Financial Review

Friday, May 23, 2014 – Always Check Your Spreadsheets

Always Double Check Your Spreadsheets
by Sinclair Noe

 

DOW + 63 = 16,606
SPX + 8 = 1900
NAS + 31 = 4185
10 YR YLD – .02 = 2.54%
OIL + .67 = 104.41
GOLD – .80 = 1293.90
SILV – .01 = 19.58

 

The S&P 500 Index closed at a record high of 1900.53. It was a record high close but not a record high considering intraday pricing. The S&P hit an intraday high of 1902 on May 13, however it closed on that day at 1897. Today, the intraday high was 1901, but I’ve always considered the close to be a more significant number than the intraday high. Since the start of the year we’ve been on a roller coaster ride in the markets, but as of today the Dow is up 0.2% year to date, the Nasdaq is up 0.2% for the year, and the S&P is up 2.8% since the start of the year.

 

If you are a regular, you might wonder why we aren’t celebrating a record high. The first answer is that 1900 is just a number with no special significance; the second answer is that we only celebrate when the Dow Industrial Average hits a record high, and the last record high close on the Dow was May 13 at 16,715. We don’t celebrate S&P records, and like so many things, the reasoning is entrenched in archaic traditional dogma.

 

An example would be Memorial Day, which started after the Civil War as a way to commemorate the soldiers who died while in military service. The holiday was originally known as Decoration Day, a day to place flowers or other such decoration on the graves of the fallen soldiers. It seems like some sort of twisted ritual when today we have such little respect for our soldiers that we can’t even provide timely health care in a VA hospital. Maybe this Memorial Day we can all contact our elected representative.

 

You can send an email by going to contactingthecongress.org, or the main phone number for Congress is 202-225-3121. I hope you could contact at least one of your elected officials and tell them to take immediate action to straighten out the problems at the VA before we lose another soldier. I really don’t care if you are republican or democrat or something else; this is not a red or blue issue, it’s a red, white, and blue issue.

 

In economic news, the Commerce Department reports sales of new single family homes rose 6.4% to a seasonally adjusted rate of 433,000 units in April. The rise ended two straight months of declines. The inventory of new houses on the market increased 0.5% to 192,000 units, the highest level since November 2010. Nevertheless, the stock of new houses on the market remains more than 50% below its pre-recession level.  At April’s sales pace it would take 5.3 months to clear the supply of houses on the market, down from 5.6 months in March. With inventories rising, the median price of a new home fell 1.3% to $275,800 from April last year.

 

According to Freddie Mac, rates on fixed 30-year mortgages fell to an average of 4.14% this week, a near seven-month low. And mortgage rates almost certainly play a very big role in the housing market and according to a new report from Deutsche Bank they explain the current weakness in the housing market.

 

Last year rates spiked as the markets threw a taper tantrum, a strong reaction to the possibility the Fed would exit QE. Mortgage rates bumped up one percentage point, not a huge move, but on a percentage basis, it was more than 30%. Sharp spikes in mortgage rates tend to produce “extended periods of weakness in housing” that last several quarters historically. The current cycle hasn’t disappointed on that front. But they also find that most housing indicators have actually fared better in the recent episode relative to the historical experience.

 

With the caveat that all real estate markets are local, most indications of housing supply show that markets have returned to pre-crisis and even pre-housing boom levels. Housing demand is improving gradually, though household formation levels have disappointed many analysts so far.

 

This week Russian President Putin traveled to China to ink a deal to sell natural gas to the China over the next 30 years. Meanwhile negotiators from the US and the Eurozone very quietly began their fifth round of negotiations on the Transatlantic Free Trade Agreement, also known as the Transatlantic Trade and Investment Partnership. Text from the private negotiations has leaked out, but nothing is official yet. Big Oil and Gas is looking at the situation in Europe and seeing a big opportunity, and so they are trying to remove restrictions on the export of energy goods.

 

For example, any request for an export license to ship natural gas from the US to the EU would be approved “automatically”, even if it means increased gas prices for US consumers, increased dependency of imports to the US, or potential environmental damage. While it would lock in more business for Big Oil, it’s hard to see how this helps the goal of US energy independence or the broader public interest.

 

The EU’s ideas for free trade in energy with the US would also be a frontal assault on the possibility for governments to impose a “public service obligation,” requiring utility companies to deliver natural gas at certain prices to consumers, for example. Any such public service obligation should be “clearly defined and of limited duration” and also not be “more burdensome than necessary.” In other words, if we have a cold spell in the US and local utilities need natural gas, we could be forced to ship it to Europe, even if for a limited duration.

 

Sunday brings a presidential election in Ukraine. Putin says he will honor the results, saying Russia will “respect the choice of the Ukrainian people” in the election and will work with the new leadership.  but the results may be a tricky thing; we still don’t know if they will actually be able to handle balloting in eastern Ukraine. And if there is not a clear majority winner, there would be a runoff election in June.

 

Have you read the new book on economics, “Capital in the Twenty First Century”, written by French economist Thomas Piketty? It’s a big, thick book and a bestseller that has started multiple and running debates. Piketty’s book claims that inequality will return to the heights seen in earlier centuries (think the Gilded Age or the French Revolution) unless governments intervene. The best-selling book has been embraced by liberals as a call to action against inequality, and attacked by conservatives as a call for socialism and wealth redistribution. And so a couple of journalists for the Financial Times, Chris Giles and Ferdinando Giugliano did some fact checking and they claim some of the facts are less than factual.

 

Giles noted what he described as fundamental problems with some of Piketty’s numbers on wealth inequality. Giles wrote: “I discovered that his estimates of wealth inequality — the centrepiece of Capital in the 21st Century — are undercut by a series of problems and errors. Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air.”

 

Giles also said that the spreadsheets Piketty provided as source material for his book have “transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.”
In his detailed response, Piketty did not confirm or deny that there were any big errors in his data, but said his raw data sources had to be adjusted in some cases to paint a smoother picture, or to fill in gaps. Piketty wrote:  “I have no doubt that my historical data series can be improved and will be improved in the future, but I would be very surprised if any of the substantive conclusion about the long-run evolution of wealth distributions was much affected by these improvements.” Piketty also pointed out that subsequent studies have backed up many of his conclusions, including the idea that wealth has become more concentrated in the US in recent decades.
Next week’s economic calendar includes a look at housing prices from Case-Shiller/S&P; the year-over-year increase in prices in 20 major cities has slowed from the recent peak of 13.7% in November 2013, and the trend likely continued in March.

 

Next Friday, we’ll get a report on personal income; wider coverage as a result of the ACA meant Medicaid benefits accounted for 20% of all personal income gains in the first three months of the year, therefore income excluding Medicaid benefits is probably a more accurate way to look at the data.

 

The Conference Board will release its confidence survey Tuesday and the University of Michigan sentiment report is set for Friday; an important subset will be how households view job availability.

 

On Thursday, we’ll see the Commerce Department’s revised estimates of first quarter GDP; you will recall the first estimate showed growth at just at annual rate of 0.1%, which was really bad; the revised estimate could turn ugly, even negative, like maybe down 0.9%. The second quarter GDP is expected to bounce back, but the hole is getting deeper.

 

Happy Memorial Day Holiday.

 

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