De Groote Financial Group July 22, 2016 No Comments

Housing Starts Up 4.8% in June, Reversing Decline in May…

Single-family housing starts increased 4.4% and multifamily starts moved up 5.4%.
What it means – Home builders will breathe a little easier knowing that housing isn’t sliding backward, but there’s not a lot of forward momentum, either. Housing starts climbed back to 1.189 million units on an annualized basis, which keeps the figure squarely in the 1.1 to 1.2 million range. It’s been stuck there since a surge in housing starts last summer. It’s as if builders are hesitant to put more capital at risk.

Existing Home Sales Up 1.1% in June, 3.0% Over Last Year…

Existing home sales reached the highest rate since 2007, 5.57 million units on an annualized basis.
What it means – As long as builders remain cautious, existing home sales should remain steady. Although it’s notable that the year-over-year growth rate for both measures is falling. With Unemployment solidly under 5% and interest rates are near all-time lows, what’s not to love about this economy? Oh yeah, income. We need more of that. And the cost of essentials, like healthcare and rent. We need less of that. And then there are those pesky student loans and car loans that millennials bring with them.

The European Central Bank (ECB) Left Rates Unchanged at Negative 0.40%…

ECB President Draghi noted that the bank will maintain its rate of bond buying and will not change its collateral requirements.
What it means – The last part is the most interesting. Right now, the ECB only buys bonds that yield more than its primary interest rate of minus 0.40%. It sounds odd, but more than half of all German government bonds yield less than that, so they aren’t eligible for purchase. If things don’t change, the ECB could run out of German bonds to buy before Christmas, and yet its bond-buying program will run through October 2017. The news of no changes drove German bond yields lower, which just makes things worse.

Bank of Japan (BoJ) Governor Kuroda Dismisses Possibility of Helicopter Money…

Kuroda tamped down speculation that the BoJ might print money and deliver it directly to consumers in an attempt to spark economic activity.
What it means – Technically, this is probably true. I don’t think the BoJ will print a bunch of yen and ship it directly to spenders. That would break a lot of taboos in the central banking world. But there are a lot of ways to torture the logic and get some of the same results. The government could issue perpetual bonds (that don’t mature) with an interest rate of zero, and the BoJ could buy them. The government could then use the money for a new fiscal program like a tax rebate. The result would be the same as helicopter mo ney (free
cash with no payback), but it wouldn’t come directly from the central bank. This might be on the horizon. As Kuroda dismissed cash from the sky, rumors circulated that the government is contemplating a 20 trillion yen stimulus plan.

Cass Freight Index Shows Shipping Down 4.3% Over Last Year, Expenditures Down 8.8%…

Shipping and expenditures rose in June as they do every year, but have reached lower highs.
What it means – If they aren’t shipping as much stuff, it’s because retailers aren’t selling as much, which means people aren’t buying as much. At a time when everyone seems happy with the retail space, this is a red flag. If things are so great, as retail sales indicated last week, how can shipping fall? I don’t know the answer, but it makes me cautious.

KeyBanc Upgrades Papa John’s Pizza Because of Social Strife…

Equity analysts predict more people will stay home and order in, leading to increased pizza delivery sales.
What it means – The analysts put together two trends–falling casual dining sales and increased social unrest. Are riots in various locations and political rallies actually keeping people from restaurants? Who knows? But people still have to eat. Oddly, the conclusion could be right even though the logic is wrong. So far, the protests and rallies are localized, leaving the rest of the nation free to choose any restaurant they want without fear of a hassle. But it could be that consumers see pizza delivery as a cheaper, and therefore preferable, alternative to dining out these days, as they try to make their modest incomes stretch a little further.

Insurance Premiums Set to Skyrocket Next Year…

Insurance providers that sell on the government-mandated exchanges in Texas asked for premium increases of up to 60% for 2017. Insurance providers in other states have requested increases up to 40%.
What it means – Citing losses over the last two years, providers told regulators they must increase their premiums dramatically or risk even bigger losses. Government officials were quick to point out that most who buy insurance on these exchanges receive subsidies, so they wouldn’t bear the cost. But that’s not the whole story. Millions of Americans actually pay the entire bill, and it hurts. For those that don’t, the bills are sent to the American taxpayer. Shifting the burden isn’t the same as fixing the problem.

Doug De Groote, CFP®, MBA, CTC
Managing Director

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