All Things in Moderation

Stocks are higher this morning as Euro markets rally on M&A activity, and the 200 day moving average held for Chinese stocks. Bonds and MBS are down.

The FOMC starts their two day meeting today.

Big drop in consumer confidence, according to the Conference Board. It fell from 99.8 in June to 90.9 in July: “Consumer confidence declined sharply in July, following a gain in June. Consumers continue to assess current conditions favorably, but their short-term expectations deteriorated this month. A less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China, appears to have shaken consumers’ confidence. Overall, the Index remains at levels associated with an expanding economy and a relatively confident consumer.”

The S&P Case-Shiller index of real estate values was basically flat in May, and is up 5% year over year. David Blitzer has an important comment on the first time homebuyer, which speaks to the education challenge those of us in the real estate business have to do:  “First time homebuyers are the weak spot in the market. First time buyers provide the demand and liquidity that supports trading up by current home owners. Without a boost in first timers, there is less housing market activity, fewer existing homes being put on the market, and more worry about inventory. Research at the Atlanta Federal Reserve Bank argues that one should not blame millennials for the absence of first time buyers. The age distribution of first time buyers has not changed much since 2000; if anything, the median age has dropped slightly. Other research at the New York Fed points to the size of mortgage down payments as a key factor. The difference between a 5% and 20% down payment, particularly for people who currently rent, has a huge impact on buyers’ willingness to buy a home. Mortgage rates are far less important to first time buyers than down payments.” Probably the biggest misconception in the market is the idea you must have 20% down.

Markets are lower after Chinese stocks dropped 8% overnights. Bonds and MBS are up.

Durable goods orders came in at 3.4%, a good reading. Durable goods ex-transportation rose 0.8% versus the 0.5% estimate. Capital goods orders rose 0.9% while shipments fell. The Capital Goods number is used as a proxy for business capital investment – businesses look like they might be investing in capacity in the future, but so far they aren’t.

The biggest event this week will be the FOMC meeting on Tuesday and Wednesday. No one expects the Fed to raise rates at this meeting, since there is no press conference. The drop in commodity prices certainly gives the Fed room to hold off on raising rates. Some economists think the Fed might actually be closer to hitting its 2% inflation target than the consensus seems to be. The key is wage growth. And so far, it is nonexistent.

Speaking of commodity prices, here are the states which have the most exposure to commodity prices. The top nine states on the map got at least 10 percent of their gross state product from energy, mining and agriculture last year: Wyoming, Alaska, North Dakota, West Virginia, Oklahoma, Texas, New Mexico, Louisiana and South Dakota. There is a massive spread between the states, with Wyoming getting 36% of its state domestic product from mining and agriculture, versus places like Connecticut, which gets 0.2% from mining and ag. We will get a read on Texas (almost 15%) tomorrow when homebuilder D.R. Horton reports tomorrow morning.

Overall, don’t sweat the drop in commodity prices on the economy. While it does hurt earnings in the oil patch, most people are users of commodities and benefit from lower prices.

Hillary Clinton is going to push her plan to end “corporate short termism,” by raising capital gains taxes. Not sure how that is going to help, but she has her story and she is sticking to it. She is going to review securities regulations in order to help companies defend against activist investors. Not sure what her corporate governance vision is (I am afraid to ask), but essentially her goal is to compel companies to shift the amount they plow into stock buybacks into “investment,” whether that is capital expenditures or salaries. I hope this is just specious pablum for the Democratic party base – because it demonstrates a gross ignorance of how companies make decisions. Not only that, but government induced “investment” creates gluts which cause bad busts. Always has, always will. We are still digging out from the last glut (residential real estate).

Markets are flattish on no real news. Bonds and MBS are up.

Amazon.com reported good numbers last night and is now the biggest retailer in the US, by market cap, surpassing Wal Mart. Last year, Walmart made $16 billion on $485 billion in revenue. Amazon. com lost $130 million on $89 billion in revenue.

New Home sales unexpectedly fell to 482k in June from a downward-revised 517k in May. Strange number given what we are seeing in housing starts / building permits, and numbers from the homebuilders. The median new home price fell 1.8% to $281,800.

Hillary Clinton is bemoaning the “tyranny of short-termism” in Corporate America. She wants to hike capital gains taxes, play with the tax code regarding executive compensation, and rein in activist investors. I hope someone in her staff whispers in her ear to google the term “agency costs” and has her read up on Armand Hammer. I am guessing this is just red meat for the base.

Sustainable Finance MBAs are having a rough go of it finding a job. Not surprising. Who wants a Social Justice Warrior managing their money? Maybe a union or a church. Not anyone who is concerned with, you know, actually making money. The business schools should be upfront about the job prospects for majors like these before students take on six figures worth of student loans.

Markets are lower this morning as earning pile in. Bonds and MBS are down small.

Dodd-Frank has severely neutered the market-making function of the banking system. When the Fed starts tightening and bonds sell off, the natural buyers of bonds (primary dealer banks) will no longer be able to dampen the moves by standing on the other side of the trade. The Fed is unconcerned about this, but we shall see what happens when rates start going up and the bond market starts falling faster than they are comfortable with.

Incidentally, Hillary will probably be forced to support a financial transactions tax, which is a tax on market-making as well. Basically it would slap a  tax on every stock trade, currency trade, and bond trade. Narrowing bid / ask spreads and a 90% drop in commission rates has basically eliminated the market-making functions (NASDAQ market makers, the specialists on the NYSE floor, block trading at banks) in the stock market. Machines are all that is left, and even they are not in the market-stabilization business. The next crash, they are going to suspend trading until things stabilize and there will be nothing but GTC (good till cancelled) buy orders for people to sell to. Washington should be careful what it wishes for.

As China’s economy cools off, and the US dollar rallies, we have seen commodities get absolutely slammed. Oil has been cut in half over the past year. Gold is in free-fall. Natural Gas is down big. This will keep a lid on inflation, and allow the Fed to keep rates lower longer.

Everyone knows that Chinese money has been behind the building boom in many large cities. This is actually driven by policy. Chinese investors who invest $500,000 and can prove that their investment created at least 10 jobs (not hard to do on a construction project) get permanent green cards. These are typically wealthy Chinese investors who are trying to get green cards for their kids and are not all that concerned about return on investment, which means dirt cheap financing for developers. Now, the government is thinking of making some changes. Obama would like these investors to put money in low-income housing, not luxury condos. Also, abuses in the program have led other to question it altogether. The program has bipartisan support so it probably isn’t going anywhere, but when you use policy as an economic lever you invariably create dislocations and marginal projects that don’t make economic sense. Something to watch.