|
ASSET CLASS |
H.I.A. OUTLOOK |
COMMENT |
|
Real Estate Investment Trusts |
Negative |
Residential and commercial real estate suffering from over-supply. |
|
Commodities |
Neutral |
Weak demand globally, even China. |
|
Bonds |
Neutral |
Treasuries are expensive but high quality corporate and municipals are attractive. |
|
Foreign Stocks |
Negative |
Export- and commodity-based markets punished by falling demand. Weakening US$ provides small offset later. |
|
U. S. Stocks |
Positive |
Fairly valued; should move higher before foreign stocks |
Mar 31th
Investment Outlook 2009
The Commerce Department reported that the “final” estimate of fourth quarter real Gross Domestic Product fell 6.3%, on an annualized basis, from the third quarter of 2008. Today’s figure showed a slight downward revision from the “revised” -6.2% figure reported last month and followed a -0.5% posting for 3Q08. The -6.3% reading was marked by a sharp downturn in exports, business inventories and consumer spending. Unsurprisingly, Federal government spending posted a positive contribution. Excluding the effect of inflation, the US economy contracted at a 5.8% annual rate.
For the full year of 2008 real US output rose 1.1%, when exports and consumer spending, fueled by tax rebates, offset weakness in residential fixed investment and other areas.
As noted, today’s release was the “final” figure that is based on more complete source data than the “advance” and “revised” estimates issued in January and February respectively.
Corporate profits fell 16.5% during 4Q08, the largest drop in 55 years. Profits at financial companies declined by 59%, whereas non-financial corporate profits fell 11%. The weakness in corporate profits provides an explanation for the rising unemployment rate and the drop in stock prices.
Harmonic Investment Advisors believes that 4Q08 marks the sharpest contraction of US economic growth that will be seen in this cycle. However, as noted in earlier commentaries we anticipate that the US economy will remain in recession throughout this year and note that the economy has continued to weaken during the first quarter of 2009. Consequently our tactical asset allocation, sector weights and security selection remain skewed towards defensive and high quality equities and fixed income investments.
Real GDP (quarterly data, annualized), white, left scale (%)
Sales of both new and existing homes rose more than expected in February, suggesting that parts of the housing market may be in the process of finding a bottom. Existing homes, representing around 90% of the housing market, saw sales rise 5.1% over January’s level to an annualized rate of 4.72 million homes. New homes saw a similar 4.7% increase during the month to an annualized rate of 337,000 units.
Compared to a year earlier, however, sales of existing and new homes were lower by 4.6% and 41% respectively. Sales prices also slumped over the past year, dropping 16% for existing homes and 18% for new homes. Further, the backlog of homes for sale remains substantial; at the current pace of sales, it would take 9.7 months to liquidate the existing home inventory and 12.2 months to exhaust the supply of new homes for sale.
Importantly, the National Association of Realtors, which reports the existing home sales data, indicated that first-time buyers represented about half of all sales and that distressed properties accounted for 45% of existing home sales in February.
Harmonic believes that, while this data suggests the rate of decline in the housing market may be lessening, house prices will continue to fall throughout 2009. Continued increases in the unemployment rate will conspire with the above-mentioned overhang in home inventory to maintain a generally unfavorable housing market. Since housing was the epicenter of the current economic downturn and the home is the largest asset on most families’ balance sheet, downward price pressure will continue to be a significant headwind to broader economic recovery.
Existing home sales (monthly data, annualized), white, left scale (millions)
The Federal Reserve Open Market Committee unsurprisingly left the benchmark Federal Funds target range unchanged at 0.00%-0.25% as the Fed and Treasury attempt to spur the economy out of its recessionary malaise. A couple of new developments were announced after the meeting, though, that Harmonic Investment Advisors believe to be significant.
First, the Fed announced plans to purchase up to $300 billion in Treasury securities, an additional $750 billion in mortgage-backed securities and an additional $100 billion in bonds issued by agencies of the US government. These efforts are part of the administration’s efforts to create liquidity in the credit markets, especially in hard-hit mortgage lending. Of particular note is the purchase of Treasuries, since these bonds are the benchmark to all others; consequently, a decline in their yield may benefit other markets by extension.
Second, the Term Asset-backed Securities Loan Facility (aka the TALF), which was recently upsized from $200 billion to $1 trillion, may be used to purchase distressed or “toxic” assets off banks’ balance sheets. Uncertainty about the value of these securities, which firms own them and how they might be ultimately accounted for was, in part, the genesis of the credit crisis, so providing answers to those questions is key.
While the impact of these developments may not be felt immediately and concerns about longer-term inflation remain valid, HIA believes that these efforts are an important step in improving the health of the banking system, the financial markets and the economy.
The Conference Board reported today that the Index of Leading Economic Indicators (LEI) fell 0.4% in February, somewhat better than a consensus expectation for a -0.6% reading and following a revised 0.1% increase in January. Despite the negative overall figure, the 10-component Index was rather balanced in terms of the readings suggested by its components. Four components, led by weekly unemployment claims, drove the Index lower. These items offset positive readings from the other six components, led by the interest rate spread (10-year Treasury yield less the Federal Funds rate).
The economy will continue to contract in the near-term
The LEI, intended to forecast the direction of the US economy in the upcoming 1 to 2 quarters, suggests that the economy will continue to contract in the near-term.
Harmonic Investment Advisors believes that the LEI has historically been a useful tool for forecasting US economic growth and that today’s negative reading, driven by unemployment, reinforces HIA’s expectation of continued economic weakness. Harmonic continues to expect the US economy to contract during all of 2009 but notes that the rough balance between number of positive and negative components offers hope that the rate of economic decline is lessening.
Mar 01th
February 2009 Consumer Price Index
As reported by the U.S. Bureau of Labor Statistics the consumer price index (CPI) rose by 0.2% from February 2008. “Core CPI”, which excludes food and energy costs, climbed by 1.8% from February 2008. February’s “headline” CPI indicates that while overall prices have risen only modestly, when volatile food and energy costs are excluded the rate falls comfortably within the range the Federal Reserve apparently prefers. This fact may reduce fears that the ongoing fiscal and monetary stimulus will ignite inflation, at least in the short term.
Month-over-month, the “headline” CPI rose 0.4% in February, and the monthly “core” rate of consumer inflation rose 0.2%.
As in earlier months, energy costs remained a dominant driver of consumer prices, with the energy index up 3.3% during February, including an 8.3% increase in gasoline. Among other categories (our comments italicized):
- Milk dropped 5.7% in February and 10.0% over the past year (no surprise to our Idaho dairy farmers).
- Alcoholic beverages declined 0.2% last month, the first drop since December 2005 (surprising, given that alcohol consumption tends to rise in times of economic distress).
- Airfares continued to fall, dropping 2.6% in February and 14.0% over the past year (good news for those of us who travel.)
- Housing, which represents about 40% of the CPI, was unchanged during February (although house prices continue to fall).
- Prices for new vehicles rose 0.8% last month, while used vehicle prices fell 1.7% (interesting given the difficulty automakers are having).
- Cereals and bakery products rose 8.9% since February 2008.
- Medical care rose 0.3%, with prescription drug costs up 0.6% during the month (seem to climb inexorably higher).
Harmonic Investment Advisors sees significant benefits resulting from the decline in consumer prices. As suggested by the difference in “headline” and “core” inflation statistics, the decline in prices has primarily been due to declines in energy and food, two of the least discretionary purchases that consumers make. Indeed, the primary contributor to the decline in 2008 prices is the dramatic decline in energy prices since oil’s mid-2008 peak. Reduced pressure on consumers supports Harmonic’s stance that the economy will remain sluggish over the coming months but that the strengthening consumer balance sheet, in the form of higher savings, provides a key to stabilization in the economy and stock markets.
Harmonic recently marginally decreased its underweighting to stocks in the consumer discretionary sector in anticipation of improvement in consumer balance sheets, and to take advantage of the attractive valuations of selected high quality stocks in that sector. For similar reasons, HIA remains overweight stocks in the Integrated Oil sector on the belief that the price of oil is below its fair value and will rise as economic weakness moderates.
Mar 31th
S&P / Case-Shiller Home Price Index – January 2009
Author: Kenn Lamson
Comments: 0
In news that may be surprising to none, house prices have continued their decline, as reported in this morning’s release of the January 2009 S&P / Case-Shiller Home Price Index. The 20-city Index fell 19% from a year earlier, the most since its 2001 inception, bringing national home prices back to levels seen in late 2003. All twenty of the cities surveyed for the Index showed year-over-year and month-over-month declines.
The 20-city Index has declined 29% from its peak in mid-2006 while the narrower 10-city Index has dropped a similar percentage. All twenty cities surveyed in the more inclusive Index have declined by double digits from their peaks, with nine showing declines of greater than 30% and five dropping over 40%.
Harmonic Investment Advisors believes home prices are likely to continue to fall as the overhang of unsold homes appears to far outweigh the number of potential buyers. Further, the pool of potential buyers is negatively impacted by the increased tightening of credit available to fund purchases and by discomfort caused by declining investment market values and rising unemployment. Given that the home is the most valuable asset on most Americans’ personal balance sheet, declines in home prices reinforce the negative sentiment and increase the financial pressure that has contributed to this consumer-led recession.
However, HIA notes that falling home prices have begun to attract some buyers, as suggested by the recently reported increase in sales of existing and new homes. The upside of falling house prices is, of course, greater affordability for buyers, which ultimately will be a factor in slowing and reversing the economic downturn.
S&P / Case-Shiller 20-city Home Price Index (January 2001 – January 2009)