valueplays

I’ve heard so much about “students drowning in debt” and that it would kill any housing rebound we would see that I was obliged to look into it. Before we get started I need to set some parameters because conversations like this always get into “who’s side you are on” and the message you try to deliver gets shouted over. So…. 1- I think college costs are abhorrent 2- I think Ivy League schools having 20B endowments and charging 45K/yr for education is loan shark slimy 3- I think is Obama had any balls he would attack this like he attacks the banks/investors/anyone else with money with his “shared sacrifice” drivel 4- I think the explosion in “Financial aid” to schools (that is who gets the money,the student is just simply a transfer mechanism) without caps on tuition increases is 100% directly  responsible for out of control tuition inflation. 5- I agree the program is a mess Now we know where I am starting this little adventure from. But the question we are asking here is whether or not student loan debt is going to kill the housing rebound. Here are the current numbers from the Fed. I ignore the
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“Davidson” submits: The National Assoc of Home Builders reported the May 2013 HMI(Housing Market Index) at 44. This indicator is a sentiment indicator of home builders and while it is a confidence indicator and not a hard number count of home building activity, the fact that it is a survey of a very narrow sector of our economy is likely why it provides a good forecast of housing activity. At 44, the HMI remains in a strong uptrend and we should expect an expansion of home building in future months. Positive trends in the HMI are good for stocks. Optimism continues warranted for a higher stock market in my opinion “Davidson’s” other note below is prescient also. The media lives for melodrama and when they cannot get it, they create it. Sadly I am finding many blogs, once the more reasonable of the two medium are following suit and we are seeing many of them derive long term trends from a single data point. In a rush to be the first to “call it” we’ve seen countless dramatic predictions over the past three years none of which have come to pass. Since 2010 I have been saying that we were
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“Davidson” submits: 5Yrs ago I indicated that commodities were overpriced due to an excessive fear that the US$ would collapse with overheated inflation as a result of increased Fed Reserve liquidity commonly called “The Bernanke Put”. The Fed has actually tried to create 2% inflation to prevent what they saw as a deflationary tendency which they felt could go out of their control. While we did see the indicators register 2% inflation briefly, they have since fallen to 1.5% with further indications of lower inflation in future months coming from the Dallas Fed’s 12mo Trimmed Mean PCE core inflation benchmark. That inflation and a collapsing US$ have not resulted from the Fed’s liquidity enhancements have caused those who have bought heavily into commodities, real estate and collectables to have second thoughts on their earlier decisions. They have been faced with first a flattening in commodity prices while stock prices (SPDR S&P 500 ETF Trust (NYSEARCA:SPY)) rose and then, more recently there have been sharp declines in gold, oil (United States Oil Fund LP (ETF) (NYSEARCA:USO)), copper and etc as stock markets have risen more sharply. Recent stock market returns have forced a number of managers to sell inflation hedges to
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Stanley Druckenmiller was a managing director at George Soros’ Soros Fund Management, where he managed $22 billion for the Quantum Fund. He founded Duquesne Asset Management and ran investments until he closed the firm in 2010. Currently, Druckenmiller manages his family fortune. At the Ira Sohn conference, he reiterated his disagreement with the U.S. Federal Reserve loose monetary policy and its resulting subsidy of asset prices and risk premiums. However, Druckenmiller does not see an end to QE in the short term; hence asset prices could continue their growth. Prices could experience a correction after QE ends, which darkens Druckenmiller’s long term outlook for financial assets. Japan’s long term outlook is much more favorable as the country has experienced 15 years of deflation and central bank policy is supporting Japan’s stock market. He sees the Nikkei gaining for 18 months and exports bolstered by a depreciating yen. To play this trend, Druckenmiller favors Japanese domestic companies that benefit from reflation. Stanley Druckenmiller on China and Commodity slowdown A slowdown in economic growth in China, according to Druckenmiller, could slow down commodity demand and depreciate commodity-dependent currencies. He believes China misallocated resources and overestimated needs. In turn, commodity producers ramped up
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We can add the ABI to the drumbeat of data points that continue to point to economic expansion. “Davidson” submits: The employment reports this morning were quite positive. I follow the Household Survey which remains within its trend since July 2011 of gains of ~280,000/mo gaining 296,000 in April 2013. The Establishment Survey reported April 2013 gains of 165,000 and March 2013 revised higher from 88,000 to 138,000 an increase from the previously reported gain of 50,000. The Bureau of Labor Employment Report can be found at this link: BLS Employment Report April 2013 Construction Employment (part of the Establishment Survey) was reported with an increase of 27,000. At the bottom of this note the March 2013 ABI (Architecture Billing Index) shows steady improvement. The ABI trend which is correlated to future Construction Spending and Construction Employment is reported to subscribers monthly but available quarterly at this link: ABI March 2013 Residential Sector appears strongest but other sectors are rising and still have considerable improvement ahead before we enter economic maturity. Fundamentals are Directly Correlated to Stock Prices 1. All of the important economic indicators remain in uptrends. 2. Higher Lt Vehicle Sales and higher Household Survey(Emp) lead to higher
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“Davidson” submits: The Dallas Fed reported the 12mo Trimmed Mean PCE(Core Inflation) at 1.4%. Their table is reprinted below with some of their commentary. Below is the chart of the SP500 ( SPDR S&P 500 ETF Trust (NYSEARCA:SPY)) vs. the estimated SP500 Intrinsic Value with the end of March S&P 500 Valuation (.INX) at $1,515 and SP500 Intrinsic Value at $1,745. The market is historically priced higher with falling inflation. My research leads me to view inflation as dependent on market psychology. When we as a society are worried about the future, we tend to hoard cash, reduce our spending and inflation falls. Like today!! When we are more buoyant about the future and eager to accumulate goods or we feel that future dollars will not buy as much, we spend freely and even expand our use of credit thus we cause inflation. Like what government and society did during the 1970s!!! Historically, stock prices fall when inflation rises and rise when inflation falls. Lower inflation results in higher equity prices all things being equal. In the PCE Table below, the trend is for lower inflation. Since 1978 the SP500 Intrinsic Value Index calculated using the “Prevailing Rate”(Real GDP Rate +
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I found this discussion online via Tyler Cowan’s excellent blog “Marginal Revolution”. I sent it to our “Davidson” since he has written the most I have seen on it to date. His response is at the end…. Krugman offers a full argument with graph, which you should read in total, but here is one bottom line summary: When I say that the rate is too high, I mean relative to the rate that would produce full employment, which is, as Brad reminds us, Wicksell’s “natural rate”. And here is his opening bit: One of the baffling aspects of economic debate during this Lesser Depression, or so it seems to me, is the apparent urge of many economists to shy away from straightforward conclusions, the urge to make the simple complicated and the clear blurry. If you’re asking what is at stake, it is whether we should be confident or even mildly confident about any predictions made through a liquidity trap model.  I’ll stick with a few points, which I will put under the fold… 1. I am persuaded by Scott Sumner that, at least these days, the interest rate channel is not very important.  Given that, one still can favor looser
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  The National Association of Home Builders Housing Market Index (HMI) was reported at 42-see the LIGHT BLUE LINE. This series like all economic data series is volatile. While some are expressing concern at the 5pt drop from the Jan 2013 report of 47, I note that the New Single Family Starts series has gained momentum-see the RUST COLORED LINE. The economic trends of improving residential housing remain intact. One should never use a single data series for investment decisions, but determine if multiple data trends are providing correlated signals. Thus far, the overall direction for residential housing activity remains in an uptrend. The next report to watch is the Monthly Supply of Homes For Sale. The last report was well into the ~4mos supply range which indicated strong demand for single family homes. The demand for building lumber has been rising for some time-see the chart Mark Perry provided on lumber prices below. The demand for lumber in early 2009 actually tracks remodeling activity which bottomed at the same time. Remodeling is cheaper than buying a new home and this index showed that while the activity slowed markedly due to the market correction in 2008-2009, there was still activity
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  One can get a perspective on the historical level of the S&P 500 vs. the Industrial Production Index by comparing the two across several business cycles. S&P 500 (S&P Indices:.INX) appears to have much higher to go in future years. There are two charts below which help to provide perspective. The chart below compares the S&P 500 (S&P Indices:.INX) vs. Industrial Production Index(IndPro) from 1978-Present. From this chart one can see that the major peaks of the S&P 500 S&P 500 (S&P Indices:.INX) occur simultaneously with the major peaks in IndPro. Using this as our jumping off point we then go to the IndPro chart to estimate where the IndPro is relative to its historical trend. The next chart is the history of the IndPro from 1939-Present. In this chart I use a Logarithmic scale which lets one draw and measure a growth trends. One does this by observation. There is an identifiable growth trend from the early 1970s to the Present which is ~2.4% annually. The IndPro cycles with the business cycle to form a lower level trend level during recessions and an upper trend level at economic highs. Together these trend levels form the IndPro Trend Channel which we
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“Davidson submits: The media has been reporting over and over that the “Market rise is due only to low rates set by Fed Reserve”. And that, “The markets (SPDR S&P 500 ETF Trust (NYSEARCA:SPY)) are set to collapse at any moment.” Industrial Production Index tells a different story! The chart below comes from the St. Louis Fed economic data site FRED. The link for the Industrial Production Index is St Louis Fed IndPro. The Industrial Production Index is based on the total production of goods and services in the US. In 2009 during the recession this measure had fallen from the high of 100.82 posted in December 2007 to a low of 83.75 posted in June 2007. The most recent report was for March 2013 where it stands at 99.04 and it is in an observable trend where one can see it hitting all-time highs within the next 2mos-4mos. Contrary to the media reports that there is no economic evidence to support the markets at the current level, the current Industrial Production Index is at 2007 levels. Not only is Industrial Production at the 2007 level, the trend is threatening to break through to new all-time highs any month now.
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“Davidson” submits: Economic expansion is all about Supply/Demand and at recessionary levels we see ~2% RGDP as the basic demand level for our economy. This is not a predicted number, but one that is simply empirical, i.e. observed. Periods of economic maturity come in ~4% RGDP, again a simple historical observation. The Light Weight Vehicle Sales(LWVS) series reflects both economic recessionary lows and mature highs. I interpret LWVS as not only capturing the basic need for transportation, but since many of these sales are financed, LWVS also captures lender confidence which is obviously lowest at recession lows and highest at expansionary peaks. The LWVS series is good as a basic economic indicator. But, once we have moved off the lows, one begins to look forward to what future months are likely to bring. Judging the future once we are off the lows is done by tracking labor demand indicators, i.e. Help Wanted Online, Bureau of Labor Job Openings and even the Gallup Job Creation Index. Together the trends of these provide roughly 6mos-12mos forecast of the US Employment trend. As we bring in more individuals to meet economic demand, this itself creates additional demand. Economic activity is spurred by leverage.
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