Calculated Risk sees a bottom in the US house prices in March

The blog Calculated Risk that has built its reputation on good calls for real estate and the housing market had yesterday as title: The Housing Bottom is Here (http://www.calculatedriskblog.com/2012/02/housing-bottom-is-here.html).
Calculated Risk has become the best blog for US macro data, with especially the real estate market elaborated.
That is why it is very encouraging that they say with some conviction that around March 2012 the nominal house prices in the US will set the bottom (in real terms that can last longer).

First we have seen the bottom in housing starts, the sales of new houses and the top in the inventories. After some time the bottom in the prices arrives.

What do they give as reasons for the bottom?
1. The price to rent ratio is low enough (certainly versus the low interest rates)
2. the real house prices are low enough
3. the inventories of unsold houses is now low enough to make a rise of prices possible
4. you will see help from politics to soften the payment problems/ help for refinancing at the current low mortgage rates.

I liked the argument of affordability as PragCap mentioned. Affordability has tremendously improved. The average buyer commits itself to a burden of $ 931 per month and that is in rea terms 66.1% below the top of 2006 and 58% below the previous bubble top of 1989.

The decline of the house prices in the past year occurred only for foreclosed properties, the voluntary sold houses rose already in value.

Obama’s re-election chances are not rising enough with the better S&P and macro

The chart of Bespoke shows that Obama should have better prospects in the polls base don the rise of the S&P and the macro numbers.
A lot of people think that when the employment growth numbers stay enough above 150.000 (and so the unemployment rate will fall), Obama will have no problems to gain re-election.
The republicans continue to throw mud toe ach other and Romney showed a lack of compassion when he told that it didn’t matter for him what happened to the 5% poorest Americans. The damage in the polls is not big because most republicans agree with Romney: social security is good enough in their eyes (the cartoonist thinks more like the Europeans about how good the social security is in the US).

Obama doesn’t need to despair, Romney changes view too opportunistically and in this phase of the battle the republicans get a lot of press (for Obama is not battled in the democratic pre-elections). All attention is good, even when it is about throwing mud. The normal scenario is that until the republicans have crowned their candidate in their convention they have to take advantage of all extra publicity to take a big lead in the polls. That has happened more often and that can be a reason why Obama profits so little of the better macro news (and the consumer confidence is much worse than the S&P indicates).

All in all the contest between Obama and Romney will be close. The mini cycle of the economy should go down after c. April and that shoud help Romney at a victory, but maybe I’m wrong and Obama will be lucky with further recovery of the economy with 200.000 employment growth every month.

McClellan Market Report sees lower markets until June because of dollar commitments of traders position a year ago (PragCap)

Based on the commitment of traders analysis of the Dollar the McClellan Market Report (hat tip Pragmatic Capitalism http://pragcap.com/big-stock-market-top) predicts that we will see a correction in the S&P that will last until June and then the S&P should ascend to heaven.
Since the credit crisis this was an incredibly good predictor, but I can’t make the story why with a lag of a year it is saying so well what the S&P should do. Correlation is no causation, so take care with the signal.
Still it is curious it is doing so well and some people take the signal serious since some time.

financial economic news of the past week

There was a lot of macro news, mainly from the US. The news was better than expected, in Europe/UK even more than in the US.
In the first week of the months you get the surveys about how well manufacturing and the service sector are doing in a lot of countries.
The ISM manufacturing, the barometer for US industrial production) improved 1 point to 54.1 with new orders very strong. In Europe and the Emerging Markets the barometers for business (PMI's) were also strong. India had for the second month in a row the best rise and there the PIM is above 57 (no wonder Indian equities are a top performer this year).
The ISM non manufacturing was in the US almost 57 and this was a major pleasant surprise and bodes well for employment growth in the service sector.
That employment growth was with 243,000 about 100,000 more than the consensus thought. A big part of that surprise is caused by the unusually warm weather in January, but still, the numbers were quite good, almost everywhere in the economy and the unemployment rate declined further (only point of attention: the participation rate did not go up).
The house prices declined in the US, a disappointment (but this was November, old news). The car sales were very strong, even while consumption expenditures did not grow in January and while personal income rose with 0.5% (not annualised).

The fear for the euro crisis is still diminishing, visible in lower bond yields in Italy and Spain. The Greek are still making objections against the actions that are needed with the depreciation of their debts (Germany is not allowed to control tax income in Greece, they have to throw a lot more money for the good purpose, so the austerity in Greece can be less) but the markets don’t seem to mind this, they dream about how many bubbles a trillion euro of 3 years deposits (LTRO) of the ECB at February 29 can be made on the European stock markets.
There is some political unrest in Russia and Iran, but even that was not disturbing the party.
The long dated bond yields ought to rise wit hall that good macro news, but that was disappointingly little the case.
Bernanke held its Humphrey Hawkins Testimony, but this produced no news (quite unusual, the FED seems to have communicated everything that could be communicated, there was only some dismay about the FED doing politics with their suggestions to help the housing market).

BCA: the bull market will climb the wall of worry further: the future will be better than we have seen, tail risk is exaggerated.

The equity markets rose nicely in the last few months, but still is everybody very cautious, seeing disasters and tail risks everywhere. People are not impressed by the macro numbers in the past quarters. Those were indeed not what was normal in economic recoveries, but that was the past and the only thing that counts is the future: that is what Zhao from BCA is saying, while one cannot accuse BCA of overoptimism in the past years.
The economic climate is improving while the tail risk in Europe is declining pretty fast.

Most people underestimate the favourable influence of the three years deposits (LTRO) from the ECB and the big monetary easing that China will give us. In the US small and mid sized companies at long last can get credits easier. Central banks are now creating liquidity more energetic than ever. In thepast investors knew what to do: buy, buy, buy.
Investors underestimate growth in the US. That will remain c. 2.5%. The housing market is improving and business is slowly getting more brave with investing.
The equity markets are pricing in a mild recession, while the ISM is pointing to an above normal economic climate.

Everywhere in the world pessimism reigns. Transport shares indicate that the world economy is not at all in a bad condition. The consensus hears the whole day long we are in a crisis.
The quantitative models of BCA are very optimistic, evrywhere it is green aaand BCA advices to buy lots of beta. The only cloud at the horizon is the strong dollar and its bad influence on US profits.
I think that equity market can rise further as long as the ISM goes up and in Europe no new disasters develop while Iran is not exploding.
The BCA story is of course approved by the club of optimists.

Kostin (GS) sees S&P500 at 1325 with low low volatility

Kostin of Goldman Sachs still cannot be persuaded to go for higher targets for the S&P at the end of 2012. Het thinks PE’s will not change much, in the short run they can rise a bit and then they can go don somewhat. Profits in the US can rise with 3% in 2012. So PE’s and profits are not pointing to an exploding or imploding S&P500.
The macro fundamentals are getting more encouraging for the US, 2% GDP growth should be possible. With the help from central banks liquidity has gone up and so volatility is forced lower for equities (VIX). That should mean that PE’s can rise in the short term.
Later in 2012 the profit margins will decline and that should lead to lower PE’s as he thinks (and when true should be normal).

The chart with the equity risk premium (ERP) shows that equities have been too cheap in Q3 2011 and that GS thinks on the short run the ERP will improve to what has been average since Lehman. The ERP will move with the profit margins and these will deteriorate in H2 (GS). The top down estimates are pretty much n step of what GS (Kostin) thinks and the market has that priced in (not the bottom up forecasts).
This can surprise a bit to the upside, especially when volatility will remain low and then PE’s can be a bit better than Kostin calculates.

The euro crisis and the growing capital problems for the Bundesbank and DNB

Each day we read that big progress has been made in how Private Sector Involvement will soften the problems for Greece. Banks hope the loss will be limited to 70%, while they start to think that even 75% would be a good result. The IMF is no longer the biggest friend of the ECB now they ask for the ECB to suffer along with the private sector.
Germany is saying that is not allowed, especially when Greece summons to get new money from Germany. When the current trends continue with losses for the ECB the capital of the Bundesbank and DNB will soon no longer be adequate.

Lagarde tries to collect € 500 billion for the IMF to get Money to burn for help for the PIIGS. She first visited the great sandpit Saudi Arabia. Brazil wants to show solidarity wit hits former coloniser and gain extra influence in the IMF and China is even more happy to get rid of its too big currency reserves in exchange for more influence in the IMF.
Wen Jiabao has leaked again China is thinking about how to help ESM/EFSF.
So there is good progress to get € 1500 billion for a common fund of ESM+ EFSF + IMF to finance the garlic belt.

That good news was neutralised by anger from Germany that the Bundesbank could not endless go on with collecting collateral of dubious quality (they have already € 496 billion, of which € 12 billion of Greek sovereigns), see Ambrose Evans- Pritchard (always a good read for people that want to indulge themselves into Armageddon thinking about the euro crisis): Bundesbank sinks deeper into debt saving Europe
http://www.telegraph.co.uk/finance/financialcrisis/9055142/Bundesbank-sinks-deeper-into-debt-saving-Europe.html.
In the Target2 system of the ECB the strong central banks, now the Bundesbank and DNB, get inundated with with credits from the other central banks in the Eurozone. Their governments are bankrupt but their central banks are treated as 100% credit worthy. This situation aggravates when the balance sheet of the ECB continues to grow further so rapidly. Especially when the 3 years deposits (LTRO) grow into the trillions you get really big collateral problems for then no longer strong central banks (and Germany/Netherlands could no longer be seen as AAA). When the Eurozone explodes you can easily think at situations where the central banks will lose lots of money (the DNB dividend will be passed this year, so warned DNB). So when you continue to give endless liquidity to the banks it could very well be possible that the European central banks need a lot of new capital.
So it is not that strange that the Bundesbank wants better collateral.
FTalphaville had a good post about how Target2 is bankrupting the Bundesbank and DNB: http://ftalphaville.ft.com/blog/2011/12/06/782821/how-germany-is-paying-for-the-eurozone-crisis-anyway/
(see for example the table about Target2)

Interest rates not following macro fundamentals (yet?)

The chart of Absolute Strategy Research shows that the interest rates in the US very much, even more than ever, have lagged the macro news.
Because of all the manipulations of the FED the yields are no longer what inflation and economic growth indicate, but what the market thinks what the FED will do together with an unfaltering love with the New Normal with endless deleveraging.
It is not a sound situation when interest rates no longer show how the economy is doing, because f that wrong investment decisions are triggered.

The rational investor is selling (already for quite some time), the market has lost its senses now they don’t translate the traditional fundamentals into higher yields (the rational investor buys high yield now).
Bianco advises to continue buying, the parties that buy against any price are still buying and indicate even to go buying more: the FED thinks mortgage backed securities are an attractive instrument to get the housing market moving again. Obama supports this view as we are seeing this week.
ASR thinks the yields have to rise 1% and even that should be not enough.
Strategas sees the end of positive economic surprises, 1.5% growth in the US is the best one an get after Q1 and is not following the advice of ASR to tear Treasuries into pieces.

Golden Cross S&P: most of the time favourable

The past years we had a few times a death cross and that originated prophecies of very bad times for equities that not came trough. Now we have had a golden cross for the S&P500 and as the name indicates that promises golden mountains for the equity markets. The 10 week average is again above the 40 week average. It should be better when the 40 week average was in a rising trend but that is not yet the case.

In the table you can see that since 1948 and especially 180 a golden cross is often followed by rising share prices. It is not a very reliable signal, so much is the probability of rising equity markets not going up (that probability is almost always above 50% for longer periods).
Source table: Bianco

ISM topping at 56 over two months

Every year at this time the parts of the ISM index are revised and that changes the levels of the ISM, this to the annoyance of the quants that cannot back-test models with ISM because of all these changes. This year the orders component got a blow.

Almost all components of the ISM rose past month, but orders rose less than inventories (not good for the leading indicator for ISM of orders/inventories).
After the revisions the ISM landed almost exactly on the model values this month. According to this model some further rise of the ISM in the next two months to 56 could be very well possible and then a limited decline could occur.

At the site of the ISM they had some optimistic remarks from several sectors:
• Still seeing raw materials pricing moving down in general, but expect inflation later in the quarter." (Chemical Products)
• "Year starting a little slow, but customers are positive about increased business in 2012." (Machinery)
• "Once again, business continues to be strong." (Paper Products)
• "Pricing remains in check with the demand we are seeing. Supplier deliveries are on time or early." (Food, Beverage & Tobacco Products)
• "The economy seems to be slowly improving." (Fabricated Metal Products)
• "Business lost to offshore is coming back." (Computer & Electronic Products)
• "Business remains strong. Order intake is great — more than 20 percent above budget." (Primary Metals)
• "Indications are that 2012 business environment will improve over 2011." (Transportation Equipment)
• "Market conditions appear to be improving, with the outlook for 2012 better yet." (Wood Products)

Shiller: real house prices back to 2002, not yet bottom in US (?)

The monthly numbers of the Case Shiller index for the house prices in the biggest 10 and 20 cities in the US declined -0.7% in November and yoy -3.7%, a tad more than in October.
That is disappointing and the pessimists think the bottom will not be reached in 2012. In nominal terms the house prices are bottoming since 2009 and we are already almost three years at the bottom. This can easily last for another two years but I think we will see a (modest) rise of house prices already this year. Vacancies are down, inventories are declining at a 17% pace yoy, affordability is splendid and household formation is growing with employment gains and there will arrive help from Obama.

(chart from Calculated Risk)

Emerging Markets cheap and good for 80% of the growth in the world

Twee plaatjes uit een presentatie van ons Emerging Markets team: eentje waar je kunt zien dat de koerswinstverhoouding erg laag is, veel lager dan in de VS of Japan (maar niet lager dan in Europa) en dat je best wel enige stijging van de koerswinstverhoudingen kunt verwachten.
Het andere plaatje is van Morgan Stanley waar men prognotiseert dat de Opkomende Landen 80% van de groei in de wereld voor hun neming zullen nemen.

Two charts from an F&C presentation from our Emerging Markets team: one where you can see that the PE is very low, way lower than in the US or Japan (but not lower than in Europe) and that some rise of PE’s is very well possible, the base expectation.
The other chart is from Morgan Stanley where they forecast that Emerging Markets will have 80% of the GDP growth in the world in the coming years, so it seems not unreasonable to expect that they will show more profit growth than Developed Markets..

So prospects for Emerging Markets equities ought to be good, but take care when the cyclical indicators like the ISM declined in the past Emerging Markets did fell more than Developed Markets.

The three technological revolutions of 2012: big data, smart manufacturing and communication

The Wall Street Journal had an interesting article about the three technological revolutions, breakthroughs of around 2012: The Coming Tech-led Boom (http://online.wsj.com/article/SB10001424052970203471004577140413041646048.html?mod=WSJ_hp_MIDDLTopStories).

They (Millsand and Ottino) compare the current time with 1912 when there were also all kind of technological revolutions occurring: mass production (the T-Ford), stainless steel, electricity and telephony/ radio. The influence of these revolutions were tremendously underestimated.

What see Millsand and Ottino as the current revolutions?
1. Big data, working in the cloud.
There are huge amounts of data that can be stored for almost nothing; from these data all kind of new services will emerge and revolutionary scientific research.
All kind of (inter)networks are interconnected including social media networks and this will become –with endless number crunching- new now unimaginable markets. A medical revolution should come from this.
2. Smart manufacturing
Mass production will be replaced by individual production with the help of new materials. More and more will be produced from a molecular base, for example with 3D printing (see The Economist: How to print a Stardivarius).
Many new new materials, new alloys were discovered in the past years. Graphene got a Nobel price. Some of these materials have properties you cannot find in nature (the invisibility cloak of Harry Potter is almost reality in experiments where cannot see things anymore).
3. Communication with smart phones etc
Billions of people communicate/ trade/ socialise simpler/ faster/ cheaper than ever with (smart) mobiles. These things can more than supercomputers from the seventies or eighties.
Michio Kaku thinks that in the future (not next year) there will be everywhere connectivity with the internet and people use chips at their eyes to get information and to do all kind of commands.

The combination of the three revolutions will trigger fast rechnological change and high productivity growth and so economic growth should become high. The society has to adapt to these changes and will push on the brakes from time to time. However, you cannot stop these changes as for example the Arab spring learned.

The writers of the article see, just like Obama in the State of the Union, that only America can, will and must lead these revolutions. That is a little short sighted, even while America has led until know in these areas and even while the demography of the US is better (=more young inventors, innovators) than in Europe/China /Japan. But the world is bigger: India (IT), Africa/ Indonesia (communication) should surprise.
Striking is that in the article clean and cheap energy is not mentioned. The last year there are many stories about how cheap sun collectors have become (80% cheaper than a few years ago), so they are starting to get really competitive.
Also the coming medical revolution with gen therapy etc could have mentioned a bit more prominently.

Loss of growth versus trend because of the credit crisis

The chart of The Big Picture (Ritholtz) shows how far the economy has fallen below trend (by part of the economy) since the credit crisis did its New Normal damage. It is questionable if it were possible to close the gaps in the coming years. First can that be possible for exports, then for investments (you need a lot of growth for this, but that is possible, as well as by residential investment when the housing market recovers as well as by software & equipment), but for consumption you see that it still moves way farther from trend. That should happen when consumption is more than 70% of GDP.

The chart of Citigroup shows that accumulation of debts and deleveraging in the US is following nicely the average path according to the New Normal of Reinhart/Rogoff. That is not the case in the UK and the Eurozone, where the debts are still way too high and not falling fast enough and so will get more New Normal times (that probably is not going to happen in Emerging Markets, the US and Germany etc).