The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Even with the rush to sign contracts before the Apr expiration of the tax credit, May Existing Home Sales (closings where contracts were signed in the 2-3 months prior) were well below expectations at 5.66mm annualized vs the forecast of 6.12mm and down from 5.79mm in Apr. The tax credit still helped as May sales are the 4th highest dating back to mid ’07. The absolute # of homes for sale fell by 3.4% and helped to lower months supply to 8.3 from 8.4 in Apr. The median home price rose 2.7% y/o/y to $179,600, the highest since July ’09. Distressed sales totaled 31% vs 33% in Apr. The NAR said that delays in the mortgage process, “particularly for short sales” are having an impact on the closing process. They also point out that “many potential sales are being delayed by an interruption in the Nat’l Flood Insurance Program” particularly in FL and LA. Notwithstanding the comments, housing post tax credit, is rolling over again.

We see more evidence that next leg down in Housing has begun, as sales of existing houses fell 2.2% to an annual run rate of 5.66 million sales. These transactions include tax subsidized contracts signed by April 30 and closing by May 31st. Hallucinogenic economists had actually forecast a rise to a 6.12 million rate, according to a Bloomberg survey of 74 stoners.

We haven’t looked at the usual idiotic blatherings from the National Association of Realtors in quite some time. For shits and giggles, let’s have a gander at their latest, to see if they are still maintaining their traditional high standards of alcohol consumption.

Ahhh, the Realtor crowd rarely disappoints. The Headline — “May Shows a Continued Strong Pace for Existing-Home Sales” — reveals their inability to separate facts from wishful thinking. Such is what happens when “Spin” is your religion.

Let’s ignore their usual foolishness, and go straight for the data:

• Home resales decreased by 2.2%
• Home Sales are up 19.2% from 2009
• April’s Sales (Tax incentive included) were revised to +8%.
• Seasonally adjusted annual rate of 5.66 million units
• May 2009 median existing-home prices was $179,600, up 2.7% from 2009
• Distressed home sales were 31% of all sales, vs 33% in April (33% in May 2009)
• Raw unsold inventory is 1.1% above a year ago.
• The existing supply of homes for sale is 3.89 million units, an 8.3-month supply (this does not include shadow inventory)
• April’s Sales (Tax incentive included) were revised to a + 8.0%.
• First-time buyers purchased 46% of homes in May, down from 49% in April
• Single-family median existing-home prices were higher in 16 out of 20 metropolitan statistical versus May 2009.
• Existing condominium and co-op sales fell 6.8% (SAAR of 680,000 in May.
• Condos/co-ops sales were 32.6% percent above May 2009.
• Median existing condo price was $181,300, up 3.4% from a year ago.

This was the first monthly decrease in sales after 2 consecutive increases — and right into the teeth of seasonal strength. That’s not very good.

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Click for ginormous chart

Chart courtesy of Calculated Risk

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Source:
May Shows a Continued Strong Pace for Existing-Home Sales
NAR, June 22, 2010
http://www.realtor.org/press_room/news_releases/2010/06/may_strong_pace

Following up its words with action, the PBOC set its reference rate at 6.798 yuan per US$, up from 6.83 that has been in place since July ’08 but the daily trading range will remain at .5% of this level. Knowing the gradual process the revaluation will be, Asian markets took a breather overnight. European credit remains on the forefront of concerns as yields in Spain, Italy, and Portugal are all higher. Spain sold 3 and 6 mo bills at yields higher than a month ago but at good bid to covers. S&P did make cautious comments on Spanish banks while Moody’s said the Spanish banking system is not as bad as the market believes as long as the ECB keeps providing funding. Greece, which has a full credit backstop from the Euro region for 3 years, still has zero respect in the market as their 2 yr yield is higher by 26 bps at 9.1%, the highest since May as the market seems to believe this debt has to be restructured notwithstanding their bailout package.

Also impacting European trade is their response to yesterdays after the market downgrade of the credit rating of French bank BNP Paribas which is down 3% today. June German IFO business confidence did rise to the highest since June ’08 as a weak euro gives a boost to their exporters whose business makes up about 40% of their economy. The one fly in the # was the Expectations component which was a touch below forecasts. The spending cuts and tax hikes in today’s release of the UK budget and its expected drag on UK growth has the 10 yr Gilt yield falling to the lowest since Oct ’09. The global debate of when to start dealing with deficits will be a main topic of discussion at the upcoming G20 with the fate of the theory of Keynesian economics hanging in the balance.

I am back in Tuscany and will head to Milan tomorrow early, give a speech at the Bloomberg offices and then back home. But it is Monday and that means it is time for another Outside the Box. And I have found a most excellent offering. Dylan Grice from Societe Generale in London wrote on value for an OTB a few weeks ago, and he follows that up with more thoughts on the use of macro trends versus value investing. This is a real think piece, and worthy of more than one read.

I have to hit the send button, as my last dinner in Italy awaits (and real Italian food has been a revelation, and the wines! I am something of a chardonnay snob, and usually turn my nose up at Italian and French whites, but I found some local Tuscan chardonnays that were up to the best in California. And at reasonable costs.).

Your not wanting to leave Tuscany analyst,

John Mauldin, Editor
Outside the Box

What’s the point of macro?

By: Dylan Grice

Most people would see the macro strategist’s role as timing macro events … switching between defensives and cyclicals, adjusting duration, risk-on/risk-off trades, and so on … the only problem is that most of us are rubbish at seeing macro events coming, let alone timing them, as our evolutionary programming blinds us to events which are forecastable (and many are not even that). Perhaps we should embrace our limitations by accepting that ‘outlier events’ are actually quite regular, and use macro research to aid in the search for appropriate insurance strategies.

* A few weeks ago I mapped out a strategy that was based on the idea that since global banks’ solvency was so dependent on government bond holdings, central banks would have no option but to quantitatively ease in the face of future government funding crises. I argued that such funding crises could provide opportunities to buy cheap risk assets before liquidity/QE-induced rallies and that some value was beginning to emerge, but also that that value still wasn’t extreme enough to go all in.¹

* As usual, I received some interesting feedback – some favourable, some not (one pm said my ‘deflation-begets-inflation’ view was a “dog’s leg” forecast). But one client asked why I bothered looking at valuation at all. Surely my extreme macro views trumped such considerations? “I just don’t understand how you can separate your … economic research from your stand-alone valuation tools.” I thought this was a brilliant question because it gets to the heart of a permanent tension between macro and micro: what should the relationship between top-down macro and bottom-up valuation be?

* At the risk of oversimplifying what our more macro-focused clients do every day I’d characterize pure macro-focused managers as being less concerned with valuation. For a start, the traditional macro instruments such as commodities and currencies are difficult to value. But by far the biggest macro market – the bond market – is largely priced off central bank perceptions of what the economy is doing, and risk assets tend to be priced off those bond markets. Since mispriced assets can become even more mispriced depending on the macro climate and central banks’ reading of it, timing is everything and for such managers an understanding of the ‘big picture’ is far more important than valuation.

* But at the opposite end, where the pure value hunters reside, Warren Buffett has said that even if he knew the Fed’s exact interest rate moves two years in advance it still wouldn’t make any difference to how he would invest today. Indeed, most value investors shun macro completely and focus entirely on bottom-up valuations. They view recessions as good times to buy and have little confidence in anyone’s ability to predict them. But they don’t really care because they know recessions occur frequently enough and they are patient enough to wait. So why bother with macro?

At last year’s Value Investing Congress, David Einhorn neatly reconciled the top-down versus bottom-up investment philosophies. He was describing his Damascene conversion following a foray into a high quality US homebuilder just before the housing bubble burst:

“At the May 2005 Ira Sohn Investment Research Conference in New York, I recommended MDC Holdings, a homebuilder, at $67 per share. Two months later MDC reached $89 a share, a nice quick return if you timed your sale perfectly. Then the stock collapsed with the rest of the sector. Some of my MDC analysis was correct: it was less risky than its peers and would hold up better in a down cycle because it had less leverage and held less land. But this just meant that almost half a decade later, anyone who listened to me would have lost about 40% of his investment, instead of the 70% that the homebuilding sector lost.

“I want to revisit this because the loss was not bad luck; it was bad analysis. I downplayed the importance of what was then an ongoing housing bubble. On the very same day, at the very same conference, a more experienced and wiser investor, Stanley Druckenmiller, explained in gory detail the big picture problem the country faced from a growing housing bubble fueled by a growing debt bubble. At the time, I wondered whether even if he were correct it would be possible to convert such big picture macro-thinking into successful portfolio management. I thought this was particularly tricky since getting both the timing of big macro changes as well as the market’s recognition of them correct has proven at best a difficult proposition. Smart investors have been complaining about the housing bubble since at least 2001. I ignored Stan, rationalizing that even if he were right there was no way to know when he would be right. This was an expensive error.

“The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom-up” investor. Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long-short exposure ratio more actively, worrying about what may be brewing in certain industries, and when appropriate, buying some just-in-case insurance for foreseeable macro risks even if they are hard to time.”

I think most people would agree with this very reasonable hybrid approach: use macro analysis to avoid economic turbulence by managing your portfolio’s “long-short exposure ratio” more, and bottom-up analysis to maintain a value bias to the holdings within your portfolio.

But there is still a problem with the applicability of this philosophy: your ability to ‘actively manage’ your portfolio’s beta is a function of your ability to accurately call the market’s shortterm direction correctly on average over time. But just because most of us think we are reasonably competent at calling such short-term moves doesn’t mean we are. In fact, the reality is that we’re appalling at it.

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One of my regular criticisms of George W. Bush as President was, when presented with an opportunity to achieve greatness, he repeatedly failed to rise to the occasion. Indeed, his presidency can be viewed as a long series of missed opportunities:

“Once in a generation, the stars align for a political leader. There is this perfect moment – too often based on some enormous danger of long-lasting consequences for generations to come . . . the perfect combination of leadership and threat, of challenge and response meet. The leader – imperfect, fallible, yet ready to rise to the occasion – grabs the brass ring.”

That was what I wrote following 9/11. There was a moment to transcend politics. Restructure global alliances, refocus military spending away from its cold war footing, force some sort of Israeli/Palestine deal, wrestle structural US deficits to the ground. Rather than dare the nation to rise to the challenge, to make personal sacrifices for the greater good, to step up to greatness, the country was told to . . . go shopping.

Barack H. Obama seems to be following W’s footsteps. He has failed — twice — to is rise to an occasion of great import. In the words of White House Chief of Staff Rahm Emanuel, he has “wasted a good crisis” — for the  second time. The financial collapse was a grand opportunity to undo three decades of misguided decision-making and radical deregulation. He chose to focus on . . . Health Care.

Now, we have another crisis — the BP Gulf of Mexico disaster. And yet again, we see another missed opportunity. The Oval Office speech last week was just that — a speech, filled with platitudes and mere words. Where was the challenge, the sense of national need, the urgency? It was the same tired energy speech that, as The Daily Show’s Jon Stewart has pointed out, every single president since Nixon has given.

For the greatest orator of his generation, our president appears to be lacking in imagination.

I am not a presidential speechwriter, but if I were, this is what I would have suggested to President Obama that his less than historic, June 15, 2010 Oval Office speech should have looked like:

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“Good evening, my fellow Americans.

On April 20th, an explosion ripped through BP Deepwater Horizon drilling rig, about 40 miles off the coast of Louisiana. It killed 11 people, began pouring oil into the Gulf of Mexico. Estimates of this leak have risen from 1,000 barrels per day a month and a half ago to as much as 100,000 barrels per day. The Gulf of Mexico is now endangered — the food that it produces, its pristine beaches, its travel and tourist destinations are all threatened with despoilation.  This is an environmental catastrophe of unprecedented proportions.

But there is worse news: This tragedy may be the future we are looking at. This may be the first of many such catastrophes we face in the years ahead. It is the result of a series of too many bad decision made by too many people about too many important things. Our corporate partners have made the inexpedient judgment to take on more risk in order to pursue greater profits. We saw this in both the banking sector, the auto industry, and most recently, at energy exploration companies.

Our regulators have become too cozy with their charges. Our Supreme Court somehow has mistakenly come to the conclusion that corporations are equivalent to Human Beings, with the same guarantees to free speech and political participation. We have failed to develop fully explore alternatives to fossil fuels. We have allowed ourselves to become so inured to the benefits of cheap, plentiful energy, that we have ignored their risks and costs.

We are in danger of losing our way, of no longer being a Democracy, and morphing instead into a corporatocracy — a nation of, by and for Corporations

This has gone on for far, far too long.

So tonight, I am proposing 10 sweeping changes for America:

1. Energy R&D: First, we need to recognize that a decade into the 21st century, we are as a nation overwhelmingly wed to 19th century fuel sources. What we need is a fundamental breakthrough in energy technology. Toward that end, I am convening a new “Manhattan Project” — only this time, it is for fundamental research into new forms of Energy. We need more than incremental improvements in solar and battery power, we need a major breakthrough that is the equivalent of the Atomic bomb in its magnitude.

I am requesting Congress Fund a $250 billion dollar Federal research agency to fund fundamental physics and chemistry research — into battery technology, solar efficiency, wind and wave power, thorium nuclear, and all manners of new ideas. The private sector has failed to do this over the past century, so it is up to we the people to get this accomplished.  (If we were able to find $185 billion dollars for AIG, then surely we can find $250B to secure our energy futures).

2. Gas Taxes: Gasoline is cheap and plentiful. This has encouraged us to be incredibly wasteful in our energy choices. We are the only industrialized western nation that has not implemented some form of disincentive to to be so profligate in our fuel consumption. Hence, we will be phasing in Pigou taxes over the next 10 cents per year for the next 10 years for a total of $1.00 per gallon of gasoline by 2010.

The US consumes 16 million barrels of gasoline a day. Automobiles use nearly 10 million of those barrels — about 400,000,000 gallons per day. We want to slow that consumption, and channel the pigou taxes into productive research and mass transit. Speaking of which:

3. Mass Transit: I am implementing a massive overhaul of our national mass transit. We are too inefficient in how much energy we consume merely getting around from place to place. Hi Speed rail between cities, increased rail within the cities, natural gas burning buses, and electric vehicles will become the standard.

4. CAFE Standards: For local driving, we need to also be more efficient. Thus, we will raise our national Corporate Average Fuel Economy (CAFE) standards for automobiles. We were making progress in the 1970s and early 80s, but we got complacent. I am confident that our auto engineers and manufacturers will find a way to deign more efficient vehicles.

We will work closely with those who want to convert our long haul trucking fleet to natural gas. We will figure out how to get this done.

5. Alternative Energy for Homes: I have already established tax credits for making homes more efficient, replacing old furnaces, upgrading insulation and windows. But we can do better. So we will be offering a new set of tax credits for alternative energy sources at the home level. Solar, geothermal, wind will all be subsidized by a federal tax credits for home and multi-unit apartment owners.

6. Upgrade the Grid: Our existing energy grid is antiquated, inefficient and problematic. I am appointing a panel of scientific experts to make recommendations to upgrade the electric grid, transmit power more efficiently, and help to reduce black outs. Further, we need to make the grid more secure from attack from overseas hackers and others who would use our open society to do us harm.

7. Campaign Finance Reform: I have appointed my old colleague, John McCain, as head of a task force on campaign finance reform. Both sides of the aisle have become corrupted by the money in politics. No one knows the campaign finance rules better than John, who has been working on this issue for decades. The time has come for reform, to prevent the banksters and the oil company lobbyists from having their way.

8. Lobbying Rules: The revolving door between regulators and industry, between Congress (and Congressional staffers) and lobbying firms is totally unacceptable. Whether its Toyota and Auto safety regulation, the SEC and Corporate defendants, or BP and mineral and mining agency that supervised them. , it will no longer be tolerated.

Hence, as CEO of the Executive Branch, I am putting a 5 year waiting period before you can leave government employment and take a job with the industry you were regulating. For Congress members and their Congressional staffers, you cannot go into any industry covered by the elected official you worked with. This includes any legislation they worked upon. This moratorium will also be submitted as legislation for Congress to pass, and woe to the lawmaker who votes against it.

9. Corporate Donations:  The Supreme Court’s recent decision in Citizens United v. Federal Election Commission granted “corporate personhood” — it gave corporations the same speech rights as flesh-and-blood human beings. This was an error, and was not what the founders envisioned when they wrote “We the People.” Hence, I have introduced legislation into Congress to reverse that Supreme Court decision.

10. Transparent Disclosure: Finally, we are mandating a completely transparent system of disclosures — for all campaign donations, lobbying activity, and any and all donations to groups that engage in lobbying. You have the right to give money to whatever groups are trying to influence legislation . . . but the people have a right to know what was given to whom and for what purpose. All of this information will be published on publicly available websites.

My past 6 predecessors in this office all made similar promises — but the danger was not acute enough to get the nation to act. The Gulf tragedy has now focused our attention in a way that perhaps never was before. It will require effort, sacrifice, hardship. But it will also create new jobs, develop new industries, and put the United States on firmer footing to be a world leader in energy.

In the end, we will be a better nation for it — stronger, more secure, wealthier — for the sacrifices I am calling upon all of us to make.

Good night, and God bless America.

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That is the speech I would have had the President make. Truly inspiring leaders, when presented with terrible situations, find a way rise to the occasion, to achieve greatness. He missed the last time out. If the mess in the gulf gets appreciably worse, he will have one last opportunity. I hope he doesn’t pass up the chance yet again.

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Previously:
The Tragedy of the Bush Administration (November 2nd, 2004)
http://www.ritholtz.com/blog/2004/11/the-tragedy-of-the-bush-administration/

Tactical Error: Health Care vs Finance Regulatory Reform (September 9th, 2009)
http://www.ritholtz.com/blog/2009/09/finance-reform-vs-health-care-reform/

Hat tip Mike R

Here is what caught my eye today:

• Analysts Least Favorite Stocks Are Market’s Best Performers (Bloomberg) Classic!
• Winners and losers from a firmer yuan (Reuters)
• Is the Fed out of bullets? (CNN/Money)
• Financial Overhaul Bill: What’s on the Agenda? (Real Time Economics)
• BP, Transocean tap a well of Washington lobbyists and consultants (Washington Post)
• The Anosognosic’s Dilemma: Something’s Wrong but You’ll Never Know What It Is (Opinionator)
• A Credit Crunch That Lingers (WSJ)
• A Decade of Bank Failures (Mint)
• The internet: Everything you ever need to know (Guardian)
• Alaskan Moose Giving Birth (flickr)

What are you reading?

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June 21st: Today’s $10 Ticket

Friday, June 25
PNC Bank Arts Center

Saturday, June 26
Nikon at Jones Beach Theater

I am not whether this says more about the Music industry or the economy . . .

Markets have given up nearly all of their gains today, as the excitement over the weekend’s PBOC announcement has been replaced with a dose of reality.

Why the mere announcement of a Yuan depeg would be cause for equity celebration is beyond my comprehension . . .

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I was just discussing how ugly the Home builders look with AJ, one of our institutional sales traders.

Nearly every builder has been on a SELL SIGNAL in the Fusion IQ ranking system for several weeks now. These names are down 20 to 35% over that time.

AJ has been flashing TOL to various institutional clients as a possible short, but all of the builders — DHI, KBH, LEN, PLT — look pretty punk.

Considering we are now in the early stages of a second leg down in Housing, plus the excess new and shadow inventory that is out there, its hard to consider anything other than selling these names. Clients who are short have been advised not to cover yet.

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Residential Construction Member Names and Rankings

click for larger charts

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D.R. Horton (DHI)

Other Homebuilders’ charts after the jump . . .

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