Wednesday, September 30, 2009

REIT and Credit Market

Real estate investment trusts have been one of the outperformers in the stock market rally since March 2009.
The chart of URE, a real estate ETF that consists of mostly commercial REIT versus Standard & Poor 500 Index (S&P500) is self-explanatory.

The same goes for individual REIT such as KFN, CT, DDR, BEE, SPG, CIM, etc. Naysayers have every reason to doubt this bullishness. Think about the sharp increase in delinquency rate, the sharp decline in the occupancy rate and the rent. Think about how desperate the credit market since Lehman collapse. All are solid points and no wonder every other person was talking about commercial real estate would be the next leg down for the economy. But wait a minute. Several indicators have suggested since March that things are getting a lot better in credit markets as we speak. Ted spread measured by the difference between 3-month Treasury bill rate and LIBOR has fallen back to the level of early 2000.

Credit spread measured by the difference between corporate bond yields and 10-year treasury note yield have been narrowed to the level of late 2002 when the last economic recovery began.

Although occupancy rates and rent are expected to be dismal for a while, the credit market has certainly cranked up the REITs. With Public-Private Investment Fund (PPIP) prepared to go into full force by the end of October (four of the nine PPIP funds are funded and ready to go), we have a lot of reasons to believe REITs are the way to go.

Disclaimer: Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author  is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author owns DDR, KFN, CT, BEE and URE in her personal account as of September 30,2009.

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ADP report disappointing or encouraging?

The Dow dropped by triple digit in the morning upon the release of the non-farm private sector employment , ADP report but made a significant  reversal to a positive territory by 1pm EST.

Bloomberg in ADP Says U.S. Companies Cut 254,000 Jobs This Month (Update1) reported:

"Companies in the U.S. cut 254,000 jobs this month, more than forecast, a private report based on payroll data showed today.
The estimated drop, which was the smallest since July 2008, compares with a revised 277,000 decline the prior month, figures from ADP Employer Services showed. The ADP report was forecast to show a decline of 200,000 jobs, according to the median estimate of 33 economists in a Bloomberg survey. Projections ranged from decreases of 300,000 to 133,000.
...........................The report comes two days before a Labor Department release forecast to show the U.S. unemployment rate rose to 9.8 percent in September, the highest since 1983, while employers cut 180,000 jobs.
The economy has lost 6.9 million jobs since the recession began in December 2007, the most of any economic slump since the Great Depression.
Today’s report showed a decrease of 151,000 workers in goods-producing industries including manufacturers and construction companies. Service providers cut 103,000 workers. Employment in construction fell by 73,000, the 32nd straight monthly drop, while financial firms decreased jobs by 19,000, ADP said, the 22nd consecutive decline for the industry.
Companies employing more than 499 workers shrank their workforce by 61,000 jobs. Medium-sized businesses, with 50 to 499 employees, eliminated 93,000 jobs, and small companies cut 100,000, ADP said."
Although the numbers still look very ugly with unemployment rate expected to exceed double digit, the rate of job losses has slowed. The stock market seemed to pick up from that.

Tuesday, September 29, 2009

Is Steel Rally that Short-Lived?

The broader market rallied yesterday with the Dow reaping a triple digit gain and close to the new high. The momentum driven by anticipated cyclical recovery seems to have legs. However, one of the cyclical plays, steel sector that includes stocks like X, AKS, STLD, NUE,  was left out yesterday. It was attributable to Goldman Sach removed STLD from its conviction buy list .

In fact, this is not news. Prices of steel stocks have been driven mainly by weaknesses in USD since early August instead of strengths in fundamentals. Steel prices have been declining since its peak in July. Most recently, China's second largest , the world's fourth largest steel producer, China Hebei announced yet another price cut .

China, the largest steel producer in the world, has let supply gone ahead of demand to take advantage of the increase in steel price in the second quarter this year. In August, Chinese steel producers cranked out record high output, as much as production of the rest of the world combined.

In the first half of the year, the steel order was driven more by restocking very low inventory, mainly in China, instead of renewed demand. The restocking is done. Catalysts in the second half lie in global economy, particularly developed countries. The auto industry has announced plans to increase productions in the second half while housing market has slowly recovered . Together with public infrastructure, the recovery from these two industries is key to supporting steel prices in coming months.

Monday, September 28, 2009

Has the housing market bottomed (Part I)

One of the multi-billion questions these days has got to be if the housing market has bottomed. Both sides have gathered ardent supporters and have good case.

I found myself swaying for a long time before I started to gain some positive bias this year. There is a list of indicators I look at :

1. Housing data (existing home sales, new home sales, housing starts, months of supply, prices)
2. Other economic data (employment, interest rates/lending, housing affordability, demographic factors)

Housing data
Existing home sales

Year 2009 has generally painted a much more hopeful picture of housing based on housing data. Housing data have generally shown improvement since the end of 2008, especially so in the last five months. Existing home sales, according to the National Association of Realtors (NAR), declined 2.7 percent to a seasonally adjusted annual rate of 5.10 million units in August from 5.24 million in July, but is 3.4 percent above the 4.93 million-unit level in August 2008. In the previous four months, sales had risen a total of 15.2 percent.

Total housing inventory at the end of August fell 10.8 percent to 3.62 million existing homes available for sale, which represents an 8.5-month supply at the current sales pace, down from a 9.3-month supply in July. This figure is still high compared to a more normal level of 6-month supply although unsold inventory totals are 16.4 percent lower than a year ago.

The median price dropped to $177,700 in August from $181,500 in July, down 12.5 percent from August 2008. First-time buyers purchased 30 percent and distressed homes accounted for 31 percent of transactions in August respectively. Both were unchanged from July.

New home sales

Theoretically, new home sales shouldn’t carry as much weight as existing home sales as they carry only 10% of the latter. However, the figure is useful in gauging the homebuilder activity and is clean of complicated interpretations that involve foreclosures/distress sales. New home sales increased by 0.7% to 429,000 units in August from July sales of 426,000 and is 3.4% below August 2008 sales of 444,000.

The inventory in August was 262,000, yielding 7.3 months of supply. Again, the month-of-supply, though has improved significantly from the last year, is still higher than 6-month supply in more normal times.

The median price was $195,200 in August, down from $215,600 in July, and from $221,000 in August 2008.

Housing Starts

Housing starts are directly indicative of the supply side of housing market. Housing starts in August were at a seasonally adjusted annual rate of 598,000. This is 1.5 percent above the revised July estimate of 589,000, but is 29.6 percent below the August 2008 rate of 849,000. Homebuilders have grown cautiously optimistic but are still very careful in bringing new supply to the market. This is conducive to price recovery into 2010.

Sunday, September 27, 2009

What is the Fed thinking?

On September 23, the Fed released  a statement after the FOMC meeting:

On the economy,
"the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further,


On inflation,
"With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time............."

On monetary policies,
" The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted."

The market seemed to interpret as a signal of taking money out of the economy the Fed's plan to "gradually" slow the pace of purchases agency mortgage-backed securities and agency debt and extend the process till 2010.

In the past, the Fed starts to hike rate and tighten money supply when it foresees an economic recovery or pick-up. Many, of late, have worried about inflationary pressure or even stagflation should the government and the Fed fail in the timing and manner of such exit plan (which has been shown to be often too slow or too late in the past). If this "gradually slower purchases of securities" is indeed the first step of a series of exit steps, I would think that the Fed deserves an applause in landing a perfect finale to this once-in-a-century rescue plan on the part of policymakers.

Obviously, this big applause is on the condition that we are really seeing the light at the tunnel of this historic financial turmoil instead of a double-dip. From what we see at this moment, I vote for the former. You?

First post

As you will quickly find out,  this blog will be mostly about stocks, investing, the economy and occassionally about my life, my views and things that you and I find useful or funny. It will contain weekly economic analysis, weekly stock analysis, monthly economic/market view, monthly portfolio recommendations, This is my first post.

The "first" of everything is almost always the best experience. Remember the first date? The first kiss? The first time in Disney Land? The first job? The first pay check? The first time you take a plane? The first home purchase? All the heartbeat, blood rush, novelty leave a memorable trail for many years to come.

Yeah, I am sure many of us might also remember,or would rather forget that time we cried our hearts out the first time we gave our hearts to somebody who didn't love us back. The unspeakable tear at the chest the first time someone we love passed away. The hopelessness the first time we were rejected.The feeling of futility the first time we were laid off. The disappointment the first time we failed a test and the embarrassment that would stick to us for the rest of our lives the first time we peed in front of little friends on the first day in kindergarten.

Every "first" has its unique place in our memory. The nervousness, the anxiety, the excitement, the pain,the pleasure and the best of all, to me, the hope. The hope that this time. The hope that it will be good, or it will be better than last time, or even the hope that it will be extraordinary.

It is with this hope that I start writing a blog again. Yes, I said,"Again.". I have had posting a few posts here and there in the last couple of years but lacked the discipline to last despite some very good responses from readers.

However, talking about stocks is one of my loves that has not faded after a few years (Well,there have been many other loves of mine that couldn't last for longer than a few days). Same goes to sharing it with friends and people who share the same love as me.

Some of you may wonder how this time can be different. Well, I don't know for sure. Just like investing on our own, we wouldn't know until we try it. The more we try it, at least to some of us, the more we know how to make it work. But one thing I do know and have learned in the past is that interactions and exchanges keep me charged. Along the way, I would hope that you all will play a role in getting this going. If you see something useful, toss an applause. If you have something to say, feel free to speak up. If you see something wrong, do not hesitate to let me know. In your company, hand-in-hand, hopefully we all can get something out of this.