Fed Talk is Cheap

By The Greek:

Stocks were higher Wednesday despite a sharp downward revision to Q1 GDP and another report of decreased mortgage activity on spiking interest rates. The catalyst for stocks was some soft comments from Minneapolis Federal Reserve Bank President Kocherlakota and others. Well, talk is cheap; the action of the Federal Reserve to pull away its asset purchase programs prematurely speaks louder than words. As a result, I do not expect this latest support to hold unless it is followed by a change in policy.

Security	June 26 Change
SPDR S&P 500 (NYSE: SPY)	+1.0%
SPDR Dow Jones (NYSE: DIA)	+1.0%
PowerShares QQQ (Nasdaq: QQQ)	+0.9%
Bank of America (NYSE: BAC)	+0.7%
iShares Dow Jones US Real Estate (NYSE: IYR)	+1.5%

How desperate must traders be to be bidding up stocks on some contradictory comments from a regional Federal Reserve Bank representative when the truth about the economy shows it’s not as secure as the FOMC believes it to be?

The Truth

First quarter GDP was revised significantly lower this morning in its third revision, which usually does not bring with it major change. I’ll leave it to the reader to run the regression analysis to prove this, and trust in my own observations over the last lifetime on this one. GDP is revised several times, and so by the third revision not much change is typical. Yet, Q1 GDP was cut to 1.8% growth from its recent reporting at 2.4% (that is a big difference for the mathematically challenged). The revised growth rate is consistent with the expectations of the World Bank and Conference Board for the U.S. economy this year, but less perfectly matched with the latest Fed view for 2.3% to 2.6% growth. Furthermore, judging by the trend over the last three Fed prints on this, the Fed’s economic forecast will be cut to 2.0% to 2.6% at next printing, in my view. Eventually, it might even make sense.

In its economic report the government stated: ”The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, real GDP increased 2.4 percent. With the third estimate for the first quarter, the increase in personal consumption expenditures (PCE) was less than previously estimated, and exports and imports are now estimated to have declined.”

Add to that sour news the fact that mortgage rates spiked even higher last week, as reported by the Mortgage Bankers Association (MBA) today. For the week ending June 21, the MBA indicated that its Market Composite Index for mortgage activity fell by 3.0% to its lowest level since November 2011. Mortgage rates spiked last week after the Federal Reserve’s press conference announcing the tapering plan for the asset purchase programs. Here’s what happened to rates in the latest week:

Mortgage Loan	Rate	Change
30-Yr. Fixed Conventional	4.46%	+29 Basis Points
30-Yr. Fixed Jumbo	4.52%	+29 BPS
30-Yr. Fixed FHA Sponsored	4.20%	+35 BPS
15-Year Mortgage	3.55%	+25 BPS
5/1 ARMS	3.06%	+25 BPS

Perhaps not so surprisingly, Purchase Activity actually increased in the latest reported period, as some buyers on the fence rushed to lock in as low a rate as they could. Some believe rising rates will increase mortgage activity, and while I agree this could be a short-term phenomenon, it will not be a long-lasting sustainable economic positive or a catalyst for growth in the housing market.

So why then are stocks rising counter to intuition?

Fed Speak

Minneapolis Federal Reserve Bank President Narayana Kocherlakota wanted to clarify what he thought was a misinterpretation of the market since the FOMC Monetary Policy release and press conference. So on June 24, he published this clarifying statement and held a conference call to discuss the issue. He also appeared on CNBC this morning to discuss the issue, where I believe he caught the market’s attention.

President Kocherlakota’s statements were meaningful, mostly because they seem to give the Fed an out of this horrible trajectory it has decided on. The fact that this event occurred showed that there is some pressure on the Fed today about how markets have digested the message. Therefore, it may eventually react to stop the trend in mortgage and interest rates, hopefully in time to stop serious economic damage. But until it does, none of this matters.

The market believes the Fed is acting prematurely and taking away a critical support from the real estate recovery and from the still vulnerable economy. Interest rates will continue to rise as a result and the Fed thus destroys its own economic work. Talk is cheap, and actions speak louder than words. So the Fed should accept that the efficient market has spoken and that it was a mistake to taper asset purchase programs over the near-term, period.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Consumer Confidence Will Dive When 401K Statements Arrive

By The Greek:

The Conference Board reported that consumer confidence soared in June to a five-year high, but be careful, as this is only sustainable until passive investors receive their 401K statements next month. The consumer mood is greatly shaped by the personal wealth perspective.

The Conference Board reported the Consumer Confidence Index jumped to 81.4 in June, up from 74.3 in May. Some of the gain was due to improvement in the Present Situation Index, which rose to 69.2, from 64.8. However, a good portion of the improvement came on a gain in the Expectations Index, which improved greatly to 89.5, from 80.6.

I’m always wary of gains driven by expectations, as they are built on hope more than substance, and so can disappear as quickly as they come. In this case, that’s exactly what I expect to happen in a few weeks when passive investors across corporate America receive their 401K statements. The statements will show a disruption in the returns they had grown used to recently. Such disruption is especially important because Americans feel confident when they feel wealthy, as evidenced by the “wealth effect,” which is most often related to real estate values.

Market Security	June-to-Date	Year-to-Date
SPDR S&P 500 (NYSE: SPY)	-3.4%	+11.4%
SPDR Dow Jones (NYSE: DIA)	-3.0%	+13.3%
PowerShares QQQ (Nasdaq: QQQ)	-4.5%	+7.7%

As you can see, stocks have not done well in June versus the returns investors had gotten used to this year and last. Yet, consumer relative shares are higher today on the consumer confidence news, with the two top retailers online and on the street, Amazon.com (Nasdaq: AMZN) and Wal-Mart (NYSE: WMT), up 0.1% and 0.5%, respectively today. Each of the two stocks has had a good run through the economic recovery of the last couple years. Furthermore, both Amazon.com (AMZN) and Wal-Mart (WMT) have benefited from offering lower cost goods into a still laboring economy.

Chart at Yahoo Finance

A second bit of retail data reached the wire today as well. The International Council of Shopping Centers (ICSC) reported its Weekly Chain Store Sales data. For the period ending June 22, same-store sales rose 1.1%, versus the prior week increase of 0.3%. On a year-to-year basis, sales were up just 1.6%, versus the prior week’s yearly gain of 2.5%. While inflation is low now, these growth rates are only just barely meeting rising prices, and that is not a sign of health, though possibly a good sign for Wal-Mart and Amazon.com, which cater to value shoppers.

For economists and market enthusiasts, the takeaway from the Consumer Confidence Index should be that this might not last given the new paradigm the Fed has laid out for stocks. In my weekly report at my blog, I warned investors to beware of dated data this week, which would provide false comfort to markets. This data point is not one of those as it is measuring a current period, but it is at risk of change near-term due to the likely change in consumer mood that should come with altering perspectives of personal wealth as 401K reports are received. So, in conclusion, I advise those made confident by today’s report to temper their enthusiasm.

Retail Relative Securities	June 25 Change 3:20 PM ET
SPDR S&P Retail (NYSE: XRT)	+1.8%
Consumer Discretionary SPDR (NYSE: XLY)	+0.9%
Macy’s (NYSE: M)	+1.1%
J.C. Penney (NYSE: JCP)	+4.0%
Nordstrom (NYSE: JWN)	+2.2%
Kohl’s (NYSE: KSS)	+1.8%
Sears (Nasdaq: SHLD)	+0.1%

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Builder Confidence Soars – Don’t Believe the Hype

The National Association of Home Builders (NAHB) today reported its Housing Market Index (HMI) for the month of June, and it marked an important shift. For the first time since falling under the break-even mark of 50.0 at the start of the real estate collapse, the HMI rose back above it today. However, a closer look at the data shows it remains suspect and unreliable as a forecasting tool.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Builder Confidence

The HMI surged 8 points, rising to a mark of 52 for June. The last time it rose that much was in 2002, so this is strange to begin with. It’s the first time the index sat above breakeven since April 2006. Each of the three components of the index increased, though take note of the much lower level of the index measuring actual prospective buyer traffic. I view both the other two metrics as being speculative in nature or prospective, but the “prospective buyer traffic” figure actually accounts for what builders are really seeing in terms of activity. The current sales conditions index is measuring sentiment about “conditions,” not sales.

	June Level	June Change
Housing Market Index	52	+8
Current Sales Conditions	56	+8
Expectations Index	61	+9
Prospective Buyer Traffic	40	+7

Regionally speaking, the component indexes seem to say builders are buyers into the “grass is greener” philosophy. Because, when measuring their own operating regions, it seems they’re not seeing the best of circumstances. Otherwise, explain why each regional index sits under 50 while the national measure is above it.

	June Level	June Change
Northeast	37	+1
Midwest	47	+3
South	46	+4
West	48	-1

Builder confidence gained on what the NAHB chairman said was a lack of inventory in the existing home market. That’s a positive way to look at it from a biased industry viewpoint, but I see something else catalyzing the sudden surge. Builders are just coming out of the spring selling season, where business is generally better than the rest of the year. Also, they’ve likely seen some buyers pushed into action on the sudden surge in mortgage rates recently. However, I disagree, as I do not see that happening based on the real mortgage activity data; in fact I see the opposite occurring. Last week’s increase in mortgage activity was a flawed data point in my opinion. Anyway, activity driven by rising rates would be from the buyers on the fence, of which the number is limited. So such a surge would not be sustainable, and would not be driven by underlying economic catalyst, but instead by fear of missing the opportunity.

Housing stocks surged today on the news, but I do not see a good enough reason for it here.

Housing Security	6/17/13 thru Noon	52-Weeks
SPDR S&P Homebuilders (NYSE: XHB)	+1.9%	+55%
iShares Dow US Real Estate (NYSE: IYR)	+0.1%	+9%
PulteGroup (NYSE: PHM)	+3.6%	+140%
K.B. Home (NYSE: KBH)	+3.2%	+180%
D.R. Horton (NYSE: DHI)	+2.6%	+54%
Toll Brothers (NYSE: TOL)	+3.8%	+35%
Hovnanian (NYSE: HOV)	+2.6%	+158%
Beazer Homes (NYSE: BZH)	+2.7%	+53%
Lennar (NYSE: LEN)	+1.7%	+53%

Let’s not forget that the index is only at about breakeven, and that the perspectives of a large number of smaller builders surveyed is keeping it down. It’s the larger builders, who have gained market share on the failures of the smaller players, who have benefited most from the crisis shakeout. That is behind their numbers as much as anything else, because the general levels of activity, while improving, is not all that great yet. In any event, these stocks have had a great run, but they are probably extended and still vulnerable here.

The economy is slipping currently, in my view, and mortgage rates are moving in the wrong direction too quickly. This week, the Fed had better fix the mess it created in mid-May, or mortgage rates will continue rising and potentially derail the real estate recovery.

In conclusion, there is enough suspect data in the HMI to question the message that is being received by housing stocks today. With the Fed meeting being the obvious determining factor this week, I’m not buying housing stocks on this news, and recommend investors wait a few days before placing bets. We need the Fed to cut its economic forecast and hedge on its recent hawkish commentary, so mortgage rates will back up and the real estate recovery will be secured.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Phoenix Real Estate Investors: Time to Take Profits

Let’s step back 4 years to a time when the “Great Recession” was in full force and Phoenix, Arizona had fallen from the #1 builder market in the United States to one of the worst MSA’s (Metropolitan Statistical Area) in the nation. The Metro Phoenix Builder Community had completed over 60,000 new homes in 2006, a record year. Builders in October 2008 had thousands of finished homes completed and ready for delivery when “The Lehman Moment” changed everything.

Phoenix Real Estate

Builders, including major companies like PulteGroup (NYSE: PHM), D.R. Horton (NYSE: DHI) and K.B. Home (NYSE: KBH), had a cascade of buyers refusing to close and their finished homes became “Specs Available,” or expensive inventory on short-term construction notes that would eventually no longer belong to the builder, but become Real Estate Owned (REO) of many local and national lenders like Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) and J.P. Morgan Chase (NYSE: JPM). The Arizona Regional Multiple Listing Service (ARMLS) listed a low of less than 6000 available properties in 2005 to a ballooning inventory of over 59,700 properties for sale and 9800 properties for lease in late 2008. The housing industry in Phoenix was in a depression with a glut of new and existing homes.

To exasperate the problem, over 300,000 individuals working in or connected to housing and new construction left the Valley of the Sun in search of other employment. In Phoenix almost everyone was connected to housing, which included the obvious roofers and framers, but also title and escrow officers, loan officers and loan underwriters, thousands of real estate agents and brokerage houses, surveyors, and the not so obvious furniture , electronic, decorating centers, and even movers. Tens of thousands lost their jobs and most had their income severally curtailed. The loss of business was felt everywhere in Metro Phoenix. Incomes and available capital were declining while underwriting standards for new loans was rising and excluding buyer after buyer. Phoenix had crashed and was burning.

As with any commodity, the law of supply and demand dictated terms in the market place, and the over-inflated prices tumbled past fair value to in some instances 50-60% below replacement costs. As costs declined, the over-valued status of Phoenix changed to an under-valued market, and then to an extremely undervalued market. Many local business people and employees alike were experiencing the loss of income, and many local homeowners were burning through their savings and capital to pay monthly expenses. Eventually, many depleted entire nest eggs while their real estate wealth evaporated as prices declined well below mortgage values, condemning them to future foreclosure or short sale. Incomes, down payments, and then credit issues excluded many potential buyers and shrunk the buying population, further reducing demand. The cleansing process is brutal, but necessary in the business cycle, and the excesses needed to be removed in order for the eventual recovery. Prices plummeted to ridiculous levels because there were very few buyers. Enter the original courageous and foresighted investors.

Everyone knew buying real estate was a very bad idea; however, the properties were priced below cost, and if unemotionally approached, were very compelling. Further, rental rates had declined about 15%, but properties had dropped 60-70%. Although rental rates were lower, the acquisition cost was much lower. So were operating expenses including: repairs, insurance costs, taxes, and long-term mortgage rates. Rents for the now distressed and depressed properties purchased at much lower prices were cash yielding investments. The gut wrenching declines, the turmoil of speculators buying high to sell higher, and the builders and developers caught in the final capitulation doomed the average homeowner. The simple indicators of value: Own vs. Rent; the Gross Rent Multiplier; and the Affordability Indexes all shifted wildly from indicating an overbought market to a hugely undervalued one. Cash flows began to yield 9-15%.

Much of the buying public had already purchased in the frantic years of 2004 to 2007 and was trapped in underwater homes. There was a void in the buying pool. Prices and returns were exceptionally compelling as a result. My recommendation for several years has been unabashedly bullish. Investors in Phoenix have helped clear the inventory and pave the way for a fresh set of homebuyers to replace the rental homes with owner occupied. Former homeowners that liquidated their properties via the short sale process are becoming eligible once again to purchase.

As demand began to enter the Phoenix market, prices rose steadily and have recovered a portion of the decline. Many early investors have seen cash purchases double and those that assumed more risk with leverage have realized huge capital gains as well as monthly cash flows in the range of 5% on cash to over 8%+ levered. The investment in Phoenix real estate has been exceptionally profitable. It may be time to take some profits now, and those properties not sold should be evaluated for long-term mortgages.

Real estate is local; however, real estate is economically sensitive. The economy may be heading for difficult times and if the economy enters a recession as Charles Nenner and the Economic Cycle Research Institute (ECRI) predict, and as our site's founder warns is highly possible, a better buying opportunity awaits just a few years away.

A specifically aggressive, but overall cautious approach may be the appropriate theme for the foreseeable future. A good price on a good property is usually profitable, but the low hanging fruit has been picked and much of the recovery is priced in current values. Low long-term rates indicate more potential for future capital gains, but rental rates are stabilizing indicating a normalization of rental growth rates. Some properties are gems and should be kept for the long-term; marginal properties may be considered for liquidation.

In 2006, I reviewed the market dynamics with my clients and advocated selling as I believed the direction of the market was down. Enormous profits had been gained. Most did not heed my advice and in fairness, I was 9 months early to the peak. Now once again enormous profits have been gained; my advice is to take some profits.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Hooked on Economic Happy Pills

Before U.S. markets opened Tuesday, markets across Europe and Asia were already markedly lower. It’s because equity investors hooked on central bank stimulants want more and more to stay high. We received two bits of information Tuesday that reinforce this argument. But as I reviewed the economic data from Japan and Germany, I see the dealers still serving us. It’s just that we seem to want and need more and more, as we are hooked on happy pills.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The Bank of Japan (BOJ) issued its latest monetary policy Tuesday, and it was full of colorful pills for our addicted markets to swallow. The BOJ’s statement shows all sorts of creative economic engineering efforts in an asset purchase program that makes our Federal Reserve’s efforts look simple.

The BOJ is doing more than buying treasuries, and it has gone beyond the buying of mortgage backed securities (MBS) like our Fed. The BOJ is buying treasuries, yes, but it’s also buying ETFs and Japanese REITs. Imagine if our Fed were buying the shares of mortgage REITs like Annaly Capital (NYSE: NLY) and American Capital Agency (Nasdaq: AGNC). It goes a step beyond the controversial effort our Federal Reserve is applying, and is bringing leverage into central banking. The BOJ is also buying corporate bonds, tying the economy into one big knot that it may not be able to untie quickly enough someday.

Yet, equities across the globe were bothered Tuesday, because of concern about not enough being done. Investors wanted to see the BOJ buying longer dated securities. In other words, junkie investors want a higher high, because they think this one is not enough. I would have to disagree. These are extraordinary measures that show desperation and introduce risk to at least the Japanese, and probably the rest of us if they are accepted into the toolbox of central banks globally. It’s like our Fed efforts in MBS were a stepping stone drug into the much more dangerous cocaine and methamphetamines being used in Japan. What will come next, the economic equivalent of dangerous new “bathing salts”? I am unsettled inside about it all. We are getting hooked on economic happy pills, and it is unnatural and dangerous.

Meanwhile, the global junkie is worried today that German logic could kill the party. The German Constitutional Court is reviewing whether recent European Central Bank and other euro area crisis management measures are legal in Germany. One of those measures is ECB bond purchases, which was critical in turning the tide for stocks in Europe. So, investors see this German debate as a threat to their supply. Druggies do not fret, though, because the Germans cannot afford to cut you off.

Look at how this economic mayhem has affected markets today:

Market Security	Through 10:00 AM ET
SPDR Dow Jones (NYSE: DIA)	-1.0%
SPDR S&P 500 (NYSE: SPY)	-1.0%
PowerShares QQQ (Nasdaq: QQQ)	-1.1%
iShares S&P Europe (NYSE: IEV)	-1.2%
iShares S&P Asia 50 (NYSE: AIA)	-1.5%

Friends, we are hooked on economic happy pills. Instead of seeking higher highs, we need to find natural ways to make us happy, through fiscal policies that reinforce economies. Improved trade & tax laws and the better containment of runaway funds are a start. We may yet get there, but we are currently caught in the middle of an economic drug war, and we have to get some help to cure this addiction.

Like this report? See more at www.WallStreetGreek.com.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Higher Rates Exposing Underlying Housing Weakness

By The Greek:

For three straight weeks now, mortgage activity has been on the downslide and we cannot ignore it any longer. It illustrates how sensitive the housing market is to low interest rates and how vulnerable the housing recovery still is to disruption.

The Mortgage Bankers Association (MBA) reported its Weekly Applications Survey for the period ending May 24, 2013 on Wednesday. The MBA’s Market Composite Index collapsed by another 8.8% on a seasonally adjusted basis in the latest period, after dropping by 9.8% last week and 7.3% the week before that. Activity declined in mortgage refinancing activity and in mortgage activity tied to the purchases of homes over the three week period, though purchase activity improved in the latest week.

Week of	Market Composite	Repurchase Index	Purchase Index
May 24	-8.8%	-12%	+3.0%
May 17	-9.8%	-12%	-3.0%
May 10	-7.3%	-8.0%	-4.0%

Yet, you hardly hear whimper of it from the popular press and major media. News of this developing situation has not really reached the masses yet. Recent tests of the shares of mortgage bankers and homebuilders instead reflect the latest market uproar about potential Federal Reserve tapering of its dovish monetary policies. Well, that potential tapering would lead to higher mortgage rates, and that is precisely what is stalling activity here. So investors in real estate, and in the shares of the real estate complex, including of course mortgage bankers and homebuilders should be concerned. This is the issue impacting shares of the housing complex on Wednesday. Banks have strangely avoided the day’s demise, but as investors connect the dots, I expect we will also see concern reflected in finance, as it was on the relatively similar Fed flurry.

Company	Wednesday
Bank of America (NYSE: BAC)	+1.0%
Citigroup (NYSE: C)	+0.9%
Wells Fargo (NYSE: WFC)	+0.6%
PulteGroup (NYSE: PHM)	-3.3%
K.B. Home (NYSE: KBH)	-2.9%
Hovnanian (NYSE: HOV)	-1.8%
Radian Group (NYSE: RDN)	-1.9%
MGIC Investment (NYSE: MTG)	-4.2%

Just look at how much mortgage rates have increased over the last three weeks.

Mortgage Loan	May 24	May 17	May 10
30-Yr. Fixed Conforming	3.9%	3.78%	3.67%
30-Yr. Fixed Jumbo	4.07%	3.93%	3.87%
30-Yr. Fixed FHA Spons.	3.62%	3.53%	3.43%

If housing is so sensitive to synthetically lowered rates, it must reflect an economic reality that differs from what investors seem to see. It reflects a real unemployment level nearer to 12% than 7.5%, and the reality of 7.5 million unaccounted for jobless Americans. Some will say this issue is temporary, and simply reflects real estate investors holding off in the short-term for better rates. Only time will tell the truth, but put this on your radar nonetheless, and stay tuned, as your author here intends to keep a tap to this data.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.