Wednesday, February 26, 2014

Jim Grant: Six Years In The Fed Is Still Making It Up As They Go

Robert Shiller Discusses His Concerns Regarding U.S. Housing

After the second consecutive month of non-seasonally adjusted home price declines on the Case-Shiller index, the co-founder of the index Robert Shiller speaks with CNBC about his concerns. He notes that the housing data rolling over feels eerily reminiscent of 2005-2006, although he does not anticipate a severe price decline in the immediate future.

For more on the recent housing data see: U.S. Housing Data Begins To Crack

Sunday, February 23, 2014

The Corporate Cash Myth

If you've read the headlines recently you have probably heard that "companies are sitting on a record amount of cash." This is true. Then you hear how all this cash is waiting to be deployed which will create explosive earnings growth in the coming years. Sounds amazing.

Imagine that your next door neighbor asks you to lend him $20,000. He takes you inside and shows you his bank account which holds $100,000 in liquid cash. He then tells you that the money will be used to invest in his business to create explosive growth in the coming years. What is the first question you would ask your neighbor before lending him the money?

"How much debt do you have?"

He then shrugs his shoulders and says he has about $110,000 in business debt, which is currently locked in at only 4% for the next few years due to the incredibly low interest rate environment.

How would you proceed? You would most likely thank your neighbor for inviting you over but keep your money safely invested at the bank. How does this apply to corporate cash?

The chart below shows the "record cash" against the record net debt companies hold today, which is now 15% higher than it was prior to the financial crisis. Click for larger image:

Debt is borrowed through corporate bonds which have recently been issued at all time record low interest rates. When those bonds come due they will need to be refinanced at far higher rates (if you believe rates will move higher in the future), or the cash will be needed to pay down the debt. There are a very small handful of companies such as Apple that actually have a large pile of cash. Almost all companies, however, have no net cash.

Want to know another secret? Over the past year companies have been borrowing money at these all time record lows rates and using the funds to.....drum roll.....repurchase their own stock to boost stock prices. We can only wonder what happens when this process begins to move in reverse.

The European Debt Crisis Visualized

U.K Average House Price To Rent Ratio Is High While London Is Back In Bubble

Interesting graphic below showing that the price to income ratio is clearly back in bubble territory in London, which rose 12.3% in price last year alone. The city has diverged from the remainder of the country (which is overpriced but not yet back in a bubble).

For more see Rogue Wave 3: The Global Housing Bubble Is Back

U.S. Housing Data Begins To Crack

Over the past week U.S. residential real estate data has come in disappointing across the board. The immediate response to the slowdown from the mainstream media has been to disregard the data due to the weather conditions. A closer look at the regional data shows that the western portion of the U.S. (which was not impacted by the weather) has been just as troublesome as the remainder of the country.

Existing home sales fell 5.1% month over month to the lowest reading in 18 months. The west experienced the greatest decline, while the northeast (weather?) fell the least.

Single family home starts fell 16% in January, while multifamily starts fell 16.3%. Starts can certainly be impacted by the weather, but the starts in the west fell by 17%. Housing permits, not weather related, fell by 5.1% (26% in the west).

Home builder sentiment, which has been rising violently over the last two years, fell off a cliff in the most recent reading. The drop from 56 to 46 was the largest month over month decline in history. The largest sentiment decline occurred in the west.

Mortgage applications have fallen 16% over the last five weeks and are now sitting at 1995 levels.

While the stock market moves like a speed boat, the housing market makes turns like a cruise ship in the ocean. Prices have a tremendous amount of upward momentum so it takes longer for these early data points to become full turns.

However, the view from the captain's seat on the cruise liner looks ominous.

First time home buyers, the fuel needed for housing's hand off from speculators and Wall Street back to the public, have stepped away from the market. They have fallen from 35% of the market share in early 2012 down to 26% as of the most recent reading.

Why? Home are much more expensive than they were two years ago. Less first time home buyers can afford to purchase at the median home price in major cities as they are entering the market with crushing student loan debt and declining real wages.

A good friend of mine recently moved to San Francisco with his wonderful wife. They both have very high paying technology jobs but have not purchased a home. The reason? The price on a mediocre median priced home just crossed $1 million. The same theme has occurred in major cities throughout California, which is why the data from the west discussed above has been devastating. The following home, close to train tracks with a cracked foundation, recently sold for $1.6 million in Palo Alto.

At some point, just we saw in 2006, the cost of a home for the next marginal buyer exceeds their ability to pay. This does not even factor in what should occur if interest rates were to rise or the economy were to slow down (both of these are coming).

The major catalyst behind the most recent home price bounce has been Wall Street's entry into the market. However, home price appreciation impacts institutional money the same way. Jonathan Gray, Blackstone's global head of real estate said recently, "the challenge for us is as the prices go up the yields go down. So we have been winding down, not ending, but reducing the amount we are investing."

Bloomberg reports that the rents used on the collateral for rental home securities declined by 7.6 percent from October to January.

We are entering a phase where the cost for Wall Street to purchase homes is rising while rents are beginning decline. The largest portion of the acquisitions are well behind us, and the slow down in purchases may soon become net sales.

We will continue to track the data here closely, as the most recent housing miracle and boost to GDP growth could soon become a drain.

h/t Bloomberg, Zero Hedge, Dr. Housing Bubble, TestosteronePit