Tuesday, November 26, 2013 - The Best Question

The Best Question

by Sinclair Noe

DOW + 0.26 = 16,072
SPX + 0.27 = 1802
NAS + 23 = 4017
10 YR YLD - .02 = 2.71%
OIL - .60 = 93.49
GOLD – 9.60 = 1243.00
SILV - .39 = 19.92

Today we celebrate the Nasdaq. Yes, the Dow is at record highs, again, but the milk and cookies thing is getting old, kind of sickly sweet. Some might argue that you can never have too many cookies; that any day with milk and cookies is a good day. It's hard to dispute this argument. Still, it bears notice that the Nasdaq has closed above 4,000 for the first time in 13 years. The Nasdaq is up about 33% year to date, and counting. So, today we celebrate with chips and salsa.

If you're thinking the Nasdaq has had quite a run and it's starting to feel like 1999, you could be forgiven, but when you put it in perspective it's not quite the same. P/E ratios are around 19, compared with 29 just before the millennium. Price to book is now 2.6 compared to 5.1 back then. Basically, back in 1999, the Nasdaq was extremely overvalued. You can argue that it's overvalued today, but it isn't nearly to the old extremes.

Two economic reports on the housing market today. Permits for future home construction hit a near 5-½ year-high in October and prices for single-family homes showed big gains in September, suggesting a run-up in mortgage interest rates has not derailed the housing recovery.

The first report comes from the Commerce Department; building permits jumped 6.2 percent last month to an annual rate of 1.03 million units, the highest since June 2008. It was only the second time since mid-2008 that permits topped the 1 million-unit mark. Permits were up 13.9 percent from a year ago in October. Building permits are not counted toward GDP but they are a leading indicator, suggesting more construction activity in the coming quarters. Yesterday, we reported that pending home sales declined in October, likely some recalcitrance from buyers in light of the government shutdown; so maybe the permits indicate pent-up demand; or perhaps a shift away from single family residential.

Permits for the multifamily home sector jumped 15.3 percent in October and approvals for buildings with five units or more reached their highest level since June 2008. Single-family home permits, the largest segment of the market, rose 0.8 percent.

A separate report showed the S&P Case Shiller composite index of home prices in 20 metropolitan areas jumped 13.3 percent in September from a year ago, the strongest gain since February 2006. The Southwest continues to lead the housing recovery. Las Vegas home prices are up 27.5% year-over-year; in California, San Francisco, Los Angeles and San Diego are up 24.8%, 20.8% and 20.4% respectively. Phoenix posted 22 consecutive months of positive returns, up 18.9% in the past year. However, all remain far below their peak levels. As an example, since January 2000, home prices in Los Angeles were up 170% during the bubble days, dropped from those levels but are still up108% from 2000. Phoenix prices are up 41%, basically matching inflation.

Since April 2013, all 20 cities in the index are up month to month; however, the monthly rates of price gains have declined. More cities are experiencing slow gains each month than the previous month, suggesting that the rate of increase may have peaked.

As prices have rebounded, that has drawn REO properties out of the shadows and onto the auction block. Investors, including hedge funds and private equity firms, which acquire the lion’s share of homes at auctions, have raised about $20 billion to purchase as many as 200,000 homes to rent. Their purchases are spurring a rebound in property prices. As that speculative demand drives prices, that gives banks the chance to get foreclosures off their books.

Banks have reduced their collection of repossessed homes by 26 percent to $7 billion from a year earlier, according to the Federal Deposit Insurance Corp. That’s 50 percent of the level they held at the height of the foreclosure crisis at the end of 2010. Firms are motivated to sell these dwellings because they have to pay monthly outlays for maintenance and insurance. Banks have been eager to dispose of properties but they've been waiting for the right price. They may still take a hit on the sale, but it's a smaller hit and they are better able to absorb it; and waiting out the market, many properties will return a profit. Thanks in part to a Zero Interest Rate Policy, and the Fed buying up $85 billion a month in securities, and the stock market at record highs, the 6,940 FDIC-insured firms reported $42.2 billion in profit in the second quarter, up 23 percent from a year earlier.

Admittedly, third quarter bank profits dipped slightly, marking the first year-over-year decline since 2009. The Federal Deposit Insurance Corp. says the banking industry earned $36 billion in the third quarter, down $1.5 billion or 3.9 percent from the third quarter of 2012. The FDIC says the year-over-year earnings decline came primarily from a $4 billion increase in litigation expenses at a single institution. The FDIC did not name the institution.

Hmmm, I wonder which bank....

JPMorgan Chase of course, everybody knows that. We reported on their $13 billion penalty to settle charges of selling toxic mortgage bonds back in the day. Now that they have cleared that legal hurdle, the share price has jumped about 3%, raising the value of JPM shares by about $7 billion. Toss in a potential $4 billion in tax deductions, because profits are privatized but losses (and fines) are socialized, and the fine is almost paid.

The Conference Board's Consumer Confidence Index dropped in November to 70.4, down from 72.4 in October. The proportion of Americans who said jobs would become more plentiful in the next six months declined to 12.7 percent, the lowest since November 2011, from 16 % last month. The share of respondents who said they expected a pickup in their incomes declined to an eight-month low of 14.9 percent in November from 15.7 percent a month earlier. It should be noted that retail sales in October beat expectations, despite the drop-off in consumer sentiment. And the latest weekly chain-store sales snapshot for last week showed a solid increase, although it was driven by gains at discount and dollar stores. Consumers haven't gone into lock-down mode but we remain concerned about future finances because of weak gains in jobs and incomes.

Pope Francis today published a major document, known as an apostolic exhortation, which establishes what might be considered an official platform for his papacy. Pope Francis called for renewal of the Roman Catholic Church and attacked unfettered capitalism as "a new tyranny", urging global leaders to fight poverty and growing inequality. In it, Francis went further than previous comments criticizing the global economic system, attacking the "idolatry of money" and beseeching politicians to guarantee all citizens "dignified work, education and healthcare".

He also called on rich people to share their wealth, writing: "Just as the commandment 'Thou shalt not kill' sets a clear limit in order to safeguard the value of human life, today we also have to say 'thou shalt not' to an economy of exclusion and inequality. Such an economy kills."

Economic inequality features as one of the issues Francis is most concerned about, and the pontiff calls for an overhaul of the financial system and warns that unequal distribution of wealth inevitably leads to violence, writing: "As long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world's problems or, for that matter, to any problems."

Denying this was simple populism, he called for action "beyond a simple welfare mentality" and added: "I beg the Lord to grant us more politicians who are genuinely disturbed by the state of society, the people, the lives of the poor."

"How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses 2 points?"

That's the best question I've heard in a long time.