Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘U.S. housing market’

A Major Problem with This Quarter’s GDP Numbers

By for Profit Confidential

U.S. economyIn its revised estimates of the gross domestic product (GDP) for the second quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the U.S. economy grew at an annual pace of 2.5%, up from its previous 1.7%. (Source: Bureau of Economic Analysis, August 29, 2013.)

GDP numbers being better than before will send a wave of optimism through the stock market—I can just hear stock advisors saying “Buy, buy, and buy some more!”

But you can’t take these GDP numbers too seriously. When you look at them in more detail, there’s a major problem: consumer spending in the U.S. economy is not improving!

In the second quarter of this year, real personal expenditure in the U.S. economy (an important indicator of consumer spending) increased by only 1.8%. In the first quarter of 2013, this number rose by 2.3%! If we are hoping for economic growth, declining consumer spending is not a good start.

So what changed in the second quarter to boost overall GDP in the U.S. economy? Higher exports from the U.S. economy made a big impact. Exports increased by 8.6% in the second quarter, while in the first quarter they declined by 1.3%.

Many will say rising exports are a good sign, because we are producing more and selling more. But what this really gives us is proof that American companies are seeing sales rise abroad, but not here in the U.S.—in fact, it’s more proof that consumer spending in the U.S. economy is weak.

It has been well documented in these pages that companies in key stock indices are complaining about consumer spending in the … Read More

Best Explanation on the Fake Housing Market Recovery I’ve Seen

By for Profit Confidential

Housing Market RecoveryThe average American Joe isn’t participating in the U.S. housing market. As a matter of fact, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, investors purchased 69% of “damaged” properties in April 2013, while first-time home buyers accounted for only 16% of “damaged” purchases.

It is very well documented in these pages how home prices in the U.S. economy are being driven upward by institutional investors. Affirming my stance on the U.S. housing market, Suzanne Mistretta, an analyst at Fitch Rating Services, was quoted this week as saying, “The [housing price] growth is being propelled by institutional money… The question is how much the change in prices really reflects the market demand, rather than one-off market shifts that may not be around in a couple of years.” (Source: Popper, N., “Behind the Rise in House Prices, Wall Street Buyers,” New York Times Dealbook, June 3, 2013.)

Major financial institutions like The Blackstone Group L.P. (NYSE/BX) have become major buyers in the U.S. housing market. Blackstone has spent more than $4.0 billion for 24,000 homes in the U.S. housing market that it plans to rent out.

Rising prices on homes in various pockets of the U.S. housing market are a direct result of large institutional investors buying in.

Take Atlanta, for example. Blackstone bought 1,400 properties worth more than $100 million in Atlanta last year. (Source: Bloomberg, April 25, 2013.) And what happened to prices for homes in Atlanta? According to CoreLogic, a housing data compiler, home prices in Atlanta increased 12.4% in the 12-month period ended February 2013, compared to a 10.2% increase in the overall U.S. housing … Read More

As Investors Flee Gold ETFs, Central Banks Jump in as Bigger Gold Buyers

By for Profit Confidential

Central Banks Jump in as Bigger Gold BuyersWhile mainstream financial and a growing number of economic forecasters focus on investors fleeing the gold bullion market, I am following in the footsteps of central banks around the world…

Investors pulled out a record amount of money from gold bullion-backed exchange-traded funds (ETFs) this past February. A total of $4.1 billion was withdrawn from gold bullion ETFs last month, the largest single-month outflow since January of 2011. (Source: ETF Trends, March 6, 2013.)

Gold investors fled the market on speculation that gold bullion prices will plummet, as the metal’s future looks anything but bright—the theory being the global economy is improving and central banks will need to pull back on their easy monetary policies.

But, as investors sold ETFs in February, central banks around the world added to their gold bullion reserves.

South Korea added another 20 metric tons of gold bullion to its holdings in February—raising its gold reserves by 24% to 104.4 tons. Since June of 2011, South Korea has purchased gold bullion five times. (Source: Bloomberg, March 6, 2013.)

Similarly, central banks from Russia and Kazakhstan have been increasing their gold bullion holdings as the prices go down. According to the International Monetary Fund (IMF), the Russian central bank purchased 12.2 tons of gold bullion in January.

As the World Gold Council cites, central banks across the world ramped up their gold bullion buying; they bought 534.6 tons last year, 17% more than the previous year.

Dear reader, when you have the former biggest sellers of gold bullion, central banks, turning into buyers, it is nothing less than a bullish indicator.

What holds … Read More

Short Sales and Foreclosure Jump to 20% of Home Sales; Institutions Support Housing Market with Major Buying

By for Profit Confidential

The chart below is the S&P Case-Shiller 20-City Home Price Index.

$!ESSPCS20RSA S&P case shiller 20 city stock chart

Chart courtesy of www.StockCharts.com

From the S&P Case-Shiller 20-City Home Price Index, we can see that home prices are still down almost 30% from their peak in early 2007.

As the chart shows, a little change in home prices doesn’t really mean recovery in the housing market. On average, home prices in the U.S. economy will have to go up about 42% for the people presently living with negative equity in their homes to break even. This much of a recovery could be far away for the U.S. housing market…

According to RealtyTrac, foreclosures in the U.S. housing market dropped seven percent to 150,864 in January from the previous month. One in every 869 homes in the U.S. housing market was on the verge of foreclosure in January. (Source: RealtyTrac, February 12, 2013.)

And, according to real estate research firm CoreLogic, in October of 2012, foreclosures accounted for 11.5% of total home sales. In the same period of 2011, they accounted for 17.3%. But in the same period when foreclosures declined, short sales climbed from 10.4% to 8.4% of all sales. (Source: Wall Street Journal, March 5, 2013.)

Short sales, where a homeowner sells his/her home for less than the mortgage and the bank takes the loss, have taken up the slack in foreclosures! Add to this the fact that first-time home buyers are not present in the U.S. housing market rebound while institutional investors are buying single-family homes in bulk and renting them, and all of a sudden the U.S. housing market rebound is questionable.

There is … Read More

The Fed’s Running the Show and Risk Keeps Going Up

By for Profit Confidential

250213_PC_clarkThere just isn’t enough real economic growth out there for a rising stock market—at least not much more than has already been achieved. News from the Federal Reserve of the central bank considering how to end quantitative easing sent the stock market much lower, revealing just how artificial the whole system is.

I actually think the current stock market is fairly valued, but it shouldn’t be going up in value with modest revenues and earnings growth. The Federal Reserve is the catalyst for today’s trading action, but first-quarter earnings season will be a catalyst for investor sentiment. Some companies and industries are doing better than others. The choppy recovery in the U.S. economy is now being reflected in earnings results, as corporations can no longer cut any more costs. Revenue growth is now the key.

On the release of the minutes from the Federal Reserve meeting, stock markets around the world sold off, literally. All the positive action so far this year has been incredibly tenuous, and the low trading volume said it all. I think we’re now in a mini-correction, induced by recent news from the Federal Reserve, although it won’t be a market-breaking pullback.

Right now, the prospects for gold, silver, and oil are terrible, and the near-term action in resource stocks is headed downward. We also have a lot of solid, dividend paying large-caps that are trading right near their highs and are due for a break.

It’s odd that the stock market reacted so negatively to the Federal Reserve’s latest news. Investors have been complaining about all the easy money and artificially low interest rates. … Read More

Approved; Unlimited Credit Line for the Most Debt-Infested Country

By for Profit Confidential

The Most Debt-Infested CountryWould you lend money to a person who is unemployed, whose assets are declining, and who is heavily in debt? Even a person with minimal knowledge of finance would say, “No, thanks.”

But, the opposite of this happened in the U.S. economy on January 23, 2013, when Congress passed a bill “temporarily” suspending the limit of how much the government can borrow.

This bill gives the U.S. government the right to borrow without limits until May of this year. It’s like giving an unlimited line of credit to a person who doesn’t have the means to pay it back.

The original idea behind a government “debt limit” in the U.S. economy was to put a limit on how much the federal government could borrow so our national debt didn’t get out of control. So much for that idea!

If you thought $16.4 trillion was a lot of debt, the U.S. government just got approved for an unlimited line of credit with no background check.

Most investors have no idea how big a Ponzi scheme the U.S. economy has become. The government spends money it doesn’t have; it then issues T-Bills to sell to anyone who will loan them money, and the Federal Reserve then buys most of those T-Bills with money it creates out of thin air.

The Federal Reserve, which started buying $45.0 billion of U.S. bonds in January, has been working hard, printing more money and keeping the U.S. economy afloat artificially. In the most recent update on its balance sheet, the Federal Reserve revealed that it holds almost $1.7 trillion worth of U.S. bonds, while its balance … Read More

Realities of the New Housing Market; Institutions Buy and Rent Homes

By for Profit Confidential

Realities of the New Housing MarketHere’s the bottom line on the U.S. housing market and why it’s not really a recovery we can bank on:

The most important part of the U.S. housing market—first-time homebuyers—is missing from the action! We need first-time homebuyers in the market to see real growth in the U.S. housing market. After all, they are the ones who buy the fridges, stoves, dishwashers, and other goods that help increase consumer spending in the U.S. economy.

In December of 2012, out of all the existing home sales in the U.S. housing market, first-time homebuyers accounted for only 30%! This number was unchanged from November and more than three percent lower compared to December 2011. (Source: National Association of Realtors web site, last accessed January 22, 2013.)

Just look at sales of appliances…

According to the Association of Home Appliances Manufacturers (AHAM), as the housing market “rebounded” in the U.S. economy, the shipments of appliances to stores and warehouses actually declined to 60.7 million units in 2012, compared to 60.8 million units in 2011. (Source: Wall Street Journal, January 15, 2013.) If the housing market is rebounding, why are appliance sales declining?

The Association notes that shipments of six core appliances—washers, dryers, dishwashers, refrigerators, freezers and ovens—declined 2.3% in 2012. For December alone, the shipments dropped 4.1% compared to December of 2011.

To the mainstream media calling this a “recovery” in the U.S. housing market: you’re missing one big point…

Home prices are slowly rising, and supply is slowly decreasing in the U.S. economy, because institutions and individual investors are running to buy residential properties.

For investors, buying up single-family homes … Read More

Surprise: German Economic Growth Turns Bleak for 2013

By for Profit Confidential

Surprise German Economic Growth Turns Bleak for 2013Developing countries are supposed to be the fastest growing world economies. Sadly, according to a recent report by the World Bank, in 2012, developing countries put in their slowest economic growth rate in a decade. Developing countries saw their economic growth come in at only 5.1% for 2012. (Source: The World Bank, January 15, 2013.)

How about the more developed countries in the global economy?

“High income” countries in the global economy are estimated to have grown by only 1.3% in 2012. In 2013, this growth rate is expected to remain the same.

Gross domestic product (GDP) growth in Europe and Central Asia is expected to have slowed to below three percent in 2012 from 5.5% in 2011. Similarly, Latin America and the Caribbean are expected to see their GDP grow only three percent in 2012, compared to 4.3% in 2011.

Add it all up, the World Bank estimates that, in 2012, the overall global economy grew at only 2.3% and it expects the same rate for 2013.

Dear reader, I don’t want to be the bearer of bad news, but the numbers don’t lie. The risks in the global economy persist. The combination of a recession-infested eurozone, a slowing economy in China, a depressing Japanese economy, a disappointing U.S. economic performance, and the struggles of the other emerging market economies points to bleak world economic growth for 2013.

Even the world economies that were once the strongest are in trouble. The central bank of Germany slashed its GDP growth prospects. It expects Germany’s GDP to increase by only 0.4% in 2013 compared to a previously forecasted increase of … Read More

Why It’s a “Fake” Housing Market Recovery

By for Profit Confidential

Fake Housing Market RecoveryThe U.S. housing market is becoming a main topic again in the mainstream media these days. I keep reading about how rising home prices will now get the U.S. economy going again.

The National Association of Realtors (NAR) expects average existing home prices in 2013 to be around $185,800, with an increase to $193,600 by the end of 2014. (Source: National Association of Realtors, January 2013.)

But what’s fuelling the soft rebound in the U.S. housing market and home prices is something that’s never happened in our history. It’s not individuals buying houses who are moving prices and demand higher; it’s institutions. Yes, big institutional investors are buying houses—and in a big way!

The Blackstone Group L.P. (NYSE/BX) bought $2.5 billion worth of U.S. homes—that’s 16,000 units in total so far, with cash! In October of 2012, the company owned $1.5 billion worth of homes and was spending $100 million a week to purchase more! (Source: Bloomberg, January 9, 2013.)

Other companies like the Colony Capital LLC and Waypoint Homes are taking similar courses of action as the home prices increase. Colony Capital has already purchased 5,500 homes since April of 2012 and expects its investments to increase to $1.5 billion by the end of this year. Waypoint Homes has bought 2,500 home and plans to have a total of 10,000 homes by the end of 2013.

Institutions are pouring big money into buying individual homes, fixing them up, and then turning around and renting them. And more and more companies are entering this new “game.” As an example, Silver Bay Realty Trust Corp. (NYSE/SBY) raised $245 million in an … Read More

The Debt Demon Lurks—It’s Still Out There Waiting to Strike

By for Profit Confidential

Still Out There Waiting to StrikeThe stock market is very much in consolidation mode, and it’s still highly vulnerable to all the risks out there. The sovereign debt crisis isn’t over; the eurozone has just backstopped sovereign debt with additional debt. And while the U.S. housing market is showing signs of improvement, this really isn’t a surprise. Enough years have elapsed that home sales and prices should be improving. Risk is very high in this stock market, and prices may soon become expensive relative to earnings.

You can’t really say that the stock market isn’t holding up well. Large-cap technology stocks have taken a hit, but this group has been one of the strongest performers since the 2009 low. Intel Corporation (NASDAQ/INTC) has really been hit hard, now trading below $20.00 a share. This company illustrates the problems faced by many international businesses. You can’t grow your earnings if there’s recession in Europe and China is slowing. Intel’s stock chart is below:

INTC NASDAQ Stock Market Chart

Chart courtesy of www.StockCharts.com

What I did see this third-quarter earnings season was a lot of improvement in small- and mid-cap technology-related companies whose businesses are mostly in the U.S. market. I read countless earnings reports that showed a significant turnaround in revenues among software companies, in particular.

One business that stood out to me is AZZ Incorporated (NYSE/AZZ). This is exactly the kind of business that can do well in a sluggish economy. AZZ manufactures electrical equipment and sells components to the power-generation industry in the U.S. and Canada. According to the company, its third-quarter revenues improved 34% to $153 million. Earnings grew to $15.9 million from $9.6 million in the comparable … Read More

What I’m Worried About Over the Next Four Years…

By for Profit Confidential

Over the Next Four YearsBefore the U.S. elections, there was hype about the housing market getting better, the stock markets soaring, and unemployment decreasing. But truth be told; there is no growth in the U.S. economy. As they say, the “devil is in the details.” The numbers only look good on the surface.

In these pages, I have discussed how, in spite of media reports to the contrary; the housing market in the U.S. economy is very weak. Robert Shiller, creator of Standard & Poor’s/Case Shiller Index, agrees. In an interview with CNBC, he asserted that it is still unclear if there is actually a recovery in the U.S. housing market. He stated it could take up to 50 years for the housing market to get to where it was before the housing bubble burst. (Source: CNBC, October 31, 2012.)

During economic growth, you want to see consumer demand and overall activity in the economy increase. Looking at the longer-term picture for the U.S. economy, it’s as blurry as it can get. The demand for the most basic needs by consumers is falling in the U.S. economy, while economic activity is decreasing—the last thing you want when you are searching for economic growth.

American Electric Power Company, Inc. (NYSE/AEP), a utility company that delivers electricity to five million customers and has business in 11 states, reported that earnings fell 48% in the third quarter due to poor consumer demand, customer defection. and some costs associated with storm clean-up. (Source: Bloomberg, October 24, 2012.) Economic growth or not, utilities companies tend to be stable most of the time—but that’s not the case … Read More

Where the Returns From Equities Will Go

By for Profit Confidential

Returns From EquitiesThe stock market is not looking that good right now. There have been plenty of days where the main stock market indices start out strong, but the price action dwindles by the end of the day. The “AGA” stocks, which are Apple Inc. (NASDAQ/AAPL), Google Inc. (NASDAQ/GOOG), and Amazon.com, Inc. (NASDAQ/AMZN), aren’t reporting the kind of growth needed to get this market moving. I think what we’re in for is a considerable period of stock market mediocrity. Because valuations aren’t high, the downside has a buffer. Dividends will be the market’s only friend this quarter.

Near term, I think we’re going to get more downside, and I would not be a buyer in this market. A full-blown stock market correction would provide a good new entry point, but the outlook in 2013 remains as conflicted as ever with all the fundamental headwinds. You might argue that the stock market’s performance over the last few years has only been due to the massive liquidity injection by the Federal Reserve. Corporate earnings have been decent, but earnings growth rates are obviously in decline.

It’s been a good year for the main stock market averages so far. The NASDAQ Composite led the other principal indices and large-cap, dividend paying stocks generated exceptional capital gains, all things considered. Looking ahead, I certainly find it difficult to be bullish. We’re almost on the cusp of a new business cycle, but it’s likely that the U.S. economy will experience more pain before this happens. Fiscal headwinds are likely to put a lot of pressure on gross domestic product (GDP) growth next year.

Going forward, I think … Read More

Clinton’s Speech Last Night & Food Stamps:
What They Have to Do with Each Other

By for Profit Confidential

Clinton’s Speech Last Night & Food StampsThe grim reality is that the U.S. economy will not be improving anytime soon. The statistics don’t lie—there is no economic growth, but there is growing evidence the U.S. is experiencing an economic slowdown.

One important indicator of economic growth includes the standard of living. As I have written recently, the American middle class is in jeopardy of disappearing, just like it has in most of Europe.

In June of this year, there were 46.7 million people in the U.S. on some form of food stamps. (Source: U.S. Department of Agriculture, August 30, 2012.) The number of people using food stamps has increased 3.3% over the course of the year. This means that almost 15% of the U.S. population is on food stamps!

Why are there so many Americans on food stamps? It’s simple. The unemployment rate is too high for economic growth to happen, food prices are going up, and millions of people can’t afford to pay their expenses. How can we experience economic growth when so many people can’t afford to fill the most basic needs?

Another reason for soaring food stamp usage: the majority of jobs created since the credit crisis hit are mainly in low-wage sectors—retail, food prep, laborers, freight workers, waiters and waitresses, office clerks, and customer service representatives. These jobs do not create economic growth; they just put food on the table.

There are still approximately 10 million jobs missing from the economy. (Source: NELP, August 31, 2012). What we are witnessing in the U.S. is a continued economic slowdown, as real economic growth would have resulted in across-the-board job creation.

While I … Read More

Dow Jones Transportation Index Still Diverging From Broader Market; What It Means

By for Profit Confidential

Dow Jones Transportation Index Still DivergingTrading volume on the stock market is lethargic, even for the traditionally slow summertime period. All eyes will be on Ben Bernanke this Friday, and the main stock market indices won’t move much until then. (See “Broader Market to Consolidate—No More Upside Without the Fed.”)

The significant divergence that has built up between the S&P 500 Index and the Dow Jones Transportation Index remains, and to me, it represents non-confirmation of the stock market’s most recent rally. Naturally, the divergence is most pronounced between the NASDAQ and the Dow Jones Transportation Index, followed by the S&P 500 Index and the Dow Jones Industrials. It became apparent mid-July, when oil prices recovered from their recent correction. But I think the divergence is due to more than just higher oil prices; I think it’s emblematic of a stock market that’s losing its momentum.

Already this year, the Dow Jones Industrials, the S&P 500 Index, and the NASDAQ Composite are up substantially, and this doesn’t include dividends. Average trading volume for the Dow Jones Industrial Average has been declining over the last several years; the performance of this index has repeated itself three times since its low in March of 2009. I get a real sense among stock market investors that things are coming to a head on the economy, Wall Street, and the political landscape. It’s a very tough environment in which to make predictions about the stock market. There are just too many unknowns out there, and that’s why so many dividend paying stocks, like those in the Dow Jones Industrials, have done well this year. All the … Read More

Consumer Spending: May Numbers Weren’t Very Pretty

By for Profit Confidential

Consumer SpendingConsumer spending remains fragile, impacting the retail sector and gross domestic product (GDP). The key drivers are employment and wealth generation from such sources as stocks and housing.

In the retail sector space, sales have been largely mixed with discounters and big-box stores faring the best as shoppers flock to Wal-Mart, Target and Costco, along with the increasingly popular dollar stores and hyper-supermarkets.

The reality is consumer spending drives GDP growth. The way consumers spend will likely dictate how the economy will fare in the remainder of 2012. With consumer spending accounting for about 70% of the GDP growth in the U.S., it will be critical to get consumers to spend. However, the Consumer Confidence reading weakened to 64.9 in May, down from 68.7 in April and below the estimate of 69.4. In general, this lack of confidence translates into lower retail sector spending—and slowing GDP growth.

In particular, spending on big-ticket items continues to be fragile. The Durable Goods Orders gained 0.2% in April, remaining below the 0.3% estimate but ahead of the 3.7% decline in March. Ex-transportation, the reading fell 0.6% compared to the estimate calling for a one-percent gain.

In May, retail sales excluding automotives fell 0.4%, worse than the 0.3% decline in April and below the zero-percent estimate.

Job creation is the most critical variable for the retail sector. In May, a disappointing 69,000 jobs were created, well below the 150,000 estimate and the downward revised 77,000 in April. The jobless rate was 8.2%, which has been improving but still too high for a healthy economy and could strangle growth in the retail sector.

The Fed … Read More

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