A&I Financial Services Periscope

A & I Financial Services LLC Newsletter

For the Week of
April 14, 2011
 

 

Slow-Growth Reason 3: 
The Housing Market Is Still in Bad Shape


This week, we'll wrap up our three-part series from Litman Gregory on why they believe we are facing a period of prolonged, slower growth. It could be as early as next week that we look at an alternative point of view. As a reminder, reasons 1 and 2 are: too much debt, both in households and in government, and likely high unemployment.


Very high foreclosure rates and excess "shadow inventory" could dampen a recovery in home prices for a number of years. As of September 2010, more than 10 million homeowners owed more on their mortgages than their homes were worth - that's close to 25% of all homes with mortgages. Of those, more than 40% had negative equity of 40% or more. That is reason to give us pause.


These figures suggest foreclosures are likely to remain high as some of those homeowners decide to walk away from their homes. The high unemployment rate doesn't help, because someone without a job is more likely to lose their home. Meanwhile, the number of homes already on the market reflects a supply that is about twice the normal level.


When you factor in shadow inventory of homes in varying stages of foreclosure but not yet on the market, the supply increases to about four times the normal level. Home prices are not likely to mount a strong recovery until these excesses are worked through, and that could take a few years.


Home prices matter because they strongly influence people's sense of wealth, which in turn affects how much they spend. Home sales and values also influence other areas of the economy, including construction and spending on appliances, furniture, remodeling and materials. 


Conclusion


Taken together, the high debt levels, high unemployment, and continuing foreclosures will dampen growth. As the temporary stimulus that has driven growth coming out of the recession ebbs and we look forward over a period of years, we think these negatives will be felt more strongly. Further, risks are higher than normal, and if some of these materialize it would dampen investors' willingness to accept risk in their investments and push prices lower.


These risks, very briefly, include the risk of policy errors in which fiscal austerity is too severe too soon (and chokes the economy), or that the opposite happens, and deficits and debt levels reach breaking points and the cost to finance our debt becomes damagingly high; or the risk that housing prices experience another sharp decline, further damaging the household sector and elevating bank losses; or the risk of a macro shock like defaults among weaker euro zone countries or even the breakup of the euro, or a major slowdown in China as a result of their real estate and loan practices that some believe are creating a bubble there. Whether or not our lower-return expectation proves correct, we believe that given the risks we face it makes sense to cast a wide net as we seek opportunities to earn good returns. (1)

 

Economic Briefs

ISM SERVICE SECTOR INDEX DESCENDS TO 57.3
 

The Institute for Supply Management's February non-manufacturing index came in at 59.7; the March edition is 2.4% lower, and ISM's survey estimated a 7.2% decline in business activity/production for the month and a 4.0% increase in the backlog of orders. However, the ISM non-manufacturing index has shown sector expansion for 16 months. (5)


REMARKABLE GAINS FOR CRUDE & GOLD
Oil prices rose 4.49% last week, and they have soared 11.60% in the last three weeks. NYMEX crude ended the week at $112.79 a barrel. (The American Automobile Association said the price of a gallon of regular unleaded gas averaged $3.73 nationally as of Friday.) Gold advanced $45.30 last week to settle at $1,473.40 on the COMEX. (6,7)


A FLAT LANDSCAPE FOR STOCKS
The Dow, NASDAQ and S&P 500 didn't move much between Monday and Friday. Here is how things went for the week: DJIA, +0.03% to 12,380.05; S&P 500, -0.32% to 1,328.17; NASDAQ, -0.33% to 2,780.41. (8)

Market Summary

% Change

Y-T-D

1Yr Chg

5-Year Avg

DJIA

+6.93

+13.30

+2.27

NASDAQ

+4.85

+14.10

+3.77

S&P 500

+5.61

+11.95

+0.50

(Source: cnbc.com, bigcharts.com, treasury.gov, treasurydirect.gov - 4/8/11)
Create a beautiful week!

Karl Frank, MBA, MSF
Certified Financial Planner (R)
A & I Financial Services LLC
303.690.5070
 

Citations:
(1) - http://www.advisorintelligence.com/portfolios/currentinvestm
entstrategy.aspx
(2) - cnbc.com/id/42478476/ [4/7/11]     
(3) - blogs.wsj.com/marketbeat/ [4/8/11]
(4) - money.cnn.com/2011/04/08/markets/thebuzz/index.htm [4/8/11]
(5) - ism.ws/ISMReport/nonmfgROB.cfm [4/5/11]
(6) - blogs.wsj.com/marketbeat/2011/04/08/data-points-energy-metals-483/ [4/8/11]
(7) - charlotteobserver.com/2011/04/08/2208080/gas-prices-are-on-rise-again.html [4/8/11]
(8) - cnbc.com/id/42498783 [4/8/11] 
 
This material has been prepared and is distributed solely for information purposes only. It is not a solicitation or an offer buy any securities or instrument or to participate in any trading strategy. There is no assurance that a particular trading strategy will achieve investment success.

 

Certain material in this work is proprietary to and copyrighted by Litman/Gregory Analytics and is used by A & I Financial Services LLC with permission. Reproduction or distribution of this material is prohibited and all rights are reserved. 

  
Securities offered through Geneos Wealth Management, Inc., member FINRA/SIPC.  Investment advisory services offered through A & I Financial Services LLC, registered investment advisor.
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Riddle of the Week
Can you rearrange the letters in new door to make one word?
  

Last week's riddle:

 

Two children are born in the same hospital (and in the same hospital room) on the same year, month, day and minute. They have the same two parents, yet they are not referred to as twins and have no brothers. How is this possible?
 

     

Last week's answer:

 

 They are sisters and two-thirds of a set of triplets.