Monday, November 3, 2014

Construction vs. Industry, the plot thickens

Two charts from Calculated Risk today.

First, the ISM Manufacturing Index reaching the top end of its long term range.  "The PMI was at 59.0% in October, up from 56.6% in September. The employment index was at 55.5%, up from 54.6% in September, and the new orders index was at 65.8%, up from 60.0%."

Then, Construction Spending.  "On a year-over-year basis, private residential construction spending is now up 1%. Non-residential spending is up 6% year-over-year. Public spending is up 2% year-over-year."  And growth trends look terrible.
 
So, where is the most likely source of financial instability?

1) Industrial output growth at cyclical peaks in spite of extremely low corporate leverage and high risk premiums.

2) Private construction spending growth rapidly falling while institutional buyers decline, home owners continue to deleverage, and banks hold real estate assets below the levels of 7 years ago.

3) Monetary and regulatory policies aimed at thwarting financial instability.

9 comments:

  1. Great thinking. BTW I like mREITs.

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    1. I have been thinking about multi-family residential firms, but, now that you mention it, mREITs might offer the best position for our basic point of view on how things are coming along.

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    2. Hi, this is Nick ... I comment sometimes at tmi
      I was heartened to read these comment as I recently invested in several mREITs (during the unpleasantness last month). Obviously I would have been better served just buying the dip in equities but they've done ok so far.
      Anyway I just wanted to get some opinion on how well mREITs can do if the yield curve keeps flattening. I see stagnation (but no calamity) as the sweet spot for mREITs. Is this wrong? I read all the time about how they will thrive on a steeper yield curve. I understand this in theory ... like if someone just handed them a steeper curve tomorrow they would make money ... but in practice I see any of the ways we get there being quite harmful.
      If we adopted ngdplt tomorrow they might thrive for a time, but equities would be outpacing them. Then when short rates finally do rise they will suffer just as much as equities.
      I feel like a never ending cycle of half-hearted stimulus followed by scaring rate hikes off by talking about hiking rates too early is their sweet spot. Is this insane?

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    3. Honestly, I need to look at this more closely, but I agree with you here. Even calamity doesn't look that bad. NLY did very well during 2008-2009. I think you're right about the yield curve relating to these equities.

      Something like NLY, which is the one I'm most familiar with, isn't going to give a 300% speculative profit, but considering equities have generally recovered most of the outsized cyclical gains, and probably will just be seeing regular growth rates along with the economy for a while, these positions give a great exposure to what seems to me to be a wholly oversized alpha, mostly through the huge dividends, with what looks like strong bear market protection. Maybe I'm missing something, but I think this deserves a look.

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    4. I suppose they could eventually be hurt by unexpectedly sharp increases in short term rates, if housing markets ever recover enough to lead to that risk. If that's the main risk, I wonder if this would make a good hedge to combine with out of the money LEAPS on some homebuilders.

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    5. Thanks for the reply, Kevin
      NLY is one of my holdings. Personally, I'd get scared trying to connect anything but the largest mREITs and homebuilders. And even something like Toll Brothers and Annaly would frighten me. I've traded mREITs through the ETF REM before but I donna how well it's options trade. I've never found a homebuilder ETF I liked. Many seem to hold a ton of brick and mortar home renovation retail outlets.

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  2. TravisV here.

    Over at TheMoneyIllusion, I asked:

    "5-Year inflation expectations (at FRED) surged from 1.49 on 11/4/14 to 1.54 on 11/5/14.

    That’s a rather curious result, since the Republicans beat election expectations the night of 11/4/14. Why do you think inflation expectations shot up? Was it all Draghi anticipation?"

    http://www.themoneyillusion.com/?p=27943#comment-370186

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    1. Maybe. I don't know if we can read too much into those daily fluctuations in TIPS spreads.

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  3. It is somehow terrible considering those numbers. I think when it comes to this kind of thing Singapore has far more stability. Residential places whether public or private has their own scale. I always talk from the guys of http://www.newreadyproperty.com/ and I am very thankful with the information that they always share to me.

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