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)
Uh… Very uncomfortable French downgrade. Not surprising per se, but uncomfortable. Ask the EFSF… Brings back the question of “Who’s Next”? European Risk (Equities & Credit), however, oblivious and taking rising yields as a sure sign for Risk On. I’d see the risk of France (and everyone else) starting to count contingent costs.
"A Tout Le Monde" (Bunds 1,41% +6; Spain 5,79% -9; Stoxx 2509 +0,6%; EUR 1,281 unch)
With everyone throwing the kitchen sink into creating the illusion that this time housing has bottomed, seriously, this morning's report on housing starts and permits was set to be quite awkward: on one hand, realistic data accounting for weakness due to Sandy would have broken the housing momentum - many were expecting a far weaker than expected print precisely due to the Hurricane. On the other, the Census Bureau could have gone hog wild and completely ignored the same reality that apparently is impacting all other data points, and said housing starts soared to their highest number in 4 years, or a seasonally adjusted 894,000 in October, up 3.6% from a downward revised 863,000 in September, and well above expectations of a Sandy-driven decline of 3.7% to 840K. The CB opted for the latter, while adding a solid pinch of seasonal adjustment to the data, which not annualized and not seasonally adjusted rose from 77.8K to 77.9K sales. In this number was the drop in Northeast housing starts from 4K to 3.5K, the lowest since February. The mystery boost came in the West, where annualized starts rose from 198K to 232K, even as they dropped in the South and Northeast. Finally, and more irrelevant, housing permits dropped from 890K to 866K seasonally adjusted, even as the NSA number rose from 71.4K to 75.0K.
Another day, another melt up overnight wiping out all the post-Moody's weakness, this time coming courtesy of Europe, where following the French downgrade, the EURUSD filled its entire gap down and then some in the span of minutes following the European open, when it moved from 1.2775 to 1.2820 as if on command. And with the ES inextricably linked to the most active and levered pair in the world, it is is no surprise to see futures unchanged. It appears that the primary catalyst in the centrally planned market has become the opening of said "market" itself, as all other news flow is now largely irrelevant: after all the central planners have it all under control.
Spoiled little investors feeling good today.
European equities ripping and squeezed after Friday’s dismal close. Credit the same and, as more often than not lately, overdoing the equity move. EGBs rather muted with the Core pretty much where it stood throughout last week – with exception of Friday afternoon. Spain back on the radar. Europe still under US influence. Huge relief. From what and why exactly still needs to be seen. In the meantime: Rip & Tear!
"Rip And Tear" (Bunds 1,35% +3; Spain 5,88% +2; Stoxx 2495 +2,7%; EUR 1,281 +110)
The yellow metal soared 4.9% in euros in one week from the 11 week low set November 2nd and has since fallen 1.3%. The rebound from the November dip means prices should recover to reach the all-time euro high set last month, before rising to the point-and-figure target at 1,395 euros, said the bank’s research. Point and figure charts estimate trends in prices without showing time. Gold may then reach a Fibonacci level of about 1,421, the 61.8% extension of the May-to-October rally, projected from the November low, Commerzbank wrote in its report on November 13th which was picked up by Bloomberg. Fibonacci analysis is based on the theory that prices climb or drop by certain percentages after reaching a high or low. “What we are seeing is a correction lower, nothing more,” Axel Rudolph, a technical analyst at Commerzbank in London, said by e-mail Nov. 16, referring to the drop since November 9th. Rudolph remains bullish as long as prices hold above the November low at about 1,303 euros. Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.
With Thanksgiving this Thursday, trading desks will be empty on Wednesday afternoon and remain so until next Monday. So even though it is a holiday shortened week, here are the main things to expect in the next 5 days: Bank of Japan meeting, the European Council meeting and the Eurogroup meeting. Key data releases include European and Chinese Flash PMIs.
Those looking for fundamental newsflow and/or facts to justify the latest bout of overnight risk exuberance will not find it. To be sure, among the few economic indicators reported overnight in the Thanksgiving shortened week, European construction output for September tumbled -1.4% from August, after rising 0.6% previously. How long until Europe copycats the latest US foreclosure sequestration, "demand pull" gimmick and gives hedge funds risk free loans to buy up housing (aka REO-to-Rent)? More importantly, and confirming that Spain is far, far from a positive inflection point, Spanish bad loans rose to a new record high of 10.7%. This was the the highest level since the records began in 1962. The total value of these loans was €182.2 billion ($233 billion) in September, according to the Bank of Spain (more on this shortly). The relentless rise indicates that the Spanish bad bank rescue fund will be woefully insufficient and will need to be raised again and again. So while there was nothing in the facts to make investors happy, traders looked to hope and prayer, instead pushing risk higher on the much overplayed Friday "news" that politicians are willing to compromise in the cliff (which as we reported was merely a market ramping publicity stunt by Nancy Pelosi et al), and that Greece may be saved at tomorrow's Eurogroup meeting, for the third time. That this will be difficult is an understatement, with the Dutch finance minister saying no final decisions on Greece should be expected, and his German counterpart adding that a Greek debt writeoff is "inconceivable." In other words, even hoping for hope is a stretch, but the market is doing it nonetheless.
While the prior week was marked by some kind of awakening, this week was more about finding a direction. Eventually mostly downwards, but always in jumps, marked by tentative rebounds. Europe mostly lost, so unused not to be the focal point anymore, waiting for US input. If it wasn’t for the Fiscal Cliff, and in absence of further news out of the Periphery, we seem to have
"No Direction" (Bunds 1,32% -2; Spain 5,86% +5; Stoxx 2429% -2,1%; EUR 1,27 -10)