Thursday, January 30, 2014

U.S. Home Prices Decline

The Case-Shiller U.S home price index released this week for November turned lower month over month. The November data is a composite average of September, October and November.

This data shows the sharp rise in interest rates, which began back in May, has had an impact on prices faster than many anticipated.

The impact is only beginning to occur in the construction sector with permits (blue line) and starts (green line) rolling over as interest rates have risen (red line inverted). The permits and starts, which are already sitting at depression like troughs, should continue to decline.

With home prices rising, interest rates rising and incomes stagnating or falling, home affordability has plunged over the last nine months. It will take incredible investor demand and market momentum euphoria to keep this most recent bump in prices artificially high.

For more see: 2014 Outlook: U.S. Home Prices

New U.S. Farm Bill Continues Food Stamp Welfare Program

After a "heated" debate this week, Republicans and Democrats in the United States reached a compromise on the new farm bill. The bill will total $956 billion over the next ten years and consists mainly of the food stamp welfare program (blue portion of the pie below).

The "devastating" cuts you read about on the mainstream headlines totaled $8.6 billion. However, the cuts are removed once a heating assistance loophole is filled. This provides no incentive for the current welfare state to veer from its current course.

There will be no changes until a bond crisis arrives. Until then, continue to enjoy the party.

Monday, January 27, 2014

Emerging Market Equities Are Cheap & Will Likely Become Cheaper

As stocks and currencies fell around the world last week and into today, even those living in the United States took notice as the bubblicious S&P 500 turned a strange color of green (it was red).

The headlines now read that we have an "emerging markets crisis." Investors, we have been told, should take cover and run back into the safety of the DOW. Will they do so? Perhaps. Will joining that herd provide strong long term results? Let's take a look.

The following charts were posted by John Mauldin this weekend courtesy of Mebane Faber. The first chart shows the CAPE price to earnings ratio for most of the stock markets around the world. As you can see, the United States entered the year as the second most expensive market on the planet. Click for larger image:

While high P/E ratios do not mean that stocks will fall tomorrow, they have historically led to disastrous returns for investors over a 1, 5, or 10 year span into the future. 

The next chart shows where the P/E ratios stood entering 2013 and the market performance over the last year in those markets. You can see that in general, the countries with low P/E ratios (inexpensive markets) performed well while the countries with high P/E ratios performed poorly. The two outliers were Russia, which had cheap stocks that became cheaper, and the United States, which had extremely expensive stocks that became much more expensive.

Have we entered the next contractionary period for the global economy? That is unknown and only the data will tell as we move forward. However, if we have, and we see continue to see an across the board sell off in stock markets and currencies globally, it is important to remember which markets represent true long term value (emerging markets) and which may only be correctly down closer to fair value (the U.S.).