Tower Private Advisors
This is the story of my day and, thus, this blog posting…
Capital Markets Recap
Markets are behaving nicely, and I think this is why. The chart below shows three panels. In the first one is charted the cost to insurance against sovereign debt defaults by Italy and Spain (5-year debt, both). Since autumn, Credit Default Swaps on the two countries have settled down. In conjunction with, and reflecting that, the risk–implied volatility from option prices–of European stocks has been declining (panel 2). Behold, (panel 3) European stocks are rising. It appears that the market is confident the European authorities are committing to keeping a cap on rates. In addition, with inflation coming down in the region–a natural consequence of the deleveraging going on there–the European Central Bank, with its memories-of-the-Weimar-Republic focus on inflation, should be able to breath easier and–speaking of easier, make its monetary policy easier without having to worry about runaway inflation.
This S&P 500 earnings season is getting started slowly, just 47 companies reported results this week. Analysts have ratcheted down their numbers for the Q4 reporting season, but their overall number (+9%, I think) had the wrong sign on it for this week, when reported earnings were down, on average, by (-)8.58%. The worst results came from the Materials sector, but the sector has the highest positive surprise. Financials were just lousy, reporting -27% earnings growth and a hurdle that wasn’t low enough (-11% earnings disappointment.)
I think, though, that the season will prove to be a good one. No one will care that earnings in the period ended December 31 were lousy so long as the forecasts are rosier, and the environment seems rosier. Our internal economic strength numbers are reflecting that, as are the reports we get from our Key Strategy Providers.
There were a couple of economic series that stood out this week, and two of them were related to housing. First, the MBA Mortgage Application index increased by 23.1% in the last week. It’s a simple translation: mortgage applications were up by 23%. The trouble with this series is that it’s been driven largely by refinancings and not purchase applications. That was pretty much the case last week, too, although purchase applications did rise. Since the end of 2011 purchase applications are up by +20%; refi applications, +31%.
Next, the index that records sentiment of the homebuilders, themselves, the NAHB Housing Market Index, reached its highest level since 2007. I’m not sure what’s supporting that, however, as Housing Starts fell this week (-4.1%). It appears, though, that the sentiment index has some leading tendencies, so perhaps we’ll see a corresponding pickup in starts.
Here is what’s helping to bolster the morale of homebuilders–well, 25% of them, at least, which is what the index measures–Prospective Buyer Traffic and Current Sales. Odd, though, that the traffic isn’t feeding into future sales…
Here’s what we think the NAHB index implies for Housing Starts. At the current reading, starts ought to be north of 1,000. Yeah, it’s just maths (as the English say), but it’s maths.
The other, almost stunning, economic release came in the form of Initial Jobless Claims. They fell by a whopping 12.4%, or by 50,000 bodies. There are two caveats that need to accompany the figures, however. First, winter is a notoriously volatile time. Second, the week included the MLK holiday and that requires the states to estimate filings, which will, necessarily, be wrong.
See the Guess Who song at the top.
Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors