Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?
Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.
While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).
|By Fisher Investments Research Staff, 11/26/2013|
With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.
MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).
To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).
When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.
The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.
Exhibit 1: Emerging Markets Foreign Equity Inflows
With investors expecting the Fed to end quantitative easing soon, the yield spread is widening—fuel for stocks! Photo by Alex Wong/Getty Images.
Since 1932, the average S&P 500 bull market has lasted roughly four and a half years. With the present bull market a hair older than the average—and with domestic and global indexes setting new highs—some fret this bull market is long in the tooth. However, while bull markets die of many things, age and gravity aren’t among them. History argues the fundamentals underpinning this bull market are powerful enough to lift stocks higher from here, with economic growth likely to continue—and potentially even accelerate moving forward as bank lending increases.
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|By Ben Wright, The Telegraph, 07/06/2015|
MarketMinder's View: Here is quite a sensible take on the results of this weekend’s “Greferendum” vote against austerity. Now, it seems to overstate the impact of a potential Grexit some, claiming this would “irrevocably alter” the eurozone. Yes, it would set a precedent that the eurozone isn’t some one-way street, but is that necessarily so bad? Couldn’t it actually mitigate fears of systemic risk if one country gets into trouble? Now, that may seem big but it is actually a fairly minor quibble in what we believe was an overall sensible piece. About the only things that changed this weekend are the following: Who exactly is doing the negotiating for Greece, Greek bond yields and CDS costs. (Which are both higher).
|By Oliver Staley, Bloomberg, 07/06/2015|
MarketMinder's View: Why, yes, fight-or-flight responses and the influence of body chemistry can impact how an investor reacts to various financial stimuli—in that sense, we agree. And yes! Men do have a behavioral tendency to trade too much relative to women. However, this article offers up the theory that this same trait is responsible for market volatility and crashes, which we find wanting. Did body chemistry make the Fed tighten policy drastically in the 1929 – 1933 period and fail to act as lender of last resort, while it also made Congress enact the disastrous Smoot-Hawley Tariff Act of 1930? Did it make them triple reserve requirements prematurely in 1937? We are also skeptical accounting regulators installed mark-to-market accounting for illiquid assets in 2008, bringing huge unnecessary writedowns, because of a hormone surge. It is too simplistic to blame greed and risk taking for crises.
|By Dan Strumpf and Saumya Vaishampayan, The Wall Street Journal, 07/06/2015|
MarketMinder's View: Always remember: It isn’t reality alone that moves stock prices, it is how reality compares to sentiment. The degree of earnings growth doesn’t determine stock price movement in a vacuum. As Q2 earnings season begins, expectations for low results are rampant—similar to Q1. Now, this alone doesn’t necessarily mean we get an exact replay of Q1, when earnings smashed too-low expectations, but the fact heels-dug-in analysts still have low expectations shows sentiment doesn’t appreciate the bright reality around them. This is bullish news, folks.
|By Julie Verhage, Bloomberg, 07/06/2015|
MarketMinder's View: Yes.
Market Wrap-Up, Thursday July 2, 2015
Below is a market summary as of market close Thusday, 7/2/2015:
Global Equities: MSCI World (+0.0%)
US Equities: S&P 500 (-0.0%)
UK Equities: MSCI UK (+0.2%)
Best Country: Hong Kong (+1.2%)
Worst Country: Sweden (-2.3%)
Best Sector: Utilities (+1.2%)
Worst Sector: Financials (-0.2%)
Bond Yields: 10-year US Treasury yields fell -0.04 percentage point to 2.38%.
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.