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(Articles from Jordan Wirsz and Nell Sloane)
Savant Report Week End Summary
April 29, 2016
By Jordan Wirsz – Savant Investment Partners
Amid a slumping economy and reduced levels of consumer spending, the Fed on Wednesday again opted not to raise interest rates. “Economic activity appears to have slowed,” the Federal Open Market Committee said in a statement released after its two-day meeting this week. “Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”
The bottom line is that we saw 0.5% growth in the first quarter of 2016, lower than the expected 0.7% growth. Personal consumption rose 1.9% and personal savings rate grew by 5.2% versus the 5% 4th quarter of 2015. Our economy is growing at the slowest pace in 2 years. The Atlanta Fed’s forecast has proven to be right on…
The velocity of broad money touched a new record low. All the new money created in the economy (mostly by banks lending) isn’t translating into growth. Although Obama is touting his greatest achievement as bringing the economy out of recession, it doesn’t appear he did a very good job at it. The velocity of money is one of the biggest factors in true economic growth. This is worrisome, and previously I had believed we bottomed in the velocity of money, and I was looking forward to growth. This news is disappointing to say the least. This undoubtedly means that things are not as rosy as the government would have us believe, perfectly tying into the .5% GDP growth in Q1.
What this all means is that despite people feeling “good” about the economy, real substance is lacking. Carl Icahn sold his prized possession, AAPL (Apple) just in time to have the stock take a 10% dive on the news plus news of slowing iPhone sales. Carl said that he expects the markets will have a “day of reckoning” and that he has a “huge short position” in addition to long positions.
Adding to Carl Icahn’s view, U.S. corporate defaults are rising, and in fact the highest since the financial crisis. With major retailers having challenges (Apple, Sport Chalet, Sports Authority, etc.), there are reasons to be concerned about the market in the context of rising corporate debt defaults and the cross contamination that might come from it:
The markets are at a critical juncture now. Candidly, I’m surprised by the rally that we’ve had, but I don’t feel comfortable with the market’s volatility, which tells me that this rally is not as strong as some would like to believe. Here is a 60-minute bar chart of the S&P emini futures… Big ups, and big downs.
My analysis of the market remains biased towards volatility and downside at this point, not additional upside, but stranger things have happened.
REAL ESTATE SLOWING:
Last week we talked about the big box retail risk in the real estate market, and the week before about the Miami Meltdown. But this week, the housing data continues to point towards slowing. The pace of U.S. homebuilding fell in March to its lowest level since October. Housing starts fell 8.8% from a month earlier, to an annual rate of 1.089 million. We are basically flat year over year, pointing to the slowdown I have been predicting for the last 6 months or so. Single family home starts fell 9.2% in March, which makes up about two-thirds of the housing market.
Homebuilders have done exceptionally well in the economic recovery. A big part of that, however, was how cheap they were able to buy land from 2009-2012. Now the good land deals are gone, and they are starting to pay much higher prices for development land amid slowing sales paces. Home ownership has continued to fall in recent years, not grow:
A big part of this trend is certainly millennials. It was once a coveted accomplishment to own your own home…Today people are more worried about the stylish car they drive and name brand clothing. I believe this trend is short lived pending a Republican presidential win, which will help establish a new trend of less subsidies and more reliance of self-created financial futures.
The next chart shows U.S. housing inventory adjusted for the population. This is why home prices are rising faster than salaries:
Rental vacancies are still relatively tight, and tightening even more…Which is very interesting considering the massive multi-family apartment building spree that much of the country is in the midst of right now. Are we over building apartments? Not according to demand and vacancy rates, which seem to have stabilized at a reasonable mean-line. However, if the building continues and the trend shifts back to home ownership versus renting, then we could of course find ourselves in the opposite set of circumstances when considering multi-family as an asset class.
Keep in mind that hedge funds bought hundreds of billions of dollars of single family homes during the downturn. Many of those properties have not made it to the market yet. There is a real possibility that one of two scenarios are or will be in play for the rest of this year and next year in residential real estate:
Hedge funds might start selling and flood the market, pressing prices down; or
Hedge funds might be keeping inventory off the market and holding them as rentals, keeping the home ownership rates low.
The silver lining of the housing data is that first time home buying is up, but really only because of the massive incentives that state and federal government are giving out to homebuyers. For example, here in Nevada, the state has a fund which is GIVING AWAY as much as 3-5% of the purchase price of a home in “down payment assistance.” This is literally FREE MONEY for homebuyers. Since home buying incentives began, first time home buying is up…My only problem with that is that it is somewhat fake…Its like the Fed buying bonds…Its artificially created or stimulated demand, which isn’t sustainable for the long haul.
Real estate brokers and agents (not always the brightest bunch when it comes to investing) are starting to talk of a rent growth “bubble” and pricing bubble. They are wrong on both accounts. While I’m not particularly bullish on housing for the next couple of years, I’m also not incredibly bearish. I think we’ll see some ups and downs, but long term I am still a believer in both residential and commercial real estate as a fantastic appreciating asset class…Until the next cycle top.
– Jordan Wirsz
Last Week Recap
April 29, 2016
By Nell Sloane – Capital Trading Group
Last week saw both the SP500 and the Dow futures try to break and hold their respective 2100 and 18k resistance areas. Both ended the week below these targets 2085 and 17916 respectively. We view 2069 as a key level for the bulls to watch as the trade in equities has been virtually straight up off the February lows.
The bulk of Thursday and Fridays equity futures trades was basically locked in a 11 point range. With FOMC next week on the 27th, we will continue to expect a range bound trade. Both equity and bonds saw better selling late in the week, bonds more so. Which can be noted by the US 10yr Yield chart which is getting close to its resistance at 1.93%:
Both Google and Microsoft were hit late Thursday and into Friday as their earnings disappointed. It seems as if some players took this as a cue to sell some holdings as both saw decent downside down 5% and 7% respectively:
In what continues to be a reoccurring theme almost weekly, Kuroda was once again on the wires jawboning the USD/YEN, which was dollar bid and Yen soft. Perhaps he should realize that the investing leveraged community already knows what he says can’t be trusted, in fact his reputation has become one of Goldman, do the opposite of what they are trying to do, because in reality, they are there to take what you sell and sell to you what you shouldn’t want to own.
Anyhow, it seems as if the BOJ is trying to defend the 107 level or 93-00 level in the futures as shown here in this chart:
We also had the non event ECB meeting this week. However we don’t think it’s such a nonevent as starting this June, corporate bonds will be the target du jour of the new central bank purchase program. This should solidify to any corporate treasurer to ramp up said C-Suite option packages, because the ECB will be there to buy your debt so you can fund buy backs, hint hint Deutsche Bank…
Here are the details of the program, which rest assure will add further bullish sentiment to the DAX as well as its worldly counterparts, specifically the algo FED Citadel driven SP500:
ECB announces details of the corporate sector purchase program (CSPP)
The CSPP aims to further strengthen the pass-through of the Euro system’s asset purchases to the financing conditions of the real economy.
Purchases will start in June 2016.
The CSPP will be carried out by six national central banks acting on behalf of the Euro system, coordinated by the ECB.
In combination with other non-standard measures, the program will provide further monetary policy accommodation and help inflation rates return to levels below, but close to, 2% in the medium term.
China was out this week announcing a new The yuan-denominated gold fix contract which will be launched on the Shanghai Gold Exchange. Perhaps the largest buyer of metals is sick and tired of all the paper selling manipulation state side, or they just realized that the true market dynamics are not being full represented. We dare not say manipulated, rigged, naked short selling or any of the like, right?
Other interesting tidbits this week, saw none other than Pimco’s strategist Harley Bassman in his viewpoint entitled “Rumpelstiltskin at the Fed” discuss another option for the Fed, particularly this, “the Fed should unleash a massive Fed gold purchase program that could echo a Depression-era effort that effectively boosted the U.S. economy.”
Bassman says that the Fed should “emulate a past success by making a public offer to purchase a significantly large quantity of gold bullion at a substantially greater price than today’s free-market level, perhaps $5,000 an ounce?
Now how is that insight from one of the largest bond groups in the world? Perhaps higher ups are trying to convey a simple message to the FED, aka How long can we keep this fiat money charade going. Bond yields in negative territory are certainly not normal and should never exist in a sane world! That is our opinion.
Finally after much hoopla, the Federal Reserve is planning on eliminating Andrew Jackson from the $20 bill. Many were surprised by this, however we were certainly not. In fact we are quite surprised that it took them this long to get rid of him. Jackson was one of the strongest opponents of central banking. One notable speech included these words, “You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.” (Andrew Jackson, to a delegation of bankers discussing the re-charter of the Second Bank of the United States, 1832)-However there is still speculation and reference to the exact wording of this quote that “Old Hickory” specifically stated a specific religious order, but will let you do your own research on that.
Anyhow, we are not too surprised to see him go, but his replacement is a true beacon of freedom, an abolitionist, a humanitarian, Harriet Tubman.
– Nell Sloane