Alan's Alert 7-27-2021

 

We are looking at a rough road ahead.  The Federal Reserve posted the H.6 Money Stock Measures this morning and it looks downright frightful.

Money supply growth has plummeted.  The last three readings are as follows;

6/21 – 6.36%

6/28 – 3.91%

7/5 – 3.26%

 

We have swiftly gone from a high in the 17-20% range to a low at 3%.  3% might not even be the low!  Typically, the low is around mid-July but we won’t see that data until August 24^th.  These low readings do not bode well for the capital goods sector.  The housing market and the stock market are in for choppy action at best.  I am very tempted to go short here.  In my mind, there is no way that back-to-back weeks of 3% money growth can keep this train on the tracks.  I’m afraid that the stock market will soon be looking for support and at its current dizzying level, support is a long way down.

The S&P/Case-Shiller Home Price Index was also posted today.  The S&P/Case-Shiller Index pushed itself to a new record.  It increased 2.1% over the prior month and 16.6% on a year-over-year comparison.  This is the highest year-over-year climb the index has ever seen.

 

Prior peaks happened in September 2005 at 14.5% and October 2013 at 10.8%.  The increase is housing prices has been dramatic. 

 

I’m a big believer in Robert Shiller’s theory on home prices and how they track inflation.  He spelled this out really well in his book, “Irrational Exuberance”.  Something to keep in mind while viewing this data, the Case-Shiller Home Price Index is a month behind.  We are looking at data from May when the housing market was really on fire.

 

 

 

Finally, I want to touch on the Conference Board’s Consumer Confidence Index which was posted this morning.  The index, which measures consumers’ assessments of current conditions of business and labor, rose to 129.1.  This is up from 128.9 in June.

This is the fifth consecutive month of gains in the index.  Lynn Franco, the senior director of Economic Indicators at The Conference Board stated,

“Short-term inflation expectations eased slightly but remained elevated. Spending intentions picked up in July, with a larger percentage of consumers saying they planned to purchase homes, automobiles, and major appliances in the coming months. Thus, consumer spending should continue to support robust economic growth in the second half of 2021.”

More confidence means more willingness of consumers to spend.  This is stated plainly by Franco.  Consumers are still sitting on a large amount of cash when you look at the deposits sitting at commercial banks.  I touched on this briefly in yesterday’s alert.  Bank of America was quick to use the data and run a trend line.  I covered that in a previous alert.  The bank had anticipated that these funds would be spent when a “sunny day” arrived.  It seems consumers are happy with a cushion in their bank account.  That or they are having trouble securing the products they want to buy due to logistical issues related to port slowdowns and train congestion.  To sweeten their bank accounts further, the Biden administration is now sending out advances on the child tax credits on a monthly basis.  We’ll see if consumers get motivated to spend and still feel confident when the next report is released August 31^st.  I have a feeling we’ll be looking at a completely different picture at that point.

 

Alan's Alert 7-26-2021

 

Someone is shining a laser at the housing market.  Recently the price of lumber had skyrocketed and now it has crashed back down.  This caused headaches for builders as many projects had to be re-bid or had escalation clauses inserted to cover lumber market volatility.  Now that the price is quickly plunging to pre-shutdown levels, home sales data has turned weak.  The mad scramble to buy a house is beginning to fade.  Last week I had touched on housing starts and building permits.  Not included in that data was that mortgage applications had declined 4%.  I felt this was a normal reaction after they had surged 16% in the previous week.  This morning the US Census Bureau released their New Home Sales report.  It came in at -6.6%.  This is in stark contrast to the consensus estimate of +3.5%.  

This is the third consecutive decline.  You can see from the chart; it has quickly reverted to the trend-line of the past ten years.  Also, the median sales price has decrease from $374,400 to $361,800.  More houses are starting to hit the market pushing inventories up to 6.3 months’ worth of supply.  This puts it in line with where it was prior to the government shutdowns. 

 

Home prices and sales are an important indicator.  Just like the stock market, the housing market is powerfully impacted by the Fed’s money pump.  These markets require ever increasing amounts of new money to continue to breakout to dizzying new heights.  Tomorrow we’ll get a look at the Fed’s money pump when they release their H.6 money supply data.

 

 

The banking picture continues to look rough.

Lending has run out of steam.  New business loans are not being created. 

 

On the consumer side:

Savings is up and credit card use is down.  When everyone was locked down by the government, did they go on a Dave Ramsey reading spree?  The “financial guru” emphasizes paying off debt and saving 3-6 months’ worth of expenses.  That looks exactly like what is going on here.  If this trend were to reverse, inflation would be roaring into the market.  Currently it is trickling in, here and there.

 

 

This is a big week for market moving events.  The Federal Reserve Open Market Committee (FOMC) meets for 2 days starting tomorrow.  A summary press conference will be given on Wednesday.  Tomorrow, the Fed also releases the money supply data and Friday, their favorite inflation indicator (Personal Consumption Expenditure) is posted.

Important and Potential Market Moving Events This Week

 

Tuesday, July 27
5.30am Durable Goods Orders (June)
6am S&P/Case-Shiller Home Prices (May)
6am House Price Index (May)
7am CB Consumer Confidence (July)
9am H.6 M2 Money Supply
 
Wednesday, July 28
5.30am Wholesale Inventories (June)
11am Fed Interest Rate Decision
11.30am Fed Press Conference
 
Thursday, July 29
5.30am Initial and Continuing Jobless Claims
5.30am GDP (2^nd Quarter)
7am Pending Home Sales (June)
 
Friday, July 30
5.30am Personal Saving Rate (July)
5.30am Personal Consumption Expenditures (July)
 
 

Alan's Alert 7-21-2021

 

The housing starts and building permits data came out yesterday.  It was a mixed bag.  All housing starts were up 6.3% month-over-month to a seasonally adjusted rate of 1.643 million in June.  Looking at single-family starts, they were up 6.3% to 1.16 million.  The West dominated the stats, up 12.6%, followed by the south at 9.7%.  Both the Midwest (-7.5%), and the Northeast (-9%) dropped.

However, building permits were down 5.1% from the previous month to a rate of 1.598 million.  They missed market expectations of 1.7 million.  This is the third month in a row of declining building permits.  All regions saw decreases.

The cost of materials and the skilled labor squeeze is warping the housing market.  Its consequences are felt in these statistics.  Builders with approved permits are still building, but they are reassessing future projects and not applying for future permits.  Higher costs are getting passed on to buyers but builders must be concerned that a limit will be hit.  Another factor that plays into the building permits is suitable land to build on in desirable areas.  Permitting issues can run into restrictions when they butt up against zoning laws.  These two stats typically run congruent and at some point, they will have to move in unison once more. 

Another factor playing into this dynamic is the active listings and new listings of housing.

 

Both are showing signs of a rebound.  This could be the beginning of the housing market supply, finally catching up with demand and could signal an end to the insane bidding wars for houses. 

 

Locally, I hear many stories of houses going for well over asking.  It is regularly the rule, not the exception.  In fact, I was recently looking at a house that was listed for $350k.  Zillow had their Zestimate for this house at $332k.  The house was listed as a 5 bedroom but the downstairs bedrooms didn’t have egress windows.  This is a big no-no in the industry.  My realtor told me that the selling agent would review all offers with the owner on Wednesday.  The Monday before, I got a call that the owner had already reviewed an offer and accepted it for $390k.  This kind of “soft fraud” is a signal to me that a top in the market is coming.  When the “soft fraud” begins to lead to “hard fraud”, a serious correction similar to 2008 becomes more likely. 

 

 I don’t believe we’ll see a 2008 styled correction in the housing market.  More likely, we’ll see a top, then a period of slight decline or stagnation where a new base forms.  As a reminder, Robert Shiller came to the conclusion in his book, “Irrational Exuberance”, that long term trends in home prices are a direct result of inflation.  I wrote about this back on June 29^th.  Here is the link.  If the perpetual inflation story stays intact, this top in the housing market could be a short breather before housing prices resume their rise.