May 02, 2013

May 02, 2013

Home Builders Poised For Big Comebacks 

During the last two weeks, a lot of time at Guild Investment Management has been spent analyzing the U.S. housing recovery.  In that period, we’ve listened to the conference calls of numerous home building firms who have reported stunningly good earnings.  We have spoken with four analysts who cover homebuilders and have done so for years, and we have spoken to or met with the managements of several homebuilding companies.  We have also listened to several mortgage insurance company managements discuss the improving conditions in the residential real estate market.

Homebuilding — A Tale of Two Countries

Many parts of the U.S. have been slow to recover with respect to new housing starts, but the Sun Belt, the Pacific Northwest, and the Atlantic coast from the suburbs of Washington, D.C. to Florida are doing very nicely.  As we see it, California, Colorado, Arizona, Florida, and Texas are on fire with massive demand for homes.  The Carolinas, Georgia, Alabama, and Mississippi in the Southeast are doing well, and pricing and sales trends are also strong in Washington and Oregon in the Pacific Northwest.

What areas are not doing as well are the northern Midwest and the New England states.  Many investors and homeowners in these areas might be asking, “What home building resurgence?”…

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Investors Hunting Yield Go for European Periphery Debt — in Spite of Risks

Returns on Spanish and Italian debt have been healthy this year, as bond prices — even in troubled countries — have been driven up by investors’ relentless quest for yields higher than they can find in safer debt markets.  Since the market price of a bond varies inversely with its implied yield, this investor demand expresses a hunger for yield and a willingness to tolerate higher risk to achieve it.

Since the end of March, according to the Wall Street Journal, rising bond prices have given investors 3.55 percent and 2.74 percent total returns on Spanish and Italian debt, respectively.

Risky European Debt: Investors are Willing to Accept Less Interest Income




Global Political and Macroeconomic Factors Support Demand for This Relatively Risky Debt

With the announcement of Japan’s new full-bore quantitative easing (QE) strategy, capital has been flowing into the sovereign debt of the relatively safer European economies.  Consequently, this has been driving bond prices up and yields down, causing a cascade into riskier economies by yield-hunters.  German 10-year Bunds now yield about 1.2 percent, French 10-year debt about 1.75 percent, and U.S. 10-year Treasuries yield about 1.63 percent.  The exception is Greece, where bond prices have been largely flat this year and yields are much higher…

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Maybe All Your Retirement Accounts Belong to Us

One of the Federal watchdog agencies established by 2010’s Dodd-Frank financial legislation is mulling expanding its scope to cover not just credit products, but also retirement savings plans, according to Bloomberg.

The internal deliberations at the Consumer Financial Protection Bureau (CFPB) have not been made public.  Director Richard Cordray, whose January 2012 appointment during a congressional recess generated controversy for President Obama, said in an interview that the agency was “exploring… what authority [it has]” in retirement savings products such as 401(k) and IRA accounts.  Americans’ retirement assets total some $19.4 trillion.

On the face of it, Dodd-Frank does not explicitly give the CFPB regulatory jurisdiction over retirement savings plans.  Until now, that job has fallen predominantly to the Securities and Exchange Commission (SEC).  However, Dodd-Frank has helped created a maze of agencies and agency relationships that’s far from clear:

Is the U.S. government looking for revenue in the tangled mess of retirement asset regulations?

Retirement Map.jpg

Cato Institute scholar Mark Calabria observed in an interview: “I could imagine the CFPB growing into a role on investment savings if it seems like the SEC is asleep at the wheel.”  The concept of a regulatory agency “growing into a role” rather than being assigned a role in a clearly delineated regulatory structure is alarming to some, and the CFPB has recently received critical scrutiny for its foray into large-scale data mining of consumers’ banking, saving, and spending habits.

Long-Term Questions and Problems…

Retirement Savings — the Argentine Solution…

Byzantine legislation and regulatory agencies with unclear mandates always lead us to ask uncomfortable questions about the future…

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“Twitter Crash” and Gaming of the Futures Market Show How High Frequency Trading Opens Doors for Fraud

Last week, the Twitter account of the Associated Press was hacked, and a fake tweet sent out to the effect that the White House had been bombed and the President injured.  The market’s subsequent drop was precipitous, and the recovery just as quick:


Source: The Market Ticker

The AP responded quickly.  Its account was shut down; and reports came both from the White House and the AP itself that the tweet was a fake.  The markets quickly recovered.  The whole episode was over in four minutes.

Nevertheless, it’s worrisome because of the role of high-frequency trading in the whole process — and we can’t help observing that hackers and algos (the writers of the automated trading algorithms used in HFT) have a similar knowledge base...

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In this week’s Premium Global Market Commentary available to Gold Subscribers, we discuss:

  • Guild’s Premium Global Market SummarySell in May and go away? Find out what we think about the coming months and whatinvestments we favor. 

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