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Hans Wagner
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Hans retired from his business career at 55 and pursued his passion to help others achieve financial independence. A graduate of the US Air Force Academy with an MBA majoring in Finance from the University of Colorado, Hans continued to invest throughout his career in the US Air Force, Bank of... More
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  • Will China Follow the U.S. In a Mortgage Bust?
    As the second largest global economy and one that is growing in the high single digits to low double digits, how China goes so goes the global recovery. A property boom is helping to fuel the Chinese economy. Some analysts claim many new Chinese property owners are encouraged to take out mortgages to buy a home that they can ill afford. Sound familiar? Is China following the U.S.’s example, issuing mortgages that they can cover? If this is true it will bring down the rapid growth of China and the rest of the world suffer. After all China is the economic engine for the global growth story.
    Growth of China
    A fair amount of the recent growth in China comes from home construction. This property boom is helping China achieve unprecedented growth rates in the high single digit to the low double-digit rates. Housing is the best hope for sustaining these gains, according to the World Bank.
    Wang Shi, head of China’s largest property developer, China Vanke Co, said in December 2009 that China risks a Japanese style property bubble if the rapid price gains continue. A study by the Bank of Japan concludes that China resembles Japan in the 1970’s when Japan had a strong demand for housing fueled by the fast growth and rapid urbanization. Debt exposure is reasonable.
    Home Ownership in China
    Home ownership in China remains a dream for the vast majority. Many of the people in the cities live in dormitories provided by their employers. Many of china’s homebuyers are young. China’s “one-child” policy is helping these new workers to afford a new home. They count on their doting parents to help come up with the necessary down payment. Traditionally, Chinese young people look to relatives to help cover some of the costs of home ownership. This continues today. In addition, the average mortgage is for less than 50 percent of the value of the home. This motivates the homeowner to evaluate carefully the price they are paying for their home. It also provides a cushion for the bank should the price of the home fall.
    Outside China’s largest cities, prices for homes are much lower. In addition, most homeowners paid cash for their homes or tapped friends and family, avoiding a mortgage. With so many Chinese in cramped, shoddy flats provided by their employer or the government, many Chinese are keen to buy a home. Their high savings rate helps them to find something affordable.
    In the U.S., many loans came with little or no money down. These homeowners have little or no financial stake in the price they paid for the home, a contributing factor to the mortgage crisis.
    Home Price Escalation
    Prices of new residential homes are rising at a 20 percent annual rate. Higher valued apartments in the big cities are climbing even faster. These price increases are encouraging developers to add to the housing inventory. New construction fuels the demand for workers and raw materials helping the economy’s growth.
    Koyo Ozeki, head of Asian credit research for PIMCO says the comparison to Japan’s real-estate boom is not realistic. Japan had a much more mature economy in the 1980’s. China is a young economy that remains well below the living standards of the developed world. The growth in incomes will continue to drive the demand for new housing.
    The risk is developers are focused on building homes for the upper income buyers. Serving this smaller segment of the population raises the concern of a housing bubble. While a sizeable market of 120 million people, some analysts worry that the potential to overbuild for this market will cause a slow down in the Chinese economy.
    The Chinese government is responding to these concerns of the rising home prices. However, they want to avoid the crash in house prices that occurred in 2007 and 2008. Their present goal is to increase the supply of lower priced housing. The problem is many Chinese cannot afford to buy a home without assistance.
    Homebuyers in China are accustomed to paying reasonably large down payments in the 20 to 50 percent range. Unlike the U.S., large down payments provide a cushion against any drop in the price of a home.
    To place pressure on the high end and drive away speculation, China’s policymakers are raising the down payments and mortgage rates for high-end homes. In the big cities experiencing rapid price escalation, out-of-towners cannot get a mortgage until they have paid local taxes for at least one year. If a buyer is purchasing a second home they must put down at least 50 percent. In Beijing they cannot buy a third home even it is all for cash.
    These policies are causing the price of high-end homes to slow their climb and in some cases fall. In Tongzhou, prices fell 13.4 percent since mid-April according to the Beijing Times.
    The Bottom Line
    China is a long way from reaching the mortgage crisis of the U.S. Their policy and tradition of paying mostly cash for their homes, taking on minimal debt, limits the risk of a significant mortgage bubble. A comparison to US ratio of housing loans to GDP is still only 15.3%, compared with a peak of 79% in America, shows how far China is from the problem in the U.S.
    The Chinese housing boom is not causing a mortgage crisis similar to what occurred in the U.S. Fear that a slow down in the the growth in housing will cause China to falter is real. Though the affect of any slow down will be relatively small. With China growing at approximatley 10 percent per annum, a slow down of 2 percent means the country’s GDP remains at a rapid growth rate. Actually, any slow down by China is welcome news as it will lower the risk of overheating.
    Growth in China remains the driver for global growth. China’s expansion of housing has a long ways to go. While there will be volatility in the market for homes, the growth in the number of new homes remains up. This trend will drive demand for many commodities important to home building including copper, steel, and energy.


    Disclosure: No Positions
    Jun 16 2:33 PM | Link | Comment!
  • S&P 500 Stock Market Trends - June 2010
    This is a monthly chart for the S&P 500 showing 20 years of performance. Since this index is the one used by professional traders, it is important to understand how it is performing. This chart is also excellent at defining the longer-term trends for the market.
    The end of the bear market and the stock market bottom came at the long term rising trend. Shortly after the monthly Slow Stochastic rose through 20 then the MACD rose through its 9-month moving average. Finally, the RSI climbed through the 50 level, though it is testing this bull-bear market indicator now. Most recently, the S&P 500 crossed through the 24-month exponential moving average. As long as it remains above this level, a bull market is in place.
    In early May 2010, the market pulled back as it tests the breakout through the 24-month exponential moving average. Monitor whether the 24-month EMA holds as support in the next month.
    The RSI is below 50, a sign of a downtrend, though it is close to the 50 level. The MACD is trending up. Monitor how it handles the zero level to get an idea of the strength of this move. The Slow Stochastic is trending up as it pushes through the 50 level, a potential resistance area.
    From a monthly chart perspective, the rally remains in tact as the 24-month EMA is still acting as support and the indicators have not turned negative.
    For now, I intend to invest as though we are in a more normal market that will see rallies and then pullbacks. The rally of the last 12 months came as a rebound from an oversold condition as investors feared the worse. Going forward, we will experience market rallies and pull backs as the economy struggles to expand. The overall trend will be sideways in a range of 930 on the low and 1,250 at the high.
    You can click on the link below to see a current version of this chart.
    Big Picture S&P 500
    The four-year weekly S&P 500 trend chart shows that the drop in the market that began in early May 2010. There is support at the 50-week moving average that has held, so far.
    RSI is below 50, a sign of a downtrend. The MACD has reached a high point where it turned down through the 9-week moving average, giving a sell sign. The Slow Stochastic fell through 80, a sell sign and it is approaching 20.
    The weekly chart pattern indicates the S&P 500 turned down, though it might be finding support at the 50-week moving average. If it holds, it is a good buying opportunity. Otherwise, expect another move down to the 930 level.
    You can click on the link below to see a current version of this chart.
    S&P 500 Weekly Chart
    On the daily chart of the S&P, the index broke through support of the rising trend, the 50-day moving average and the 1,150 level. The 200-day moving averages also failed as support. It will act as resistance on the way up.
    RSI is below 50 indicating a downtrend. The MACD is turning up through the 9-day moving average, giving a buy sign. The Slow Stochastic rose through 20 giving another buy sign.
    The 150-day moving average is an excellent indicator of the longer-term trend for the market. When the slope of the 150-day moving average is positive (trending up) it means the market trend is up. Should the slope of the 150-day moving average become negative (trend down) the market is trending down. At this time, the 150-day moving average is flat. Should it turn down, it will tell us the market is trending down.
    The daily chart of the S&P 500 is trying to push through resistance at the 200-day moving average. If it can regain this level, it will be a positive sign for the markets.
    For 2010, I am expecting the market to trade in a range 1,250 area as the high 930 as the low.
    S&P 500 Daily Chart
    Given this analysis of the S&P 500 trend line charts, it is important to position your portfolio for a market that is more likely to trend in a range with cyclical rallies and pullbacks.
    Selecting the right sectors and stock picking will become more important to your success. Look to buy on dips in the market to important support levels. Then add down side protection at interim high points using trailing stops and protective put options to help improve the overall return.
    The charts of the S&P 500 trend lines provide a good way for investors to align their portfolios with the overall market trends. Picking the right sectors and stocks will become even more important. Look to buy on dips in the price of the S&P 500 trend charts on the next pull back.
    Be sure to use proper capital management techniques including trailing stops, protective put, covered call options and position sizing. When the pull back ends, look to add to long positions with stocks and ETFs from the sectors that are likely to outperform the overall market. Keep in mind, Warren Buffett's first rule of investing is to not lose money. Be patient waiting for good entry points.


    Disclosure: No poistions
    Jun 08 11:43 PM | Link | Comment!
  • Inflation Prospects
    Inflation in the United States is extremely low with the GDP deflator coming in at 0.4 percent and the Core Consumer Price Index measuring 1.1 percent year over year. For April 2010, the last month reported, the CPI declined 0.1 percent.
    The Federal Open Market Committee (FOMC) is keeping short-term fed funds rates in the 0.00 to 0.25 percent range. When coupled with the huge economic stimulus from the Fed and the government, many analysts expect inflation to raise its ugly head in the near future. Let’s examine the prospects for inflation and what is keeping inflation rates low for the foreseeable future.
    Consumer Prices
    The Consumer Price Index (NYSEARCA:CPI) is comprised of three important categories, wages, productivity and the price of commodities. Compensation is by far the largest component. Offsetting wage increases are the productivity improvements companies achieve in the production of a good or service. Improvements in productivity lower the cost of the good or service, requiring less labor and materials. Commodity prices are the third and most volatile component of the CPI.
    According to the Bureau of Labor Statistics, total compensation costs for civilian workers rose 1.7 percent for the year ended March 2010. When you factor in productivity, unit labor costs (the labor cost per unit of output) have fallen 3.7 percent over the past year.
    Global competition for labor has kept a lid on rising labor costs and it will continue to do so for years to come. Competition for jobs remains fierce with five unemployed workers competing for every job opening.
    Elance.com, a web site for freelancers has grown to more than 700,000 members as people look for work in new and different ways. You can bid on a job, competing with talent from anywhere in the world, often for less than the minimum wage. Finding work that pays well remains a difficult challenge.
    High unemployment, now at 9.9 percent and underemployment at 17.0 percent, increases the competition for jobs, helping to keep the level of inflation low.
    Commodity prices are more volatility moving up and down regularly. With the recent fall in commodity prices and the rise in the U.S. dollar inflation from rising commodities is not likely.
    With unit labor costs at relative low levels and commodities at recent lows, inflation from rising consumer prices is a long ways off.
    Monitor changes in labor costs per unit of output to determine when inflation might pick up. Should commodity prices start to trend up expect some pick up in inflation particularly for sectors that are heavily commodity dependent.
    Monetization of Sovereign Debt
    Governments around the world are using substantial amounts of debt to help their economies recover and to fund social programs. Central banks are supporting this new debt with easy monetary policies. Many fear this will cause the money supply to expand at unprecedented rates. When the money supply expands faster than the GDP of the country, it leads to inflation.
    Banks create new money when they make a loan. As long as lending grows at the pace of the economy, the growth of the money supply is not inflationary. The Federal Reserve can encourage or discourage lending through their monetary policies, primarily through short-term fed funds rates.
    The quantitative easing by the Federal Reserve to avoid a depression has brought the government into the direct creation of money. In the U.S. the Federal Reserve buys government and mortgage bonds. When they do, it creates a bank loan by the government. This is new money just like when a bank makes a loan. The Fed carried out this new strategy to try to prevent a depression.
    This massive creation of money by the Fed is what concerns many analysts, who fear the U.S. is on the verge of a new inflationary spiral.
    The same concern holds for Europe as the European Union and the Central Bank are following the Federal Reserve’s example.
    So far, the rapid growth in the money supply that many analysts expect has not happened, as bank loan growth remains weak.
    M1 has grown 6.8 percent over the last 12-months, 3.1 percent in the last 6 months and 5 percent for the latest 3-month period. With inflation running at 2 percent and GDP growth at 3 percent, a 5 percent growth in M1 is just fine (3 + 2 = 5)
    M2 a broader measure of the money supply grew 1.6 percent in the last 12 months, a -0.2 percent for the latest 6-month period and -0.3 percent for the last 3 months. The weakness in M2 reflects the outright decline in commercial and industrial, known as C&I loans, at all reporting commercial banks in the U.S.
    According to the Federal Reserve data, C&I loans fell13.4 percent annually in the first quarter of 2009. The second quarter of 2009 experienced a decline of 16.5 percent followed by 26.2 percent in the third quarter and 23.8% in the fourth quarter of 2009. the trend continues as C&I loans fell another 20.6 percent annually in the first quarter of 2010. No wonder the money supply is declining despite all the money the Fed is injecting into the economy.
    Europe is following the example set by the U.S., injecting almost $1 trillion in loan guarantees and grants from the European Union countries and the ECB is buying bonds to add liquidity to the markets. They are following the example set by the Federal Reserve. To see if this program will cause inflation monitor the lending by the European banks, especially commercial and industrial loans. If the European C&I loans keep falling, it is likely the money supply will not expand as some predict.
    The question going forward for everyone is can the central banks reverse the quantitative easing once bank lending picks up. As a first step in their reversing process, the Federal Reserve stopped buying mortgages at the end of March 2010. In the months and years ahead, we need to watch carefully if the Fed can turn back their quantitative easing without causing the money supply to take off. Monitor changes in bank lending, especially the C&I loans to get an idea of when the Fed will tighten further.
    With the prospect for inflation rather muted for now, the question becomes how  will governments pay for their huge deficits. Politically difficult spending cuts and higher taxes are in the cards. If governments are unable to address their deficits, their people face series economic consequences including deflation, the topic for next week’s Point of Interest.
    The Bottom Line
    To see if inflation becomes a problem monitor the changes in C&I lending, as well as the next moves by the Fed on reversing their easy money policy. Changes in the overnight fed funds rate is only one of their tools. The St. Louis Federal Reserve with their FRED database provides many useful charts and tables.
    References:
    The St. Louis Federal Reserve with their FRED

    Disclosure: No position
    Tags: Inflation
    Jun 04 3:19 PM | Link | Comment!
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