Housing Starts

There was little excitement in today's November housing starts and permits numbers, the first of which missed expectations of 872K modestly, and was down from 894K to 861K on a seasonally adjusted, annualized basis (64.6K unadjusted, non-annualized, the lowest since March; the Northeast unadjusted print was 25% lower than a year ago!). The prior two months were also revised lower from from 863K and 894K to 843K and 888K. On the other hand, permits which are nothing more than an opportunity cost fee for an application filed with the local housing office, rose from 868K to 899K. Curiously enough, this was the one series that was supposed to benefit from Sandy, as builders would step up reconstruction efforts in the hurricane impact areas. Alas, that did not happen, in the impacted Northeast Region, as both Starts (73K) and Permits (76K) came at multi month lows (in the case of permits, this was the lowest print of all of 2012). What did drive housing starts and permits? The "South" where both categories saw the respective data prints jump to the highest since 2008. The same south which was promptly featured in our "Interactive Guide to the Housing Recovery." The housing bubble is back in full force.

Blah blah Fiscal Cliff blah. Blah blah blahdy blah Cliff. Cliff blah blah republicans blah democrats blah blah blah blah. Blah blah blah blah, blah blah, blah blah blah blah blah, blah blah, Cliff. Blah blah blah blah, blah blahdy blah.... Blah.

Last week we noted: "...when taking into account the recent slate of economic weakness, post-election we are likely to see many of the recent job gains revised away as the data aligns itself with overall economic activity...." Since that time jobless claims did indeed rise, and with the release of the November jobs report, we saw the previous two month's gains in employment revised down by a total of 49,000. What is important to remember is that the BLS only publishes revisions to the prior two months even though it has data for months prior.  This is why the annual revisions to the employment data can be significant.  Furthermore, given the weakness in the employment components of the major economic surveys, as shown by the composite employment index, we should expect to see negative revisions to the 2012 data employment data next year. While it is too early to say that employment has peaked for this current recovery cycle - there is mounting evidence that this may indeed be the case.

All the government subsidies in the world will not revive the construction industry - only demand from increasing wealth will.  The guest commentary below offers a vivid picture of the economic and regulatory factors weighing on homebuilders these days. The author is Wayne Siggard, who builds mansions for the super-rich.  A UCLA law graduate, Wayne worked for Bechtel Financing Services and was self-employed as an investment banker doing private placements in oil and gas and alternative energy project financing.  When oil hit $10/bbl in 1985, he went into the homebuilding business, turning an avocation into an occupation. His real estate operations, including land development, have primarily been in California and Utah.  Wayne lived for several years in Italy and Switzerland and speaks many languages.

There is only one problem with the home builders - expectations are way too high. The builders are not only priced for perfection (as we noted here) by the market, the builders themselves have business strategies that are modeled for perfection. We believe the bar is set at an unattainable level. In summary, the building model is flawed. Here is why.

Whether you trust the squid and their thought process or believe in 'better the devil you know', Goldman's top thinkers - from Garzarelli to Himmelberg and from Stolper to Hatzius and Wilson - lay out the top ten global macro themes from their economic outlook that will dominate markets in 2013. Agree or disagree, one thing is for sure - these ten 'themes' will impact us all one way or another and for each theme, Goldman discusses the wider implications for markets, and the potential issues and options for investing around them. Aside from the ten key themes, they provide succinct macro outlooks for rates (steeper curves and seniorty shifts), FX (moderate USD weakness amid broad stability), equities (accelerating growth and risk reduction underpin a solid 2013), and credit ('search for yield' has less to find).

Many economists are suggesting that the second estimate of Q3 GDP, which showed an initial estimate of 2.0% annualized growth, will be revised sharply upward to 2.8%. The problem is that the surge in demand isn't materializing at the manufacturing level.  The month-over-month data has begun to show signs of deterioration as of late which doesn't support the idea of a sharp rebound in economic activity in recent months. The headwinds to economic growth are gaining strength as the tailwinds from stimulus related support programs fade. This has been witnessed not only in the manufacturing reports, such as the CFNAI and Dallas Fed Region surveys where forward expectations were sharply reduced, but also in many of the corporate earnings and guidance's this quarter.

This objective one-stop-shop report concisely summarizes the important macro events over the past week.

• Rough start for fiscal cliff talks (Politico)
• Europe Fails to Seal Greek Debt-Cut Deal in IMF Clash (Bloomberg)
• Japan’s Exports Reach Three-Year Low as Recession Looms (BBG)
• Beggars can be angry: Greek leaders round on aid delay (FT)
• More financial blogs launching soon: Financial Times Deutschland closing (Spiegel)
• China's backroom powerbrokers block reform candidates (Reuters)
• BOE Voted 8-1 to Halt Bond Purchases as QE Impact Questioned (Bloomberg). In the US the vote is 1-11
• UK heads for EU budget showdown (FT)
• Eurodollars - another epic scam: How gaming Libor became business as usual (Reuters)
• Clinton Shuttles in Mideast in Bid for Gaza Cease-Fire (Bloomberg)
• Fed Still Trying to Push Down Rates (Hilsenrath)