After reaching fresh five year highs with the S&P closing at 1530.94 on 19 February 2013, stock markets sold off on warnings from Walmart (WMT), and commentary from the Federal Reserve. Shares in Walmart have been outperforming the broader market, which raised some warning signs, then late Friday 15 February leaked e-mails from Walmart executives warned of extremely weak sales. The news caused a drop in the S&P 500 as Jerry Murray of Walmart suggested that the weakest sales month in seven years was the result of expiration of a payroll tax cut, and a slowing economy. That news prompted some early speculation on what might trigger a correction, though markets rebounded on Friday with the S&P 500 finishing up at 1515.60. Our downward support level is 1496, meaning a close below that level may indicate the beginning of a downtrend. Recent Redbook Research US same store sales figures for the week ending 16 February showed sales up 3.1% over the same period in 2012, which questions the warnings of those Walmart e-mails. The next move downward in stocks came as Caterpillar (CAT) announced a 4% decrease in sales of construction and mining equipment for the three months ending in January 2013. Concerns that the Federal Reserve might end stimulus measures early, along with some disappointing economic figures, caused the worst decline on the S&Psince November 2011. Gold futures and oil futures also declined, as rumours of a commodities hedge fund in trouble began to circulate. The G20 Finance Ministers and central bank governors met in Moscow recently to discuss ongoing economic issues in the top 20 countries. Amongst the official releases was a promise of central banks to avoid "competitive devaluation" of currencies. There was some expectation that countries would try to prompt Japan to reverse their recent aggressive stance on Yen (JPY) values, though the Japanese claim that unlimited government bond purchases are intended to pull the Japanese economy out of recession. It was difficult to find a central banker or finance minister willing to address whether monetary policies target currency values, or are strictly aimed at boosting local economies. As usual in G20 (or G7) meetings, the end results and statements lack any real disincentives towards continuing loose monetary policies. Australian Treasurer Wayne Swan, in an interview with CNBC, expressed concern about the rise of the Australian Dollar(AUD), yet gave support for market-based exchange rate mechanisms. Demand for iron ore, coal and natural gas, most of it exported to China, has driven the AUD higher over the last few years. The failure to make a statement against Yen (JPY) manipulation reinforces the Japanese Government push on monetary policy, and may influence the choice of the next head of the Bank of Japan, who will be under continued pressure to devalue the JPY. Danish financial companySaxo Bank warned that the recent rise in the Euro (EUR) would not last much longer, as the failure to form a true fiscal union fails to solve long term problems. When we look at forex (foreign currency exchange) markets, we can see a continuation of large volumes in USD/JPY transactions, above the usual EUR/USD leading pair. Our market correlation indicator in currencies, the EUR/JPY rate, suggested a decline in risk markets (equities) prior to the downturn of the S&P 500. Analysts at JPMorgan (JPM) and Nomura (NMR) note a recent trend of large Japanese pension funds shifting investments away from Australia and towards Europe, though it appear some may be taking profits on the recent run-up in the yen (JPY). There is some indication that Japanese investors are moving into South African, Brazilian, and other emerging market choices. Whether this trend continues depends upon the continued weakness in the Yen. January housing starts disappointed with a reading of 890k against an expectation of 920k, though building permits increased slightly to 925k, showing that the recovery in housing continues. The decline was largely due to a decrease in building of multi-family dwellings. Fitch Ratings notes that the balance of Commercial Loans in special servicing declined from $83.1 billion at the end of 2011, to $70.5 billion at the end of 2012. Liquidations remain the main area comprising this activity, though attempts at pushing through modifications and work-outs appear to be changing the market. The average time in special servicing has gone from 9.1 months in 2009 to 21.6 months in 2012. This continues to overhang the Commercial Loan and Commercial Mortgage Backed Securities (CMBS) markets, indicating that we still have years ahead of us for a complete recovery in real estate markets. CMBS delinquencies declined for the eight straight month in January 2013, which is a great sign of continued improvements, though Fitch Ratings note that Georgia continued to be a problem area. Fitch maintain a Stable outlook on commercial real estate, based upon a continued decline in delinquencies. Late payments fell to 12.7% in January, compared to 13.4% in December 2012. The performance of the AUD appears to be fuelling some overseas investments, as Australians are now seen to be investing heavily in US rental markets. Institutional investors are putting $6 billion to $8 billion into buying houses and converting them into rentals, with a large portion of those funds coming from Australia and Canada. Given the improvements in housing and commercial real estate, it should not be surprising that JPMorgan (JPM) are looking to sell the first non-agency Mortgage Backed Securities (MBS) since the beginning of the financial crisis. Non-agency means these MBS are not backed by government supported programs, such as through Fannie Mae and Freddie Mac. The recent Federal Reserve policy of buying MBS on the open market may be prompting this move by JPMorgan, who follow Credit Suisse (CS) and Redwood Trust in issuing non-agency MBS. Most of these MBS offerings are comprised of prime jumbo loans of "exceptionally high quality", according to S&P ratings. Credit Suisse (CS) was one of the first companies to delve back into the market for Residential Mortgage Backed Securities (RMBS), though the company now finds itself under investigation by the US Department of Justice over "misleading investors" on the valuation and risk levels of those RMBS. This overhang of investigations and allegations may be holding back mortgage markets, since securitization of mortgages is an important component of the housing sector. As the latest minutes of the Federal Reserve meeting began to appear, the Pound (GBP) and Euro (EUR) declined sharply, while the US Dollar (USD) strengthened. Easy credit led peripheral economies in Europe to grow much faster than the average GDP growth of the Eurozone. Recent data from the Organization for Economic Co-operation and Development (OECD) indicated much worse fourth quarter 2012 GDP figures than had been expected. The OECD noted that many countries in Europe were slipping towards a recession, while the United States GDP growth went from 0.8% in the third quarter, to 0.0% in the fourth quarter, a significant slowdown. Fed officials expressed concern about the affect on markets of continued asset purchases and stimulus programs. These were the first hints that the Federal Reserve might end some stimulus measures earlier than previously expected. Atlanta Federal Reserve President Dennis Lockhart told Reuters that potential stimulus benefits continue to outweigh longer term risks of current unconventional monetary policies. Much of this continued risk weighting appears to be as a result of a lack of progress on unemployment levels. As long as the Federal Reserve appears willing to continue asset purchases, then markets should continue to respond positively to the additional stimulus. As a popular saying goes amongst financial analysts, don't bet against the central banks. So far consumer prices have not been rising fast, with 12 month price levels through January 2013 just 1.6% higher. The US economy grew 2.2% in 2012, despite a slowdown in the fourth quarter. Unemployment came in at 7.9% in January 2013, and job growth has remained below levels needed to make an impact on unemployment levels. Many people feel that the US economy is in recession, though technically that requires more than one quarter of slowdown in economic activity. Different regions of the United States are performing far better than other regions. However, when we look at employment, average worker pay levels have declined. That is one component of deflation. In the week ending 16 February, initial jobless claims came in at 366k against 355k expected, with continuing unemployment claims somewhat lower at 3.148 million. There have been very real worries about stimulus and central bank activity causing inflation, though economic figures continue to point towards the possibility of deflation. Recent data from the Federal Reserve Bank of Philadelphia Business Outlook Survey indicated a surprise slowdown to -12.5 (negative) as a decline in new orders and activity offset improvements in shipping and employment in the region. While business outlook remains positive for the future, the numbers and data are somewhat mixed and do not yet give a clear indication of future direction. Markit Research February PMI figures came in at 55.2 against an expectation of 55.5 on the Purchasing Managers Index. Demand amongst US consumers appeared to be good, though export demand slowed somewhat, which correlates well with the Philadelphia Fed Survey data. It seems that markets may be heading downwards into the end of February. The battle over automatic spending cuts (The Sequester) in the United States will take place prior to 1 March 2013. President Obama recently suggested that the spending cuts are not inevitable, but with Democrats and Republicans in the House of Representatives and Senate so far unable to come to any agreement, it does seem somewhat inevitable. Given the recent track history of the Legislative Branch, and with 1 March 2013 falling on a Friday, a market decline on that day has a high probability of occurring. Fiscal stimulus and government spending arguably tried to create a soft landing in the economic decline, though the way to drive an economy is through capital spending. Many companies have held back capital spending due to uncertainty, though it appears that some companies may now be ready to boost spending. One major holdback has been uncertainty over government action. If politicians can remove some of that uncertainty, and choose a definitive path of some sort, then many businesses will know how to react and plan future activity. Hopefully it is near the time that government moves out of the way of business, and moves more towards letting the real economy come forward once again. As we head into the close of February, we can watch some of our correlation indicators for a better idea of where markets are headed. Of these indicators SPXA50R now appears to be heading towards a downtrend (weekly chart view). This tells us the percentage of companies on the S&P 500 whose share prices have dropped below their 50 day moving averages. Using SPXA50R, we may have books some profits over the last few weeks, and now we are waiting for a low indication for possible buying opportunities. We can also watch the Volatility Index (VIX), especially if VIX goes above 20 in the near term. So far US Treasuries have not come under selling pressure, with yields on the 10 year and 30 year Treasuries still quite low. A yield above 3.5% on the 30 year note, or above 2.5% on the 10 year note, would be an indication of a major shift in market sentiment, though with the Federal Reserve buying some Treasuries, and investor demand continuing forsafe haven assets, we may not see that shift this year. As we head towards The Sequester on 1 March, we might see a pullback in markets as major investors await the outcome of negotiations in Congress. A failure to negotiate a long term agreement may prompt a market sell-off or lead to a correction. More can kicking with temporary measures could hold back the economy, while a longer term agreement could lead to greater capital spending by businesses. As long term investors we can take some comfort in the long term economic improvement, even if the current pace is quite slow. While politicians do have the capability to derail the economy in the short term, we may view those events as buying opportunities for long positions, or times for shifting asset allocations. The recovery in housing continues, despite the recent slowdown. Stay aware, remain informed, watch for indications of shifts in markets, and be ready to take advantage of buying opportunities. G. Moat Disclosure: I hold a long positions in Credit Suisse (CS). This article is not a recommendation for investors to either buy, nor to sell, shares in Credit Suisse. Investors are advised to perform their own research prior to making investment decisions.
Global markets continue to move higher in developed markets and some Asian markets. Of emerging markets, only Brazil appear to be on the decline, though that may present investors with a few buying opportunities, namely multinational companies headquartered in Brazil. The S&P 500 continues to make new 5 year highs, with an interday high of 1524.69 on 13 February 2013. The NASDAQ composite index reached a new 10 year high above 3200, while the DowJones Index crosses above 14000. Resistance points to watch on the S&P 500 are the 1535 and 1555 levels, still below the all-time closing high of 1565.15 set on 9 October 2007 and the interday high of 1576.09 on 11 October 2007. Shares in many companies have already peaked, so it is difficult to imagine that we might see new all time highs on the S&P 500 in 2013. There are indications that the market is overbought, so it would not be surprising to see a pull-back in the near future. On our indicator indexes we can watch the weekly chart cross-over on SPXA50R, which would indicate that more shares on the S&P 500 are moving downwards than above their 50 day moving averages. The high point on SPXA50R was on 22 January 2013, though this index does slightly lead the market. We should continue to watch other correlations with indicators mentioned in previous articles, such as the 10 year and 30 year Treasuries. Even with the continued gains in stock markets, activity this week might not be a good indication of a continued trend, since many Asian markets have holidays this week. Tradingvolumes will be lower this week as markets in China, Singapore, Japan and Hong Kong close for holidays. The lack of much movement in 10 year and 30 year US Treasuries dispels the rumour of a Great Rotation from bonds into stocks. Despite this lack of confirmation of a rotation of funds, Barron's came out with yet another article interviewing little known fund managers touting the Great Rotation. While there are some good investment ideas in some of the companies mentioned, in this article Barron's follows their usual pattern of being late to feature a trend. We may almost consider a mention of a rally in Barron's to be a contrary indicator. One of the more interesting mentions in that article is Robert Half International (RHI), who are a major international company involved in managing temporary workforces. Matthew Sauer of Lateef Investment Management mentions that RHI grew their temp business by "double digits" for 10 consecutive quarters. It is tough to find agreement on his premise, that "temporary hiring is a leading indicator of full-time employment", because the numbers reported by analysts and various agencies that track employment point towards a growing different trend, which is the growth of a long term temporary work-force. There are advantages for some companies to have temporary workers, though the greatest advantage are exemptions to get around regulations, including health care and unemployment insurance. Michael S. Derby in the Wall Street Journal argues that regulations have not held back hiring, and makes note of a Federal Reserve Bank of San Francisco (FRBSF) study to make his point. While that Federal Reserve study does not address temporary employment, the important factors they do mention includehousehold debts levels and consumer spending. Redbook Research indicated in their latest report that US same-store sales increased 2.4% in January 2013 compared to a year ago, and sales continued to move upwards 1.1% in the first week of February this year compared to January. As consumer sales have improved, hiring an employment have improved. In that FRBSF study, financing and interest rates were not found to be much of a barrier for businesses in hiring, though that does lead to the question of why Federal Reserve monetary policy targets interest rates and access to funds. The other aspect of household debt levels has changed as the housing market continues to recover, though as the FRBSF indicate the effects are more local than regional or national. The continued Federal Reserve policy of purchasing Mortgage Backed Securities (MBS) does seem to address that trend, and may be one area of policy that has some potential to increase employment. Despite a slight decline in the yield of MBS seen recently, the average yield of 2.6% is still better than the 10 year US Treasury. The next possible area the Federal Reserve may target is money market funds, especially with all 12 Federal Reserve presidents indicating support for reform. The US Trade Balance fell by $10 billion in December 2012 as export growth outpaced import growth. Petroleum products trade deficit declined by $4.7 billion to $18.7 billion, the lowest level since 2009. This change in trade balance should be reflected in an improved GDP. If this proves true, then the Congressional Budget Office (CBO) may need to reassess their latest projects of the economy slowing in 2013. The CBO also expect the US deficit to fall under $1 trillion this year, though that is based partially upon automatic spending cuts set to phase in on 1 March 2013. As Reuters analysts point out, recovery from recession to prior peak GDP levels often takes 4.5 years. So while the numbers continue to improve, there is still some uncertainty, and many possible risks that could derail recovery. The US January 2013 Budget Surplus came in at $2.88 billion compared to an expectation of a $2 billion deficit. In comparison the 2012 deficit amount was more than $27 billion, though with receipts increasing from $272 billion compared to $234 billion in 2012, most of the change is due to higher revenues. We continue to see improvements in consumer spending and in housing markets in most regions of the United States. In a new trend identified by research agency Core Logic, home equity lines of credit are increasing, despite a large number of mortgages that remain underwater. Despite the increased attention on tapping into home equity, the overall amount is well below the peak of $28 billion in 2006. Part of the reason behind the trend may be an increase in confidence of the ability to repay. There is some indication that these funds are going towards home improvements. Investor interest moved towards Residential Mortgage Backed Securities (RMBS) throughout 2012 as hedge funds bet on a recovery in housing. A newer trend now emerging is investor interest in Commercial Mortgage Backed Securities (CMBS). Commercial real estate and debt on commercial mortgages are lagging behind a recovery in residential mortgages. While commercial property values have recovered 45%, gains in commercial debt have only increased barely 12%, which suggests some remaining upside potential. More funds and large investors are now showing greater investment moves tied to commercial mortgage and commercial properties. Many investment firms have substantially increased their holdings in CMBS recently. The largest mall operator in the United State, Simon Property Group (SPG) reported a 21.9% increase in earnings for the fourth quarter of 2012. SPG plan to spend up to $5 billion on development and redevelopment over the next three to fours years, in a sign of growing confidence in retail properties. All this comes at a time when activity in residential mortgages may be slowing. The Mortgage Bankers Association note that mortgage applications declined 6.4% for the week ending 8 February 2013, compared to a 3.4% increase in the prior week. Refinance activity remains 78% of total applications, with adjustable rate mortgages only 4% of total applications. In the week ahead, there will be a G20 meeting and a return of open markets as Asian holidays end. Despite activities of many central banks, there has not yet been a derisive statement from any G7 country about active currency devaluation. It appears almost obvious that we are seeing an active currency war, yet not one country wants to confront another about currency devaluation. Japan's new government has pushed their central bank the most recently, so it should not be a surprise that there have been several resignations at the Bank of Japan over the last several weeks. We can see evidence of Bank of Japan policies through the increased volume of Japanese Yen (JPY) in forex (foreign exchange) markets, with much of the carry trade flow going through Euro and Yen (EUR/JPY) and the US Dollar and Yen (JPY/USD). Nomura Research point out that despite a weaker Yen, higher inflation rates in the United States means that Japanese exports should still be able to gain higher prices in the US. If this is true, then we should see little change in the trade balance between Japan and the US, despite a weaker Yen. So far Japan has not gained any trade surplus, but we will need to watch longer through this year to judge the effectiveness of recent Bank of Japan policy changes. The companies who may benefit the most from these policy changes may be Japanese banks, rather than electronic and automotive manufacturers. These policies may come under pressure if conditions in Europe worsen, especially with the very real possibility that Greece will once again request debt restructuring. It seems that in these times of global currency wars, only the emerging markets see much complaining about devaluations, especially Venezuela after a 32% devaluation of the Bolivar against the US Dollar. Hugo Chavez has not been seen nor heard since travelling to Cuba for more cancer treatment on 11 December 2012. Should he step down, or otherwise vacate office, Venezuela must hold elections within 30 days. This is the fifth time in nine years Venezuela has devalued their currency, and it makes the 2012 movement of gold reserves back to Venezuela of great interest. Turmoil in Venezuela could affect oil prices globally. Annual inflation in Venezuela is now running over 22% and food prices are soaring. There is demand for "safe haven" currencies, namely the Swiss Franc (CHF), Norwegian Kroner (NOK), and New Zealand Dollar (NZD), and so far only the Swiss central bank is acting to curb the rise in the Franc. In the case of New Zealand, Finance Manager Bill English indicated before Parliament that New Zealand is a "small country" and not prepared to take risks with taxpayer money to affect exchange rates. In the longer run, that policy may find New Zealand in better shape, though with some increases in the New Zealand housing markets, a rise in interest rates may be enough to avoid future problems. As we usher in Chinese New Year and the Year of the Snake, we can see that snakes in China are considered good omens and that families will never starve. As the tale goes, the snake is good at business, so he is always able to feed his family. So as wise and savvy long term investors, may the snake bring you good fortune this year. G. Moat
As worries over impending fiscal disasters have ebbed, funds continue to flow into stock markets. On a grand scale of total market valuations, or in comparison to 2008 outflows near $416 billion, the current inflows of $66 billion don't seem significant. About half of this great flow of funds appear to be going into international and emerging market funds, instead of into US listed equities. The continued low yield on bonds has failed to attract investors, so the theory of this latest flow data is that investors are now once again confident in stock markets and looking for some gains. The contrary indicator in all this, as mentioned in that video link above, is that large inflows have historically occurred near market tops. As Jason Zweig of the Wallstreet Journal points out, large institutional investors are also participating in the increased inflow of funds. As the so-called "Great Rotation" continues, another trend has appeared as funds have gone into Exchange Traded Funds (ETFs) that cover debt instruments, emerging market bonds, and other fixed income. The attraction of some of these ETFs is the steady payout ratio, combined with a perception of less risk than stocks or stock based funds. The idea that individual investors are driving market gains does not appear to be that convincing. January is historically an important time for fund managers to reposition portfolios, so under somewhat normal market conditions, we can expect inflows. Even with ETFs, it's important to remember that the managers of many of these funds buy and sell stocks to cover the investment portfolio identified in the prospectus. Despite analysts identifying some trends, when we look at the gains over the last four weeks, we can see that energy ETFs have performed well, though long and leveraged funds have performed even better. Just on a supply and demand basis, it appears that some complacency has set in. When we look at volatility (VXO)(VIX) indexes, we find they are at historically low levels. The long term volatility level of the S&P 500 is closer to 20 on the VIX. A trend we see emerging on VIX Futures indicates major investors expect the VIX to rise over the next few months. Usually movements in the VIX are opposite movements in the S&P 500, so if these futures positions prove to be correct, then we can expect a slow decline in the stock market. Instead of a Great Rotation from bonds to stock, it may be more a case of funds that were on the sidelines, either in money market funds or cash, now being used to purchase equities. Sales of new issuance of 5 year US Treasuries in January were well subscribed, and the yield on the 10 Year US Treasury has barely crept upwards. In all this it is important to remember that sometimes fund flows correlate with market gains, while other times there is an inverse correlation. As we continue through earnings season, it is important that companies continue to meet or beat earnings estimates. If the fundamentals continue to look strong, then equities could continue to rise. One thing to watch in earnings reports is forward guidance, though we may see a new precedent in guidance after insurance company Ace Ltd. (ACE) Ceo Evan Greenburg questioned the idea of giving guidance. It is odd to look at the gains in US stock markets and not see much of any gain in the US Dollar (USD). If a flow of funds is pushing stocks higher, then why has demand for USD not moved higher? When we look at all the problems in Europe, and many countries now in recession, one of the surprises is the strength of the Euro (EUR) relative to the USD. So why has the EUR gained against the USD? One factor is a consequence of central bank action, in this case the European Central Bank (ECB). At least in the near term, actions by the ECB do not appear to be increasing inflation risk, though Jens Weidmann (head of the German Bundesbank) points out that political meddling in central bank action could threaten price stability. As mentioned in prior articles, the Long Term Refinancing Operations (LTRO) of 2011 and 2012 is one area of concern, because some of those LTROs are now being paid back early. This works under a mechanism of finance called aRepurchase Agreement, or Repo. Unlike a loan, a Repo involves a sale of assets with an agreement to repurchase those assets at a later date, usually for a higher repurchase price, which in effect represents a form of interest (called the repo rate). You may think of a Repo as a secured loan with collateral. The ECB initiated LTRO through repo auctions, effectively acting as the clearing house for agreements. Recently several European banks have moved to close their LTRO positions, leading them to repurchase those assets (sovereign debt, mortgage backed securities, and other fixed payout securities). Those banks need lots of Euros (EUR) to get out of their LTRO agreements, and demand for Euros has major banks selling other currencies in order to get the Euros needed for payment. So far about 278 banks have indicated they would pay back LTRO agreements early, which has caused some run-up in the Euro. The expectation was near €35B (35 billion Euros) repayment, though by 30 January 2013 the repayment amount was €137.2B (Euros). Analysts at Deutsche Bank expect continued LTRO prepayments to push EUR/USD rates even higher. It is a positive sign that Europe, at least for now, has left the worst of recent times behind. Combined with the Federal Reserve pushing more USD into the system through various programs, we might expect dollar weakness and Euro strength to continue for a while longer. Our indicator of a change in this trend would be a sustained downward move in EUR/USD. We may expect stock markets to begin a decline not long afterwards, though we should also watch other indicators to confirm a change in trend. With the Bank of Japan adding Japanese Yen (JPY) in new stimulus, we can also watch the activity in the EUR/JPY. The tipping point may be that European companies suffer under a strong Euro as exports decline due to lack of price competitiveness. There is some concern that central bank actions are fuelling a currency war, which could hurt trade. Currently the United States and the European Union are working on a Free-trade agreement. If talks are successful, the economies of both regions would benefit. There is some urgency in accomplishing this, before India and China can establish a free-trade region. There would be a boost to GDP under such an agreement, with estimates for Europe's GDP to rise as much as 0.52% annually. After an off-hand comment from French Labour Minister Michel Sapin in which he described France as "totally bankrupt", it would appear that some agreement sooner, rather than later, would be very beneficial. Sapin also stated that France is very solvent though the country needs to continue to make progress on deficit reduction. A free-trade agreement would also help the United States, where GDP grew only 2.2% in 2012, and GDP fell 0.1% in the fourth quarter of 2012. The greatest declines in fourth quarter US GDP were from exports, private inventories, and government spending. That last one is interesting, in that decreased government spending would improve government debt levels, though that money would come out of GDP. If all other areas of GDP growth were positive in the US, then reduced government spending would not have too large a negative effect on GDP. Remove that spending too quickly, or when GDP growth is low, then the US could experience a large slowing of the economy. Many countries know they need to reduce deficits, but the trick is to do that in a way that does not stagnate an economy, nor throw an economy into recession. The Federal Open Markets Committee of the Federal Reserve met recently and announced that the current program of $85B (billion) per month of quantitative easing (QE) will continue. The Wallstreet Journal runs a Fed Statement Tracker that compares the previous FOMC announcement to the current announcement. We can note that while there has been growth in economic activity and improvements in employment, there have also been disruptions. The Fed expect a continuation of steady economic growth at a "moderate pace". The Fed will continue to purchase longer term US Treasuries at the rate of about $45 billion per month, and purchase mortgage backed securities (MBS) at the rate of $40 billion per month. In the latest ADP Private Payrolls report, employment increased 192000 against an expectation of 165000. Personal incomes rose 2.6% in December 2012, while consumer spending only increased 0.2% indicating that many consumers are either saving or paying down debt. Both those figures are substantially down from 2011 levels. Contrary to the positive ADP Report, the Bureau of Labor Standards reported a rise in Initial Jobless Claims to 368k against an expectation of 350k. That leads us into January Non-Farm Payrolls at a slightly disappointing 157k against 160k expected, and an unemployment rate of 7.9%. Prior revisions for November and December added 127k new jobs. Despite these slightly mixed numbers and reports, we can add in a better consumer sentiment in the latest University of Michigan poll, with a reading of 73.8 against 71.5 expected. There were other slightly positive economic reports released Friday 1 February 2013, all of which added to a positive day on the stock markets. In mortgage and housing news, a group of investors in Mortgage Backed Securities (MBS) has objected to a proposed $8.5 billion settlement with Bank of America (BofA). Under the terms of the settlement, Bank of America would pay to settle claims that Countrywide sold low quality MBS that went bad when the housing boom ended. A group of Federal Home Loan Banks in Boston, Indianapolis, and Chicago, on behalf of Triaxx Funds claim BofA failed to buy back $30 billion in MBS after modifying mortgages. The 22 other investors represented in the settlement proposal are not opposed. In another settlement case, 49 states (excluding Oklahoma) approved a $25 billion settlement over improper foreclosures, modification misconduct, and other abuses against homeowners. The settlement, involving JPMorgan Chase, BofA, Citibank, Ally Financial and Wells Fargo, included significant concessions for restitution for victims, and establishing a fund for principal write-downs. As part of this settlement, new mortgage servicing rules and changes to the short sale process, will be established. It should also be noted that it appears the Federal Government will sue S&P Ratings over their ratings of MBS during the housing boom. The Consumer Financial Protection Bureau (CFPB) is set to administer many of these new rules. Under legislation passed under Dodd-Frank the CFPB will develop rules for banks and lenders to follow for mortgages. There is some concern that these rules may slow the pace of recovery of the housing market, with some economists claiming the rules could constrain availability of credit, and make it more difficult for potential homebuyers to get a home loan. The proposed rules are designed to avoid a repeat of the sub-prime crisis. All this is developing as data from December 2012 indicated a decline in existing home sales of 4.3%, though sales were still 6.9% better than in December 2011. Housing inventory usually declines in winter and rebounds in spring, though this seasonal decline was much greater than normal. This limited supply of available homes is causing some bidding wars, and we may see these conditions continue in January 2013 data. Since this can take a few months to work out, and we are into the normally slow winter home sales time period, some analysts expect a very competitive market for homebuying in early 2013. As the vacancy rate has declined to 4.5%, renting has become more expensive in some parts of the United States. The average nationwide rent was $1048 in Q4 2012. According to Deutsche Bank the ratio of rent to after tax mortgage payments is now 107.8% on average. As we saw with Blackstone Group purchasing more properties to use as rentals, now we see some builders increasing the pace of apartment projects. Argus Market Research note that the Federal Reserve of Cleveland measured Median CPI (consumer price index) to be 2.3% to 2.4% throughout 2012. Median CPI is a different way to measure CPI, avoiding the computational and methodological ways normally used for CPI. Additionally, Owner's Equivalent Rents rose about 2% through 2012, indicating sheltering costs increases. The Bureau of Labor Standards (BLS) Rent Index increased 2.7% in 2012, and CoreLogic Research indicate that house prices surged 6.3% through October 2012. When we compare that to the 2.6% increase in personal income, we find that there are slight inflation pressures starting. This will be one area to watch in 2013, though for now inflation rising faster than CPI is not a good trend. G. Moat Disclosure: I hold positions in Euro futures and some European Sovereign Bonds through the Fisher-Gartman Risk Off ETN (OFF). This article is not a recommendation for investors to either buy, nor to sell, shares in OFF. Investors are advised to perform their own research prior to making investment decisions.
January housing starts disappointed with a reading of 890k against an expectation of 920k, though building permits increased slightly to 925k, showing that the recovery in housing continues. The decline was largely due to a decrease in building of multi-family dwellings. Fitch Ratings notes that the balance of Commercial Loans in special servicing declined from $83.1 billion at the end of 2011, to $70.5 billion at the end of 2012. Liquidations remain the main area comprising this activity, though attempts at pushing through modifications and work-outs appear to be changing the market. The average time in special servicing has gone from 9.1 months in 2009 to 21.6 months in 2012. This continues to overhang the Commercial Loan and Commercial Mortgage Backed Securities (CMBS) markets, indicating that we still have years ahead of us for a complete recovery in real estate markets. CMBS delinquencies declined for the eight straight month in January 2013, which is a great sign of continued improvements, though Fitch Ratings note that Georgia continued to be a problem area. Fitch maintain a Stable outlook on commercial real estate, based upon a continued decline in delinquencies. Late payments fell to 12.7% in January, compared to 13.4% in December 2012. The performance of the AUD appears to be fuelling some overseas investments, as Australians are now seen to be investing heavily in US rental markets. Institutional investors are putting $6 billion to $8 billion into buying houses and converting them into rentals, with a large portion of those funds coming from Australia and Canada. Given the improvements in housing and commercial real estate, it should not be surprising that JPMorgan (JPM) are looking to sell the first non-agency Mortgage Backed Securities (MBS) since the beginning of the financial crisis. Non-agency means these MBS are not backed by government supported programs, such as through Fannie Mae and Freddie Mac. The recent Federal Reserve policy of buying MBS on the open market may be prompting this move by JPMorgan, who follow Credit Suisse (CS) and Redwood Trust in issuing non-agency MBS. Most of these MBS offerings are comprised of prime jumbo loans of "exceptionally high quality", according to S&P ratings. Credit Suisse (CS) was one of the first companies to delve back into the market for Residential Mortgage Backed Securities (RMBS), though the company now finds itself under investigation by the US Department of Justice over "misleading investors" on the valuation and risk levels of those RMBS. This overhang of investigations and allegations may be holding back mortgage markets, since securitization of mortgages is an important component of the housing sector.
As the latest minutes of the Federal Reserve meeting began to appear, the Pound (GBP) and Euro (EUR) declined sharply, while the US Dollar (USD) strengthened. Easy credit led peripheral economies in Europe to grow much faster than the average GDP growth of the Eurozone. Recent data from the Organization for Economic Co-operation and Development (OECD) indicated much worse fourth quarter 2012 GDP figures than had been expected. The OECD noted that many countries in Europe were slipping towards a recession, while the United States GDP growth went from 0.8% in the third quarter, to 0.0% in the fourth quarter, a significant slowdown. Fed officials expressed concern about the affect on markets of continued asset purchases and stimulus programs. These were the first hints that the Federal Reserve might end some stimulus measures earlier than previously expected. Atlanta Federal Reserve President Dennis Lockhart told Reuters that potential stimulus benefits continue to outweigh longer term risks of current unconventional monetary policies. Much of this continued risk weighting appears to be as a result of a lack of progress on unemployment levels. As long as the Federal Reserve appears willing to continue asset purchases, then markets should continue to respond positively to the additional stimulus. As a popular saying goes amongst financial analysts, don't bet against the central banks. So far consumer prices have not been rising fast, with 12 month price levels through January 2013 just 1.6% higher. The US economy grew 2.2% in 2012, despite a slowdown in the fourth quarter. Unemployment came in at 7.9% in January 2013, and job growth has remained below levels needed to make an impact on unemployment levels. Many people feel that the US economy is in recession, though technically that requires more than one quarter of slowdown in economic activity. Different regions of the United States are performing far better than other regions. However, when we look at employment, average worker pay levels have declined. That is one component of deflation. In the week ending 16 February, initial jobless claims came in at 366k against 355k expected, with continuing unemployment claims somewhat lower at 3.148 million. There have been very real worries about stimulus and central bank activity causing inflation, though economic figures continue to point towards the possibility of deflation. Recent data from the Federal Reserve Bank of Philadelphia Business Outlook Survey indicated a surprise slowdown to -12.5 (negative) as a decline in new orders and activity offset improvements in shipping and employment in the region. While business outlook remains positive for the future, the numbers and data are somewhat mixed and do not yet give a clear indication of future direction. Markit Research February PMI figures came in at 55.2 against an expectation of 55.5 on the Purchasing Managers Index. Demand amongst US consumers appeared to be good, though export demand slowed somewhat, which correlates well with the Philadelphia Fed Survey data.
As we head into the close of February, we can watch some of our correlation indicators for a better idea of where markets are headed. Of these indicators SPXA50R now appears to be heading towards a downtrend (weekly chart view). This tells us the percentage of companies on the S&P 500 whose share prices have dropped below their 50 day moving averages. Using SPXA50R, we may have books some profits over the last few weeks, and now we are waiting for a low indication for possible buying opportunities. We can also watch the Volatility Index (VIX), especially if VIX goes above 20 in the near term. So far US Treasuries have not come under selling pressure, with yields on the 10 year and 30 year Treasuries still quite low. A yield above 3.5% on the 30 year note, or above 2.5% on the 10 year note, would be an indication of a major shift in market sentiment, though with the Federal Reserve buying some Treasuries, and investor demand continuing forsafe haven assets, we may not see that shift this year. As we head towards The Sequester on 1 March, we might see a pullback in markets as major investors await the outcome of negotiations in Congress. A failure to negotiate a long term agreement may prompt a market sell-off or lead to a correction. More can kicking with temporary measures could hold back the economy, while a longer term agreement could lead to greater capital spending by businesses. As long term investors we can take some comfort in the long term economic improvement, even if the current pace is quite slow. While politicians do have the capability to derail the economy in the short term, we may view those events as buying opportunities for long positions, or times for shifting asset allocations. The recovery in housing continues, despite the recent slowdown. Stay aware, remain informed, watch for indications of shifts in markets, and be ready to take advantage of buying opportunities.
