The headlines continue to be dominated by the strong dollar with occasional Greek flare-ups; even George Soros is now giving 50/50 odds for a Grexit. Watching the behavior and talking points of central bankers around the world, Hawkins is convinced that the last time it got together, the entertainment committee must have screened the 1980 Olivia Newton John classic Xanadu, because these days, the central bankers all seem to be humming one of the movie's best contributions to Muzak -- "Magic,"
"You have to believe we are magic
Nothin' can stand in our way...
There have been 27 rate cuts so far this year on top of the European Central Bank's ambitious asset-purchase program, which is on track to reach its target of €60 billion a month for its first month, which started on March 9. Meanwhile, Fed officials are less "patient" than last month, and most agree that rates will be increased at least once this year -- notwithstanding Fed's less-than-stellar track record for accurate predictions. The world's two largest central banks, the Fed and the ECB, are both claiming, at least in public, that their increasingly divergent policies will achieve their goals rather smoothly. We'll see if they really are magic and if their markets and economies can live up to that Xanadu promise,
From where I stand
You are home free
The planets align so rare
There's promise in the air
And I'm guiding you
After last week's release of the Federal Open Market Committee's meeting notes, currency markets temporarily went bonkers, with the euro rallying the most since March 18, 2009, jumping up as much as 4.21% against the dollar post-conference, only to end up right back where it was the next morning after overnight trading reversed all those gains. The markets normally see moves that dramatic only in a crisis; perhaps it's magic.
While it is impossible to guess which way central-bank bureaucrats will move given the pressures they face from a variety of sources, we believe investors can rest assured that two things will happen:
- The ECB, along with many other central bankers, will continue their efforts to stimulate their economies by cutting interest rates or with quantitative easing-like activities. If you have yet to get on board iShares Europe (IEV) following yesterday's more upbeat Markit Economics Flash March PMI data, we'd recommend you do so post haste.
- The Fed's assurances alone that it will be raising rates will put additional upward pressure on the dollar.
For investors who would like to trade on the strengthening dollar, PowerShares DB US Dollar Index Bullish ETF (UUP) tracks closely with the AMEX Dollar Index. The recent pullback may provide a good entry point.
For all the Fed's talk of a strengthening economy, we continue to see entirely too many signs of slowing for comfort as we've mentioned over the last few weeks here, here and here. The trend has continued. On Monday, an update of the Chicago Fed National Activity Index indicated that the U.S. economy expanded at the slowest rate in a year in February, declining 0.08, versus going up 0.26 in January. On Tuesday, the Richmond Fed Manufacturing survey fell to -8 versus expectations of +3. Today's report on durable goods fell 1.4% unexpectedly in February versus expectations for a 0.2% increase.
There is one area in which we are seeing some strength, however -- housing. Yes, that sector that Hawkins loves to beat up is going to get some kudos today. But as Meryl Streep would say, It's Complicated.
New-home sales came in quite strong yesterday, especially given the awful weather in much of the country, delivering the largest beat versus expectations since the peak of the housing market in the mid-2000s. Additionally, inventories are falling down to just a 4.7-month supply. The mix of home prices was rather upbeat as well, with the mix being more heavily weighted to the lower price ranges -- so that it isn't just the already wealthy who are buying. We also learned today that mortgage application rose last week, up 12.3%. All that being said, the new-home sales report is notoriously volatile, and so we weren't surprised to see the iShare US Home Construction ETF (ITB) up only 1.1% and the SPDR S&P Home Builders ETF (XHB) up 0.9% on yesterday's news. Versace would caution that we saw this same setup last year, weather included, and that means still being a tad cautious -- as Hawkins points out, one data point does not mean there is a trend.
We are also seeing a nice move up in U.S. household formation in recent months, with the December number of 2 million breaching the most recent high hit in March 2012 of 1.994 million and well above the median level of 1.2 million over the past half century. Obviously, household formation is a key component of new-home sales.
Now here's the catch. We could very well be seeing a version of what Versace likes to call the cash-for-clunkers-crunch whereby purchases are pushed forward in anticipation of less desirable future conditions for buyers. All the talk about the Fed raising rates may be pushing home buyers to act sooner rather than later when mortgage rates could be higher. That may result in a short-term burst of activity which falls precipitously later, just as we saw with the impact of cash-for clunkers on auto sales. Versace adds that we've seen this kind of pull forward in demand time and time again with emissions and other mandates, and while he admits it may be a little paranoid, it's better to be safe than sorry. Besides he's wallowing in his Kraft Foods (KRFT) call from last week.
For investors who want to get into home builders such as D.R.Horton (DHI), Lennar (LEN) or Toll Brothers (TOL), we caution that this could be better as a short-term trade than a long-term opportunity. Given the stagnant to very low growth in household-income levels, sky-high student loan levels, falling employment participation rates and rising savings trend, this sector may be more safely experienced through ancillary plays such as Home Depot (HD), Lowe's (LOW), Williams-Sonoma (WSM) and Sherwin-Williams (SHW). At the moment, those stocks look a bit rich for us, and so we'd suggest either waiting for a pullback or building a position over time.
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