From a severe winter season negatively affecting manufacturing and housing data to a deepening peace crisis in Eastern Europe, there may appear to be plenty for the market to be downbeat about. However there may appear little that can derail this soon-to-be six year bull market which refuses to acquiesce to any correction discussion. Indeed, the S&P recently surpassed what had been previously firm market resistance at 1850 to close multi-day record highs. With an upside breakout all but confirmed and bullish equity-only put-call ratios, what indicators can be analyzed to indicate overbought conditions? Jeanna Smialek of the Bloomberg has more on upbeat U.S. economy;
“Fewer Americans than projected applied last week for unemployment benefits, showing companies are confident economic growth will rebound after winter weather depressed demand. Jobless claims declined by 26,000 to 323,000 in the week ended March 1, the least since the end of November.”
“Falling dismissals set the stage for additional hiring, helping spur household confidence and giving Americans the wherewithal to boost spending.”
“Improvement in household sentiment, linked primarily to stabilization in the pace of firings, and modest growth point to a spring time rebound in overall economic activity once the polar vortex loosens its grip on many areas of the country. While a slowdown in spending, hiring and housing beyond simple weather effects remains a concern, the economy is likely not to slide back into stall speed this year.”
The advancing market breadth and optimistic economic indicators occur concurrently with positive manufacturing data out of China and an ECB decision that signaled easing signs of deflation risks. The ECB is further holding rates steady as the Euro gains strength towards $1.39 while the Ukraine crisis only registered as a blimp on the economic radar. Fleeing strength can be identified in the form of degrading emerging markets (EMs). But is the recent outflow from EMs to be trusted? Is this a sign that investors are beginning to overreact or underreact in price flows? Chart indicators headed upward and to the right are always determinative but often only in retrospect. The key in profitability for the largest gains may potentially be the identification of the chart when it is down, to the right, and about to make the turn. So the instructive question that investors always ask themselves is where is that next turn?
China Shows to Move Ahead, You Must First Head Down
February 27, 2014
“A recovery lead by consumption and not by exports” is one of the many mantras being championed by China in a critical year for economic reform. The world’s second largest economy is battling a slowdown in economic momentum as policy makers prepare to expand the trading range for the national currency and liberalize interest rates. In doing so, China’s central bank has allowed the yuan to tumble, in stark contrast to its previous policy that kept pushing the yuan higher against the dollar. Lingling Wei of The Wall Street Journal has more on China’s engineered currency decline;
“The People’s Bank of China has been guiding the yuan lower against the dollar by setting a weaker benchmark against which the yuan can trade. It has also intervened in the currency market by directing state-owned Chinese banks to buy dollars.
“By guiding the yuan weaker, the PBOC intends to thwart short-term speculators betting on a continued rise and to introduce greater two-way volatility into its trading. The PBOC is testing the market as it prepares to widen the yuan’s trading band.
“The yuan isn’t freely convertible; the central bank sets the value, permitting the yuan to fluctuate within a controlled range against the dollar. Currently, the PBOC allows investors to push the yuan’s value 1% in either direction from that set rate in daily trading. Many analysts and economists expect the central bank to expand that range this year by allowing the currency to move up or down by 2% daily.”
The systematic increase in volatility makes the yuan effectively behave like a market-driven currency as opposed to its traditional tight-reined manner. This coalesces with the economic restructuring plan first announced at the conclusion of China’s Third Plenum to transition the nation to a consumer driven economy. The introduction of greater two-way risk into the market may assist in this transition while discouraging ‘cross-trade’ inflows that support one-way currency appreciation. While the PBOC may ultimately retain control over the yuan’s regulatory rate, this marks another step forward in transforming its currency into a standard global operating model with the potential to increase its international significance. However all change comes with a caveat as a weakening yuan renews concerns over the nation’s slowing economic momentum. The PBOC must ensure deference is given to maintaining the structural integrity of the yuan, or rapid speculation may produce a counter-intuitive effect slowing down credit flows and increasing domestic pressures.
Housing Sector Begins to Cool as Deep Winter Freeze Sets in
February 20, 2014
A gauge of confidence within the housing sector slumped in January to match the tone set by recent national weather patterns. Housing starts across the U.S. saw their biggest decrease since February 2011, falling dramatically lower than most expectations. Construction in the Midwest led the decline to record lows, as a series of disappointing data readings have sector pundits wary of a building mortgage rates storm. The National Association of Home Builders index also dropped below its key level of 50, to a nine-month low of 46. This traditionally indicates that homebuilders are pessimistic about sales trends due to potential labor and land-supply issues. Michelle Jamrisko of Bloomberg has more on the housing forecast;
“Last month was the coldest January since 1994 in the contiguous U.S. Work on single-family houses dropped 15.9% to a 573,000 rate, the fewest since August 2012, from 681,000 the prior month. Construction of multifamily projects such as condominiums and apartment buildings declined 16.3% to an annual rate of 307,000, a three-month low. Three of four regions showed declines in groundbreaking last month, led by a record 67.7% plunge in the Midwest to a 50,000 annualized pace, the fewest in data going back to 1959. Starts dropped 12.5% in the South.
“Normally when permits hold up in the face of a steep drop in starts, the starts have merely been delayed owing to weather conditions, and they will occur when conditions allow.”
“We won’t know until probably April at the earliest whether there is some change in the fundamentals of the market because of the weather impact. The outlook for the rest of the year will hinge on whether hiring picks up enough to overcome declining affordability as mortgage rates and property values climb”.
This also comes on the heels of weak sales figures for existing home and retail sales. The disassociation between actual market concerns and simple weather woes has contributed to a two-week rally in U.S. stock markets that has further pushed a six-year bull market. The modus operandi of the marketplace is ‘wait and see’ to determine if the data thaws when the snow does. The question of national sector weakness versus national weather trouble chills in comparison to growing borrowing costs for homebuyers. The 30-year fixed mortgage rate is up 3.35% since early May last year and presents a dramatically different environment than in recent years. Homebuyers are quickly realizing that the treasure trove of bargains once available to them, may be quickly transforming into a perfect storm of decreasing availability, heightened values, and financial hurtles.
Will housing help carry economic growth in 2014 or will it be unable to weather the coming storm? Tell us what you think. Email us at iInvest@chesapeakeinvestment.com
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