Displaying items by tag: US

(New York)

Something very curious is going on in the REIT industry—the funds are liquidating their holdings. REITs have not performed well over the last couple of years, which means many share prices are quite low relative to the market. This means they also frequently trade at a discount to the value of their underlying holdings. In response, many REITs are selling off their property holdings to make a return and bring in cash instead of issuing new shares. REITs have fallen victim to rising interest rates, but are not, in general, using the cash injections to pay down debt.

FINSUM: Considering the position they are in, this does not seem like an unwise move. It also likely signals there is a big buying opportunity in REITs if only you can stay in them long-term.

(New York)

The mortgage market has been doing quite well for a number of years. A steady stream of home buying and refinancings because of ultra low mortgage rates has kept things flowing. However, with rates rising, the refinancing part of the business is weakening for lenders. In 2017, 37% of all mortgage origination was from refinancings, down from 72% in 2012. Accordingly, the overall mortgage market fell by a whopping 12% in 2017. In order to combat the fall, lenders are pushing home equity lines of credit and adjustable rate mortgages.

FINSUM: This is a huge part of the mortgage market that is falling away. This will mean lower earnings for lenders. One wonders when the rising rates will start to curtail purchases. It seems inevitable.

(Washington)

Investors get ready, because it looks like the next recession is on the horizon and the Fed is set to start it. And we are not talking about a distant horizon. The Fed has now made its goal a task that has been nearly impossible historically. That is to boost the unemployment rate without causing a recession. The odds of failure are very high and the Fed has never successfully achieved it in its history. The reason the Fed wants to boost unemployment is that labor markets are very tight, which will produce unacceptably high inflation. Accordingly the Fed must intentionally walk up the unemployment rate to keep things in check. The tool it will use is gradual rate rises to slow down growth and boost unemployment.

FINSUM: We think the Fed is probably going to fail in this exercise, either by being too dovish and letting inflation get too high, or by being overly hawkish. Either way we do not see a good outcome. This cycle might have just crested.

(Beijing)

President Trump is set to unveil a package of trade tariffs on $60 bn worth of Chinese goods. Unsurprisingly, the Chinese are preparing their retaliation, focused on US agricultural exports. However, the very interesting part is the retaliatory package will only be on $3 bn of US imports to China, much smaller than the US package. The new Chinese tariffs will be on items ranging from fruit to pork to recycled metals. One US adviser commented “All the products on the list are small potatoes, and the real important ones are U.S. farm products like soybeans and sorghum”.

FINSUM: So why is the Chinese measure so much smaller? In our view it means that they are either afraid to seriously anger the US, or that they need our imports much more than we realize. Interesting development.

(Miami)

The Wall Street Journal has just put out the first thoroughly insightful article about the new homes crisis that we have yet seen. The US is currently plagued by one of the most severe declines in new home construction in the last century and the piece interviews many parties, including home builders, to understand why. The heart of the issue is that the costs to build a new home have roughly doubled since just before the Crisis, as labor, land, and materials have surged in price. Accordingly, many builders now only build luxury homes, where the margins are fatter for them. The low end of the market has been left with very few homes for a large number of buyers, which has sent prices through the roof.

FINSUM: So we have surging pricing at the same time as rising interest rates. Prices look set for a big fall in the near to medium term.