid a double-dip recession"? Here I am going to borrow some ideas from the term paper I wrote for my macro analysis course last spring.

One thing for sure is that we have reasons to remain cautious and even pessimistic, though it's probably safe to say that the worst is behind us. To me the difficulty today is not a double-dip recession, but a sluggish recovery for years to come. It's unlikely that we would see another systemic default of the economy, given the decisive actions governments have carried out during the crisis. However when we examine one by one the four cartage (consumption, government purchases, investment, net exports) dragging the economy forward, it becomes really hard to believe that future is free of worries:


- Consumption, several factors make spending our way back to prosperity rather unrealistic:

1. unemployment.
2. less household wealth, diminished values of portfolios and houses
3. fear caused by the first two factors may as well transform the spending habits of the consumer. The average Joe is turning into, if never too much of a saver, less of a spendthrift.

- Government purchases:

1. A soaring deficit is highly undesirable during an economic recovery, for it could make financing costlier for both the public and private sectors, and politically weaken the administration’s control to do what is needed. And since technically we are not in recession any more, a Keynesian approach may fall out of the vote seeking politician's favor.

- Investment:

1. An optimistic stock market does not automatically signal the healing of the system, whereas a financial system that remains abnormal affects virtually every participant in the economy. For private companies, the premium they have to pay to attract capital is still very high as compared to earlier recoveries, signaling a lack of confidence in the bond markets. Since small businesses, employing 500 people or fewer, have traditionally accounted for 65 percent of all new jobs created. If these companies could not get money for their projects, they will not be in a position to hire people or make capital investment

- Exports:

1. Many economists agree that exporting our way back to prosperity is the optimal way to go. There is real hope here, but not certainty.
   
2. The U.S. is the dominant exporter of "knowledge oriented" goods, things that cannot be produced easily by a sweat-shop in China.
3. A combination of tight fiscal and loose monetary policy is likely to lower the exchange rate, and make U.S. goods more competitive abroad.
4. However, exchange rates cannot be firmly controlled, and the dollar tends to not behave in the way it is told.
5. Crisis abroad might cause capitals to flow into the dollar and make it appreciate.
   

All told, the road to recovery is a game of confidence. Until one of the horses dragging the cart wakes up and “ignites” the rest, things will remain sleepy as they are. This is not to say that over-confidence is golden; the economy is still in a feeble stage, and it will take exceptional vigilance and execution to lead it to where it needs to be. Perhaps we don't have to be pessimistic, but caution is indeed needed going forward.



Yi Gao
Research Analyst
Analyze Capital LLC

1. ---

When Will the Market Rebound - June 02, 2010

Via Bloomberg (a brief summary):
The biggest slump in commodities since the Lehman collapse may be an indicator of a bearish market, however it could just be a correction.

The Journal of Commerce Industrial Price Commodity Smoothed Price Index (which tracks steel, cattle hides, tallow, burlap, and other commodities) declined 57 percent in May. According to a managing director at the Economic Cycle Reseach Institute, the JOCSINDS reflects clearer signs of supply and demand than futures markets because half the items it tracks do not trade on exchanges used by speculators. It is important to note that the index fell at a 56 percent annual rate in October 2008 and two months later, the National Bureau of Economic Research declared that the U.S. was in a recession.



Despite this news, one analyst believed that the market is “underestimating the strength of the fundamentals” and “overestimating the impact [of the European debt crisis].” Another analyst stated, “There are headwinds, concerns both in Europe and in Asia that are making investors rethink their decisions and maybe take some profits, but I believe that the longer-term growth story remains intact,”… “I don’t think it’s a broader slowdown. I think it’s a correction.”

My opinion: The recent dip in the markets is likely a correction and a buying opportunity.


--

Dan Auriemma
Summer Analyst
Analyze Capital LLC
email:analyzecapital@gmail.com

Consumer Price Index A.K.A. Inflation

Temporarily soft energy costs pulled down the headline CPI for February while weak shelter costs kept core inflation very sluggish. Overall CPI inflation for February eased to no change from 0.2 percent the month before. The latest came in just below the market forecast for a 0.1 percent uptick. Core CPI inflation rebounded a modest 0.1 percent, following a 0.1 percent dip in January and matching consensus expectations. A number of weak components point to the fact that inflation pressures, indeed, are subdued. Shelter costs were flat in the latest month while declines also were seen in apparel and recreation.

Looking at detail, the energy component of the CPI declined 0.5 percent in February after jumping 2.8 percent the month before. Gasoline temporarily eased 1.4 percent, following a 4.4 percent jump in January. Food inflation slowed in February to 0.1 percent from 0.2 percent in January.

Year-on-year, overall CPI inflation fell to 2.2 percent (seasonally adjusted) from 2.7 percent in January. The core rate was slipped in February to 1.3 percent from 1.5 percent the month before. On an unadjusted year-ago basis, the headline number was up 2.1 percent in February while the core was up 1.3 percent.

Today's report leaves a lot of room for the Fed to keep rates low for some time. On the news, Treasury yields edged down and equity futures rose slightly. At the same time, initial jobless claims came in very close to expectations.


My only take from this report is that the economy is not inflating. Meaning QE will likely remain in some form until the Fed raises rates.

It is a beautiful day in New York. Take some time away from the terminal and get some spring air. I am likely heading up to Newport, RI later tonight. Enjoy the rest of the trading week.

Consumer Confidence- 02/23/10

Via Bloomberg:

The consumer's mood is definitely downbeat, a strong indication that the jobs market isn't improving. The Conference Board's consumer confidence index fell back in a surprising and sizable way, down nearly 10 points to 46.0 in February (January revised to 56.5). Expectations, the index's leading component, fell more than 13 points to 63.8 reflecting a sweeping sentiment downturn in income, employment, and business conditions. The expectations index never really got going last year, barely approaching the watershed 80 level, a level consistent in the past with economic expansion.

The trouble in expectations signaled trouble for the present-situation component which dipped into the teens and toward the record lows of the early 80s. The index fell nearly 6 points to 19.4, reflecting pessimism over current business conditions where only 6.2 percent of the 3,000-home initial sample describe them as good. Only a miniscule 3.6 percent describe jobs as currently plentiful with 47.7 percent, up 1.2 percentage points from January, describing them as hard to get. This latter reading, which gets a lot of attention, will raise talk of trouble for February's jobs report.

Note that consumer confidence may have weakened but momentum and recent indications on the retail sector suggest that consumers haven't pulled back their spending, at least yet. The Reuters/University of Michigan consumer sentiment index for February, which edged lower in an initial reading at mid-month, will be posted on Friday.

Wow, disappointing numbers. The Dow rallied about 33 points in early trading on strong earnings from Home Depot. However, when this report hit the market at 10 EST equities and commodities sold off. NYMEX Crude was off 1.84% midday from its highs of $80.31/barrel from yesterday's trading session. Natural Gas continues to sell-off as reports of warmer weather than usual in the Midwest began to circulate this week. Natural Gas is trading at $4.78 per British Thermal Unit down 2.35% at the close of NYMEX trading.


Patrick M. Ambrus
Managing Partner
Analyze Capital LLC
ambrus.anlzgroup.com

Industrial Production- 2/17/10

Industrial production posted another strong gain for January-but this time the strength was real and not weather related. Industrial production in January advanced 0.9 percent, following a 0.7 percent jump in December. The January was marginally better than the market projection for a 0.8 percent gain.

The manufacturing component made a robust comeback, jumping 1.0 percent after edging down 0.1 percent the month before. For the latest month, utilities output increased 0.7 percent after spiking 6.3 percent in December on atypically cold weather. Mining output rose 0.7 percent after dipping 0.2 percent in December.

A big chunk of the manufacturing spike was due to a jump in auto assemblies-but gains were healthy elsewhere. Motor vehicles & parts jumped a monthly 4.9 percent after a 0.3 percent decline in December. Excluding motor vehicles, manufacturing rebounded 0.8 percent in January, following a 0.1 percent decrease the month before.

Net, industrial production is as strong or stronger than the January headline number but also not as healthy as the December headline figure. Lesson-pay more attention to the manufacturing component than to the headline figure.

On a year-on-year basis, industrial production in January improved to plus 0.9 percent from down 2.2 percent the month before.

These numbers were expected. As I noted in my report on the U.S. economy, Industrial Production is set to surge by a total of 620 basis points yoy for 2010. Equity markets didn't react much to the news. Stocks remain flat near the close with the S&P 500 up only 42 basis points at 1099.51. Will we see a legitimate test of 1100? My Partner Alex will provide some technical analysis on this topic shortly.


Patrick M. Ambrus
Managing Partner
Analyze Capital LLC
ambrus.anlzgroup@gmail.com