The Great Housing Recovery ^Not!
New home sales just leaped to an eight-year high. Many were pleased with the gain, and as a result felt that the Fed could stay on course to hike interest rates at their June meeting. But the gain masks what is actually a bigger problem. New home sales are barely half their peak of 2006; housing starts are also barely half of their peak; existing home sales are doing better but are still 25% off of their peak; and, while housing price gains have been good, they also languish off 10% from their peak. Mortgage debt is actually down roughly $1 trillion from its peak, but the banks needing business are once again offering low down-payment mortgages to first time buyers. Mortgages are down because many don’t qualify, and many millennials who would like to get into the housing market are being held back with low-paying jobs and living in their parents’ basement. A series of charts demonstrate that the great housing leap is not that great after all.
Debt Binge!
Since the financial crisis of 2008 the world has become awash in debt. A study released by McKinsey Global Institute noted that debt had increased $57 trillion from 2008 to 2014, bringing total global debt to around $200 trillion. Today that number is estimated at over $230 trillion. A recent Bloomberg article noted that corporations have gone on a debt binge, issuing roughly $900 billion in just the first five months of 2016. One of the biggest was Dell Computer raising $20 billion with issues out to 30 years. Dell is rated just BBB- by S&P, a level just above junk. Pension funds, hedge funds, and mutual funds are seeking yield, and it appears they are willing to take down almost anything. Following years of ZIRP, NIRP, QE and easy monetary policy, it seems that not only are corporations taking advantage of the environment, but investors are willing to pile on the high-risk assets. But history is replete with debt collapse. Is this time different? Probably not. Complacency at the top of the market is not unusual.
What to Watch for: The Next Two Weeks
During our absence over the next two weeks, two important events worth watching will take place. The first one is Friday June 3, 2016, with the release of the May employment numbers. A higher than expected nonfarm payrolls will put the Fed rate hike firmly in focus. A lower than expected number could cause hesitation. The FOMC meets June 14/15, 2016, and many are expecting the Fed to hike interest rates once again by 0.25%. But is it warranted. Bond spreads are narrowing, and that is suggesting the opposite. The Fed funds rate does not appear to be pricing in a rate hike. Whatever the result, it could set the tone into the summer.
Weekly Market Review
Stocks
The stock markets continue to try and move to higher levels. But the divergences continue to mount. While the S&P 500 is within calling distance of its recent highs, the Dow Jones Industrials (DJI) not only suffered a small loss this past week, but remains well below its recent highs and the May 2015 high. European markets are even further below their highs. Money has been flowing out of the Eurozone. Complacency seems to reign, but market participants should be anything but complacent.
Currencies
The US dollar index has run into a resistance zone and appears poised to correct back. The US dollar index is being dominated by whether the Fed hikes interest rates or not, as are the markets. A Fed hike at the FOMC meeting in mid-June would strengthen the US dollar index, but the Fed not hiking would weaken the US dollar index. The charts continue to leave both the bulls and the bears confused as to which direction will be next. There are solid arguments for both cases. One currency that took a definitive turn for the worse this past week was the British pound. The pound was the biggest loser on the week as polls indicated that the Brexit could win.
Gold and Precious Metals
Gold, silver and the precious metals continue to go through a corrective pattern. Thus far our first zone of support has been hit for gold in the $1,190 to $1,210 zone. A breakdown under that level could suggest a move next $1,170 to $1,180. Major support lies at $1,140 to $1,150. Silver has slipped under $16. Major support for silver is near $15.30. An encouraging sign has been the gold stocks as represented by the Gold Bugs Index (HUI) and the TSX Gold Index (NYSE:TGD). While off their highs, the losses thus far are only in the 10-15% range. They are still up 60-80% on the year. We review the positive signs we are seeing for gold and the precious metals. We examine an alternative Elliott Wave count from the highs of September 2011. While suggested by a reader, it is one that we were aware of. Elliott Wave, like much of technical analysis, is interpretative and there can be more than one interpretation.