Morning Report – Tough times for East Coast builder Hovnanian 6/10/15

Stocks are flattish after Greece submitted a plan to creditors which was rejected. Bonds and MBS are down

Mortgage Applications rose 8.4% last week in spite of a massive sell-off in bonds, which took the 30 year fixed rate mortgage from 4.02% to 4.17%. Purchases were up 9.7% while refis increased 7%. Note that this bump is following the shortened Memorial Day week, so that accounts for some of the increase. The purchase index is approaching 2 year highs, although we are a long way from normalcy.

How much have the banks been fined / spent on legal for the financial crisis? About $300 billion. And the governments aren’t done yet. They still are scratching their collective heads wondering why credit is so tight, though.

For all the talk about how tough the Millennials have it, Generation X has it even worse. The financial crisis hit them during their peak earnings years. Want to know why consumer spending is down so much? The elderly boomers already bought their last TVs, while Gen-Xers are struggling with the 50% hit to their net worth they took in the bust. Millennials are just trying to find a job. I do think that the next big political schism will fall along generational lines, with the baby boomers trying to extract more resources from their broke offspring who want to means test the benefits their parents get.

Hovnanian, the New Jersey based homebuilder, fell 13% yesterday after they disappointed the Street with earnings. Margins fell as they company had to offer more incentives to move their inventory. Gross margins fell from 20% to 16%. The company characterized the housing market as “a  bit tentative.” Hovnanian operates in New Jersey, North Carolina, Pennsylvania, Virginia, Maryland, California, Texas, Tennessee, Alabama, and Mississippi. Not surprising since the Northeast / Mid Atlantic / Deep South housing markets have been lagging the red-hot West Coast markets.

More gloomy prognostications from JP Morgan: The US is entering a period of slower growth due to low productivity (which fell 3.1% last quarter). They anticipate job creation to average around 75,000 a month, unless some new productivity-enhancing technological development comes around. The last time we went through that was the 1970s, productivity stagnated and the oil shocks along with automatic wage increases in union contracts ignited a wage-price spiral. FWIW, I am not sure I buy that argument – cheap energy is not going away, and solar keeps getting cheaper and better.

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