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 Megan McArdle, Bloomberg, 07/02/2015|
MarketMinder's View: We’re somewhat ambivalent about this one. On the one hand, it highlights a few key ways the US isn’t Greece: America has a much deeper and diversified economy (as this piece quips, it’s much more than tourism and olive trees), doesn’t suffer from Greek-style corruption, has much better tax collection and can set its own monetary policy. However, we don’t believe the US has “massively unsustainable borrowing.” Though many bemoan the US’s $18 trillion dollar debt, about 102% of GDP, that figure includes the government’s holdings, which effectively cancel (it’s money they owe themselves). Net debt (held by the public) is $13.1 trillion, about 74% of GDP. Plus, the ability to service this debt is what really matters, and US borrowing costs are very low and falling. Debt service is less than 8% of tax revenue. If debt rises for years at breakneck speed and interest rates soar to nosebleed levels and stay there, then we’ll have a problem, but that risk is almost nil in the foreseeable future. Markets don’t deal with remote far-future possibilities in the here and now.
|By Neil Irwin, The New York Times, 07/02/2015|
MarketMinder's View: Why? Because the labor force participation rate fell again. Folks, the labor force participation rate is a largely meaningless statistic. Everyone focuses on the numerator—labor force—forgetting the denominator, population, has as much influence on the ratio. The labor force itself isn’t shrinking—it fell a bit in June, but May was an all-time high. Population is just growing faster, ergo, falling ratio. Don’t overthink it. Also, the labor market is a late-lagging indicator, utterly meaningless for stocks. Growth drives jobs, not the other way around.
|By Dimitris Valatsas, The Wall Street Journal, 07/02/2015|
MarketMinder's View: This piece has a clear political agenda, and we normally wouldn’t highlight something of that ilk, but we’re making an exception in this case because it has such a simple, clear accounting of Greece’s increasing hardships as the Syriza government—elected on an untenable promise of continued euro membership with much less austerity—floundered in negotiations with creditors and ultimately lost the goodwill of Brussels and many of their constituents. When Syriza won January’s election, Greece was in a nascent economic recovery. Now they are back in recession, and the downturn is almost sure to steepen. Grexit seems perhaps a stone’s throw away, and for all the pixels spilled over how devaluation could boost Greek exports and competitiveness in the long run, in the near term it will be devastating: “As usual, it is the poor who suffer the most. The Greek elites’ Swiss bank accounts aren’t subject to withdrawal limits. The rich don’t stand to lose their savings if the government forcibly converts their money into newly minted drachmas.” We can’t help but wonder how closely Spanish voters are watching and whether this will turn them off of their Syriza equivalent, the Podemos party, which is polling well as the general election there approaches.
|By Jennifer Kaplan and Joseph Ciolli, Bloomberg, 07/02/2015|
MarketMinder's View: Analysts currently expect S&P 500 Q2 profits to fall year over year—“more ammunition for bears who say equity valuations are too high.” We would quibble with this for several reasons: (1) As this notes, most of the expected decline stems from cratering Energy profits. Excluding Energy, profits are expected to grow a little. (2) Market valuations typically expand in maturing phases of bull markets, and earnings growth can slow or even turn negative without derailing bull markets. (3) Part of the reason analysts expect earnings to drop in Q2 is the strong US dollar, which supposedly hurts exports. But they said the same thing in Q1, and earnings grew—turned out they forgot a strong dollar helps lower overseas costs, offsetting much of its impact on overseas revenue, as we discussed in more detail here. And finally, (4) stocks are forward-looking. Q2 is in the past now, and stocks have already discounted all these dreary expectations. They’re looking to the next 3-30 months or so, and most expect earnings to reaccelerate in that window.
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.