The conventional wisdom is that low energy prices are great for Americans consumers and help provide a boost to the economy through increased spending.
The problem with conventional wisdom in the markets is that when you do what others are doing, you get what others get: sub-par returns.
Of course, low energy prices don’t affect just Americans, but consumers all over the globe. They should all be stimulating the economy with their spare change. But there’s one clue that Joe Six Pack is feeling economic pain despite low energy prices.
Thanks to Dent Research, here is our weekly information roundup ending the week on February 26, 2016. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
Fourth-Quarter U.S. GDP Revised Up from 0.4% to 1.0%... The change was based almost entirely on higher inventory.
What it means – Businesses have more stuff they don’t want. Higher inventory is something we typically see in the third quarter as everyone gears up for the holidays.
More stuff piling up in the fourth quarter means businesses didn’t sell as much as they thought they would, which makes sense, given that companies from Sears to Best Buy posted ugly holiday results.
Another ugly nugget buried in the report was a lower estimate of personal consumption. Instead of growing 2.2%, consumers increased spending by 2.0%. Weaker growth in spending won’t spur a robust economy. The markets took this as a sign that the Fed won't raise rates anytime soon.
December S&P/Case-Shiller Home Price Index Up 5.7% for the Year… The growth rate ticked higher at the end of the year, with November and December notching almost 6% gains after a string of monthly reports between 4% and 5%.
What it means – Higher home prices reflect tight supply and a growing population, but I’m not sure how long this can continue. Wages are ticking up painfully slowly, and by many measures, we’re at the edge of a recession.
California and New York are doing well, but the fallout from the energy sector has to take its toll eventually.
It's important to note the Case-Shiller report comes out two months later, so we’re looking at December's numbers. Things have turned decidedly lower since then.
Existing Home Sales up 0.4% in January, up 11% over Last Year… After a strong jump in December, existing home sales tacked on additional gains in January. The growth was in single-family and multifamily units.
What it means – The housing market keeps plugging along. Just when I think it’s going to roll over and die, it pops back up again. That’s probably because it fell to such ugly low levels after 2008, while at the same time we’ve been adding millions of new working adults to the economy.
There are a lot of young adults getting squeezed by higher rents who’d love to own a home. Now that Fannie Mae and others have introduced 3% down payment options, getting financing is a bit easier. But the timing is suspect.
Just as global growth slows with China sputtering, we entice a bunch of young people to buy homes. This might not work out well.
One note of caution in the report… The median price paid slipped 4.2%. It’s still up more than 8% for the year, but the drop could reflect discounting to keep inventory moving.
New Home Sales Fall 9.2% in January… Dragged lower by a 32% fall in the West, new home sales tumbled last month. The Midwest and South experienced modest declines while new home sales in the Northeast rose.
What it means – As I’ve noted many times, new home sales are where the rubber meets the road. We can trade existing homes back and forth all day long. Other than giving realtors way too much in the process and buying a few new couches, there’s not a lot of real economic activity involved. But with new homes, we put lots of people to work in solid, middle-class jobs. The fall in new home sales coincides with the drop in housing starts from last week.
Just as we saw with existing homes, the median price of new home sales slipped, down 5.7% for the month. But unlike existing home sales, the full year price change for new homes was actually lower, down 4.5%. This could be a couple of things. Builders could be discounting, trying to get rid of inventory, or the mix of homes could be skewing to the lower end. If there were a lot more homes sold but at lower prices, that might not be bad. But few sales and lower prices doesn’t sound like a winning combination.
A good friend of Dent Research is a homebuilder in Las Vegas. He told us that higher-priced homes are languishing on the markets. Now could be a good time to be nervous.
Harry talks about this real estate situation in depth in the March issue of Boom & Bust. He has identified four groups of cities and towns that face a significant risk of a home price collapse.
European Countries Are Ring-Fencing Greece to Stop Immigration… Several countries that border Greece, or have received many immigrants from there, have instituted border controls.
What it means – Spring is just a few weeks away, and with it comes warmer weather. That should bring thousands more refugees to Greece, but now they have limited options as to where they can go. Greek officials rightly worry that they’ll end up as the European Community’s dumping ground for refugees. Somewhere, in the backroom of a finance ministry office in Europe, an official is noting the irony of bailed-out Greece now having to bear the brunt of the Europe’s refugee crisis.
When the refugees get restless and Greece runs out of cash, things will get ugly. Chances are it won’t be long before this happens.
China to Allow More Foreign Buyers of Government Debt… The Chinese government changed the limits on sales of government bonds to foreign entities.
What it means – Obviously this is simply the Chinese government opening its capital structure so that the Yuan trades more freely around the world, just as the IMF wants, right?
It couldn’t be in response to cash leaving the country as fast as possible, or the fact that the government has already spent $1 trillion of its reserves trying to prop up the yuan, or the likelihood that the government will run a deficit between 3% and 4% this year and needs the money. Nah…
I know people will buy the bonds, but I don’t like the risk/return ratio. The extra basis points of yield aren’t worth giving my money to the Chinese.
Crude Oil Inventory Rose 3.5m Barrels to 507.6 million, Another Record… Gasoline and distillates dropped a bit. The price of oil rebounded on the news.
What it means – The price of oil swings wildly every day. Before this report came out, oil was down 3%. After the report, it was up 1%. The International Energy Agency estimates the world will keep adding to inventory through this year and next. It’s hard to see where we’re going to put it all.
The equity markets are moving with the price of oil, which seems odd. Fluctuations around $30 to $35 per barrel don’t make much difference to American shale producers.
As long as oil remains below about $50 per barrel, many of these companies are headed to bankruptcy, which will cause loan losses at banks, which are already suffering
because of very low interest rates. JPMorgan Chase Announces $500 million Loan Loss Reserve for Oil & Gas Exposure, and $100 million.
Loan Loss Reserve for Metals and Mining… These announcements are on top of the $1 billion already reserved for loans in the two sectors.
What it means – Well, if JPMorgan has a problem with energy and precious metal loans, who else is hiding issues? That question has everyone nervous. If U.S. banks take more loan loss provisions, then earnings fall. If the loans actually go bad, then capital ratios take a hit. This calls for more capital. Who wants to put more cash into these institutions? And banks in the U.S. are the “good” ones.
What sort of ugliness lurks on the balance sheets of European banks, which now have to deal with negative interest rates on their deposits at the European Central Bank and negative interest rates on government loans that qualify as Tier 1 capital. It’s not a good time to be a bank!
U.S. Treasury’s Rescue Plan for Puerto Rico Puts Pensions Ahead of Bonds… Completely contrary to existing contracts and law, the U.S. Treasury proposes leapfrogging pensions ahead of all other creditors.
What it means – Puerto Rico has $72 billion in debt and more than $40 billion in pension obligations. That is not in dispute. The structure of Puerto Rican liabilities clearly places general obligation debt at the top, before any other payments – operational or otherwise – can be made. That also is not in dispute.
The Treasury Department wants to ignore that, taking pensions from their current third place in the liability hierarchy and moving them to the top. Pay attention to this.
While Treasury officials claim this won’t have any bearing on cities and states in the U.S. because Puerto Rico is a territory, and therefore unique, they are bold-faced liars. There’s not a bureaucrat among them who thinks the city of Chicago or state of Illinois will make good on all of its debt before paying pensioners. For proof of this, refer to Detroit… or San Bernardino… or Stockton… you get the point.
Next Week – The week of February 29 brings reports on manufacturing in China and factory orders in the U.S., but everyone will be waiting for the U.S. Employment Situation at the end of the week.
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