Market volatility is often the result of uncertainty. It isn’t surprising the Brexit vote caught so many people off-guard. But it may be part of the season. Adam O’Dell has written a great deal about the “tendency to ramp up and spike during June, July, and August.
Wanting stability, the markets preferred Remain. A poll favoring Brexit last week moved equities sharply lower, but the final opinion poll favored “Bremain” (remaining in the EU) and the markets made a U-turn. I like to say it can be the bust you don’t see when crossing the street that can disrupt your day. This one is a bus we saw coming.
As a reminder, it’s not enough today to simply be “bearish” or “bullish” as that’s probably more of a fool’s game. Instead, investment gains may come from being bullish on investments that are poised to outperform the broad market and bearish on investments that may underperform the market.
Thanks to Dent Research, provided here is our weekly information roundup ending the week on June 24, 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
Britain Votes To Leave The European Union (EU)… By a count of 52% to 48%, the Brits chose to end their 43-year membership
in the union.
What it means – It means that most analysts were wildly wrong about which way the Brits would go. It means the UK gets a new prime minister, since David Cameron resigned in the wake of the vote. And it means the Brits will eventually get their country back.
Membership in the EU started out so simple. There were trade agreements and common-sense rules on travel. Then the bureaucrats started adding layers of new regulations and conditions. Economic and workplace control slowly gravitated to Brussels, and human rights issues weren’t far behind. By ending the membership now, Britons are re-establishing their identity.
Many analysts predicted economic doom. While the markets sold off hard after the news of the vote, I don’t think it will last. Untangling the ties that bind will take years, and no one involved wants (or can afford) less trade and economic cooperation. There are many reasons that equity markets should roll over. This isn’t one of them.
But there are losers, like the remaining 27 countries in the EU. When will other strong members choose to jump ship? What about Eurozone countries? If they leave the EU and the common currency, then things will really unravel fast.
The one certainty out of all of this is increased volatility, so buckle up and keep your arms and legs inside the vehicle.
May Existing Home Sales Rise 1.8% Over April, Up 4.5% For The Year… The National Association of Realtors (NAR) reports that last month's annualized sales rate notched 5.53 million, the highest mark since February 2007.
What it means – Housing remains one of the few bright spots of our sluggish economy. These strong numbers might lead analysts to forget about last month's dismal job numbers and spin the idea that the economy is humming right along. But these numbers deserve some context.
While the current rate is good, in 2005 existing home sales regularly topped 7 million sales per month. We're a long way from there. The bigger story is affordability. The median sales price in May rose 3.8% to $239,700, the highest amount on record, according to the NAR. While that's good news for sellers, high prices discourage first-time homebuyers. In May, the share of first-time buyers of existing homes fell 2% to just 30%.
Tight supply has pushed prices higher. Analysts consider six months of inventory a healthy balance of supply and demand. Although supply has climbed steadily since last December, there's just 4.7 months of inventory sitting on the market.
Even with more inventory hitting the market, we don't think this level of sales or high prices will last.
May New Home Sales Dip 6% From April, Missing Expectations… The U.S. Census Bureau reports that 551,000 new homes sold in May and revised April's impressive 619,000 sales down to 586,000.
What it means – The excitement over last month’s gain was overdone. The new housing market is still improving, but it isn't on fire.
New home inventories rose in May to 5.3 months, up from 4.9 months in April. The median sales price slipped to $290,400, up just 1% for the year. All this despite mortgage interest rates falling nearly 0.5% lower now than they were a year ago.
But just as April painted far too rosy a picture, May's slip shouldn't inspire images of doom. Despite some volatility in this sector, the overall trend has been positive. Combining existing home sales and new home sales, the real estate outlook remains the same – muted, with a positive slant.
EU Proposal Would Tax Robot Labor… The draft proposal classifies robotic workers as "electronic persons," subjecting their owners to social security taxes.
What it means – If robots replace workers, who pays for retirees? Since most government retirement programs are based on current workers and employers paying for current retirees, the money’s got to come from somewhere.
This law would force business owners to pay the amount of taxes saved by replacing human labor with automation.
There's no escaping the taxman. While this particular plan may not have legs, proposals like it will eventually find their way into law in most advanced economies.
Let's just hope the day when the robots decide they aren't terribly interested in supporting old people never comes.
Saudi Arabia's Energy Minister Says The Global Oil Glut Is Over… Comments by Khalid Al-Falih suggested that the "war" on U.S. oil producers might be over.
What it means – For Saudi Arabia, at least for now, oil is everything. They fear a loss of market share more than a dip in prices. So when crude oil tanked in 2014, the Saudis kept production high and even gave discounts to some buyers, effectively declaring "war" on the competition, namely U.S. oil producers. Nearly two years later, they can declare victory.
U.S. producers took it on the chin. Active oil rigs fell from a peak of 1,609 in late 2014 to just 316 last month. Shuttering rigs is game over for many drillers. Over the last year and a half, 81 U.S. companies declared bankruptcy, costing thousands of jobs. But in this great shakeout, the survivors innovated. They can turn a profit even in this low-price environment. And should the market demand it, producers can bring their rigs back online, although it will take a while to get enough workers back in the oil field to ramp up production.
The global oil glut might be over, but given the Saudi acceptance of lower prices, the adjustment by U.S. producers, and the general lack of global demand, I don't expect any massive moves upward for crude oil.
Chinese Students Give Nude Selfies As Collateral To Online Loan Sharks… In the Wild Wild East of unregulated online lending in China, borrowers are losing their shirts.
What it means – Unlike in the U.S. where students only need to sign a simple promissory note to receive tens of thousands of dollars in loans, Chinese students face tighter regulations and limited funds.
To fill this market demand, online lenders have stepped in, requiring a bit more personal form of an IOU. Lenders and potential borrowers meet via smartphone chat applications to hash out terms. Loan amounts can range from a handful of yuan to tens of thousands, and can carry interest rates as high as 30%.
To ensure payment, lenders require the borrower send a nude selfie along with pictures of their ID, address, phone number and family information. If borrowers don't pay, lenders will release the photos to friends and family.
Next Week – The week of June 27 is light on economic reports. We'll see the release of the S&P/Case-Shiller Home Price Index, and the Purchasing Managers’ Index (PMI) for services and manufacturing. The U.S. Employment Situation report gets bumped off its usual first-Friday-of-the-month schedule to July 8 due to Independence Day.
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