Monday, March 15, 2010

>GREED & FEAR: Housing and samba (CLSA)

The Greek bullet has been dodged for a while with a suspiciously easy sale of €5bn worth of 10-
year Greek bonds last week at a yield of 6.25%. So suspiciously easy in the sense that the Greeks are now reportedly rushing to sell another €10bn worth of Greek bonds.

The buyers would seem to be European state related banks adopting a buy and hold strategy. At least that is what is suggested by the apparent lack of trading in the recently sold bonds and by the apparent banning of hedge funds from the sovereign bond sale. GREED & fear has no idea whether implicit promises of government guarantees have been made or not by the most relevant government. But the suspicion lingers. Meanwhile, GREED & fear is convinced that the last has not been heard of Greece’s fiscal problems or those of the related PIIGS. Investors for now should assume continuing weakness of the euro against the US dollar.

Hopes are rising again for the cyclical prospects for the American economy. GREED & fear
refers to the improving capex picture mentioned here last week (see GREED & fear - Temporary fudges, 4 March 2010). Then there are the markets’ hopes for better jobs data next month given the better than expected data announced last week in the context of a weather affected month. Thus, US nonfarm payrolls fell by 36,000 in February, compared with the expected losses of 68,000 jobs (see Figure 2). The consensus is now expecting about 300,000 new jobs generated in March. Finally, US consumer credit rose by US$5bn in January. This is the first such month-on-month gain in twelve months.

If all this indicates improving cyclical prospects, and therefore the potential for a renewed pick up in Fed tightening expectations, GREED & fear would also like to draw attention to the continued fundamental sickness of the all important US housing market; most particularly when federal government support actions are taken out of the equation. The fundamental weakness of housing can be seen in the continuing rising tide of mortgage delinquencies and foreclosures. Thus, US residential mortgages 90 days or more past due rose from 4.38% of all mortgage loans in 3Q09 to a record 5.09% in 4Q09, according to the Mortgage Bankers Association. While foreclosure inventory increased from 4.47% to a record 4.58% of outstanding mortgages over the same period (see Figure 4). The weak state of housing can also be seen in the collapse in the shelter component of the core CPI which captures the falling trend in rents. Thus, the shelter CPI index fell by 0.5% MoM and 0.1% YoY in January (see Figure 5). This is the biggest month-on-month decline in shelter costs since December 1982 and the first year-on-year drop since the data series began in 1953.

To read the full report: GREED & FEAR