Archive for January, 2011

November New Home Sales

Thursday, January 20th, 2011

The U.S. Census Bureau revealed its figures on new home sales for November, and there were some improvements and a flash back to the sixties in the report.  The improvements came from the number of homes sold and prices firming up after the sudden decrease in October.  The flashback came from the number of new homes for sale which is now at a level not seen since March 1968.

The stock of homes has managed to consistently be above 197,000 houses until November 2010 for over forty-two years.  This low figure combined with the annualized rate of sale at 290,000 units put our country’s inventory at 8.2 months.  As we have mentioned before, it is commonly understood that a 6 month supply of homes is healthy.  So even after the number of new homes for sale is now the lowest in over four decades, we still have too many to call the level normal.  The supply level did not keep prices from moving up as they managed to increase 8% after falling 13.9% in October.

While it is not mentioned in the report, home builders have an implicit lack of confidence.  Even with a population that is over 100,000,000 larger than 1968, home builders are reluctant to substantially increase the number of new homes available.  This suggest to us that the home builders feel, as we do at Atlas, the housing market has more healing to do before it is hale and hearty.

December Consumer Sentiment

Wednesday, January 19th, 2011

Coming out of the summer, consumer sentiment has been improving.  It continued its trend into the final month of the year.  This is an indicator we watch since there is some connection between consumer attitudes and the way they spend money.  The final reading of 2010 was 74.5 and is now at the second highest level since the start of 2008.

Providing leadership to the indicator’s growth is the expectations in the labor economy.  The number of those surveyed feeling the unemployment rate would drop in the coming year rose.  Along with the outlook for the jobs market becoming more positive, consumers indicated they are more likely to purchase household durable goods.  These are wares that are expected to last longer than three years and tend to be large ticket items that may require credit to purchase.

The recession we are growing out of was remarkably bad, so one cannot expect all of the news to be good.  Personal finances continued to be a source of grim responses and continued to hold the overall number down.  To put it in perspective, December was the 19th month we have been out of recession; and consumer sentiment had a reading of 92.1 in May 2003 or 19 months after the prior recession.  Today only 25% of consumers expect their finances to improve in the next year, and the majority expects no income increase in the same time frame.  Economist think  this indicator is less prescient coming out of a recession than going into one, so Atlas will continue to pay attention to it, but at this stage in the cycle we will emphasize other leading indicators.

January 2011 Economic Cycles

Tuesday, January 18th, 2011

One of our most favorite indicators here at Atlas comes from the Economic Cycle Research Institute.  These folks are quite secretive as to how they come by their conclusions, but their track record spans some eighty years and their accuracy has been stellar.   They were the first to call a bottom to our economic doldrums back in 2009, the first to warn about a slowdown early in 2010, and one of the few voices saying there would be no double dip as a result of the slowing.

The ECRI is calling for the current recovery we have been discussing in our blogs of late to continue picking up steam.  They feel we will see continued growth well into this new year, describing similarities between now and the recovery that developed after markets hit lows back in 2002-2003.  In their view the gathering economic momentum we will experience may not be shared by other countries, especially some in the Asian-Pacific region where inflationary pressures are beginning to show.  Thankfully, they do not as yet see signs of the same manifesting here in any serious way for the near-term future.

They are not so sanguine about the depth and durability of our current recovery, emphasizing this is more a period of cyclical rather than structural growth.  This is not too surprising given the poor condition in which both our labor and housing markets are to be found.  What they have been saying for some time is that we can expect to experience a series of pronounced highs and lows coming in a more compressed fashion than what we all grew accustomed to during the “great moderation” of the 1990s.  We’ll watch all our indicators, ECRI included, and do our best to steer your investments consistently in a positive direction.

Meet the Standards

Friday, January 14th, 2011

Please allow me to introduce Gil and Pam Standard, a lovely couple in their early thirties living in Normal, Illinois, to you.  They have twins named Jim and Sue.  From time to time they have agreed to allow me to fabricate all manner of data about them.  Gil stands 5’10” while Pam is a more petite 5’6”.  The kids were born early on a New Year’s Day, both an adorable 18 inches long.  Today we want to draw some conclusions about their average height.

Obviously Gil and Pam were both 68” tall on average before the children came.  Immediately after being born the average height of each family member fell to 43”.  “Not fair!” you might say, and here at Atlas we would tend to agree were we not used to such statistical manipulation in all the data we process.  If you insist on clarification we can modify the result by saying they are all 43” high seasonally adjusted.  Anyway, the kids grew about 6” each every year until they turned eight.  That means the family’s average height increased almost 7% in the first twelve months, but slowed every year thereafter.  In fact by the end of the seventh year, they were growing at less than 5% per annum.  What should we do?  More importantly, what would Congress do?

Most folks would probably not become too distressed about what appears to be normal in Normal.  The parents aren’t expected to grow and the children seem to be coming along just fine thank you.  We would certainly kick up a fuss if Washington mandated human growth hormone injections to keep the growth rate itself growing.  Perhaps the stimulus package could even be referred to as quantitative easing, but our government wouldn’t really be that dumb would they?  More on this later.

November Existing Home Sales

Thursday, January 13th, 2011

According to the National Association of Realtors, existing home sales improved in November over October.  The housing market is one of the three parts of this economy in which Atlas would like to see material improvements.  Unfortunately the last statement must be modified by the word material.  The most recent numbers for existing home sales, while having improved month-over-month, have not yet grown enough to demonstrate in our view a material change which can benefit the housing sector longer term.

November’s 5.6% advance is a move in the right direction, but it is only one move.  This progress must first be viewed in light of October’s decrease in month-over-month transactions. Significantly, the year-over-year figure for November is far from fit with a 27.9% contraction.  It is worth noting November of 2009 was the most recent peak in existing home sales as it was stimulated by the initial deadline of the first-time buyer tax credit.  The subsequent decline from that peak will provide for easier comparisons in upcoming months as future reports are evaluated against easier figures.

It will take more than an undemanding comparison to qualify as a vigorous real estate market in our view.  Inventories are one way to discern its health.  They did improve for the month but are still too high at 9.5 months.  A six month inventory is considered normal.  Interest rates are still near recent lows and will continue to help the affordability of homes, but rates alone are not enough to modify this market.  It will take real and sustained economic progress to drive demand enough that we see things materially improve.

Golden Dragon

Wednesday, January 12th, 2011

Back in March of 2010, China’s chief foreign-exchange regulator said, “Gold is not a bad asset, but currently a few factors limit our ability to increase foreign-exchange investment in gold.”  He emphasized that a 30-year history of the yellow metal’s performance suggested it was an underperformer relative to more popular investments like U.S. stocks and bonds.  Given the rarity of such official discussions concerning their reserves, here at Atlas we felt this was likely a ruse, an attempt to keep demand by others from forcing the price up while the Chinese were accumulating the metal.  Especially given how well it had performed over most other time frames.

Consider this century.  While you can’t actually buy a share of an index like the Dow Jones Industrial Average, it remains one popular way to measure how stocks have done in general over that period.  The DJIA started the year 2000 at approximately 10,400; it ended the decade around 11,575.  Measured in Federal Reserve notes we see a gain of about 11%, roughly 1% a year.  Big deal.  The spot price for gold started around $290 per ounce over that same period and climbed to roughly $1422.  We knew it had done well recently, the headlines have told us so, but how about on a relative basis?  Consider this:  in January of 2000 the DJIA was equivalent to more than 35 ounces of gold; now it’s equal to just over eight.

Getting back to the Chinese: they recently announced their gold imports through October of 2010 had jumped almost 500% over the entire prior year.  So much for seeing it as a lousy investment.  China also happens to now be the world’s biggest producer of the yellow metal.  And at a time when Americans seem to be selling their gold jewelry at every pawn shop in town, the majority of Chinese imports are being bought by its own citizens.  Ditto for India, which also exceeded their 2009 level of gold imports in 2010.  Could we be seeing precious metals in general take their place as one of the world’s most reliable currencies?  We’ll see, and invest accordingly.

The Dow Jones Industrial Average (DJIA) is a price weighted index based on the average price of 50 of blue chip stocks that are generally industry leaders.  Past performance is no guarantee of future results.  Average annual returns assume the reinvestment of all distributions and/or dividends.  Indices are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent.  Such costs would lower performance.  It is not possible to invest directly in an index.

Gold is historically volatile and carries specific risks including illiquidity and the actual physical spot price of gold and the return on your respective investments may differ.

Final Third Quarter GDP

Tuesday, January 11th, 2011

The Department of Commerce made its final revisions to third quarter Gross Domestic Product (GDP), increasing the estimate for a second time.  This revision pushed the quarter’s annualized rate to 2.6% from the second estimate of 2.5%.  The third quarter’s growth rate is faster than the prior quarter’s rate of 1.7%, and with any luck that will be slower than the economy’s rate of improvement in the final quarter of 2010.

The slight adjustments producing the final total came to just over $1 billion.  They stemmed primarily from positive changes in inventories, net exports, and residential investment.  These outweighed the negative adjustments provided by personal consumption, nonresidential fixed investment, and government purchases.

The revision to GDP was subtle and not enough to finalize an opinion about the movement of the economy.  Fortunately for the Atlas crew, we follow more than this indicator, and many of the others are pointing to a foreseeable future (which happens to only be 3-6 months out) that allows the existing expansion to continue.  The hope is that the velocity of the expansion will be fast enough for our country to grow out of some of its deeply rooted issues.  This remains to be seen.