Weekly Recap & Outlook – 07.19.13

Tower Private Advisors


  • Just three things
  • Really cool chart
  • Housing
  • Subdued recovery

Capital Markets


Top Stories

Just three items for this week; the last one is totally borrowed but well worth your time.

Item, the first…
One of the things pressuring municipal bonds, keeping them at record levels of cheapness versus other debt instruments, has to be the discussion about capping the tax-free nature of municipal bond interest–the deductibility of it. This thing won’t die. The President is in favor of it, and on June 25, the Treasury Department’s Undersecretary of Domestic Finance (“Mom, guess what! I got promoted to Undersecretary of Domestic Finance!”) said that she favored the action as a source of tax revenues. Investors and municipalities alike are opposing it, the former for obvious reasons, the latter because it will raise the cost of munipal finance. It seems that the odds of the action getting any traction in Congress is unlikely, but it’s the margin that’s the most important thing to watch, and this is action at the margin.

Item, the second…
There is a much stronger movement afoot by the SEC, and that is the movement to change the nature of money market funds. In short, it has two components. First is the idea of a floating Net Asset Value. Historically, money market funds have always been priced at $1.00 per share, and the yield has fluctuated. What is proposed is that for a certain class of money market funds–specifically, institutional prime funds, which invest outside of government securities–the per share value would fluctuate and the yield would fluctuate. While it would be disarming to see one’s “cash” to fluctuate in value, it also introduces the complex tax element of incurring gains or losses on money market funds. Second is the idea of gating. That simply means that you might not be able to have all of your “cash” when you ask for it. This would likely be at times of severe market stress when–oh, I don’t know–you might really want all of your cash, so you could go buy a gun or some foodstuffs. The SEC is still accepting comment from the public, but this is a subject that’s much closer to becoming reality than the muni bond discussion, above.

Item, the third…
John Mauldin publishes a couple of newsletters, one of which is Outside the Box, in which he shares something–a newsletter or research report–that is outside the box in terms of the idea or concept discussed. Curiously, though, they never seem to be outside John Mauldin’s box, just–presumably–the reader’s. This week, he featured a report by Michael Lewitt, who writes The Credit Strategist, and in the issue shared, he talks about what investors should do to prepare for the eventual rise in rates, which he doesn’t seem to expect for a couple of years, although, naturally, he had happened to advise just the right strategies before May and June.

Here are a few bullet points that I took from the piece.

  1. The violent market reactions show how dependent markets are on the Federal Reserve, but most are clueless to this (e.g. there is a 90% correlation between rising stock prices and the increases in the Federal Reserve’s balance sheet.
  2. Own short-duration bond funds and floating-rate bond (aka leveraged loan) funds (“they remain extremely compelling defensive holdings.”)
  3. Gold will be coming back, as paper money will be devalued and gold will benefit

The link nearby will replace this page with the Mauldin newsletter in PDF form. In accordance with Mauldin Economics’ policy, I have included every last word of the newsletter. What I’ve also done–and this is a plug for an excellent iPad app–is use Notability to annotate the PDF, so you get my highlighted and annotated version. Click here for the full Mauldin newsletter.

Really Cool Chart

This is from the Lawrence Livermore National Laboratory (click on it to go to the ginormous version on the original site.) It shows the sources and uses of energy in the U.S. If you’re a solar guy (yellow), the 99.765% market share of the others might represent opportunity; ditto for geothermal. If you’re a petroleum person, you’re going to be tough to displace. I suppose it’s purely coincidental that solar is color-coded yellow, while petroleum is color-coded green. The site has these going back to 2008.


This Week

The Consumer Price Index data was released, and it showed price increases still below the Federal Reserve’s target of 2%. The year-over-year price level, considering all goods, is up just 1.8%. Industrial Production inched higher but remains below the 2007 peak, as do many economic indicators. So why don’t stocks? Your conspiracy theory is as good as mine, but I’d say it’s because the stock market looks forward and industrial production looks backward. As you can see in the graph nearby, the stock market’s movements seem to have foreshadowed industrial production.


Housing market indicators, for the most part, have taken it on the chin of late–due, in part, I would guess, to the move higher in interest rates. Mortgage Applications have fallen sharply: applications for refinances are down by 51% from their May peak; applications for purchases are down by 6% over the same period. This week showed that June Housing Starts fell by 78,000 (-8.5%) to 836,000 (annual rate), well below the dismal science crowd’s estimate of 960,000 (jusssttt…a bit outside.) Building Permits fell by 63,000 (-6.5%), also short of economists’ marks. Still, the NAHB Housing Market Index reached its highest level since early 2006, as shown below. This index of homebuilder sentiment suggests that a majority (57%) of builders are optimistic about their markets. What’s more, the builder sentiment index and the homebuilder stock index have parted ways…something has to give there: either the sentiment comes back down to earth or the stocks have to play catch-up. If the housing starts plot at bottom is supporting evidence, it’s the former we should expect.

Something has to give...

Something has to give…

Initial Jobless Claims have fallen back into the range that has served to blunt past declines. The weekly claims figures of 2007 and earlier continue to be elusive. This is, however, one of the economic indicators that suggest strength in the economy, but like Industrial Production, it has yet to recover/decline to pre-recession levels.

jobless claims

Next Week

We have a grab bag of releases next week, with none typically a big market mover.

  • Chicago Fed National Activity index
  • Existing Home Sales
  • New Home Sales
  • Initial Jobless Claims
  • University of Michigan Consumer Confidence

Wishing for a cold front,

Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors


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