Another Disappointing US Housing Data Release

Existing home sales fell by -5.1% month-over-month in January. Existing home sales have now declined five of the past six months are now down on a year-over-year basis (5.13%). Mean and average prices, however, remain higher on a year-over-year basis (8.8% and 10.7%, respectively). The month's supply of exisitng homes for sales moved back toward 5 months which may indicate that housing price gains moderate or decline a bit from current levels.

Abenomics is Failing on Multiple Fronts

With each passing month it is becoming more clear that Abenomics is, at least so far, failing to meet one of its critical goals, which is to stimulate exports and bring the country back to a trade surplus. Indeed, the latest trade statistics revealed the largest single month trade deficit ever. The blame for the now persistent deterioration in the trade account is usually attributed to the fact that Japan's nuclear facilities are shuttered thus causing energy imports to soar in yen terms. Another popular explanation is that demand is being brought forward ahead of the consumption tax increase that is to take place in April. While these two explanations may be true in part, we would offer another explanation: Japan's trade account is deteriorating because it has for the last decade consistently lost competitiveness relative to it's North Asian rival, South Korea. In the second chart below we show Japan's exports to Asia relative to South Korea's exports to Asia (blue line) and then plot the KRW/JPY exchange rate (red line) on top. The main takeaway here is that over the last 10 years Japan's exports to Asia have fallen by almost 50% relative to South Koreas's exports to Asia. Further, this stunning loss of market share shows almost no relationship to the exchange rate (indeed the exchange rate today is almost exactly the same as it was 10 years ago) signaling that the competitiveness issues go much deeper than exchange rates. Unfortunately Abenomics has done little to address the competitiveness issue while at the same time exacerbating (perhaps temporarily) the strain on trade.  

A Look At Global Food Retailers

Last night news surfaced that Safeway, the US grocery store chain, was in talks to potentially sell itself.  Whether this is the start of further consolidation in the food retail business is unclear, but it is clear that there a bunch of cheap looking stocks in the global food retail industry with perhaps one exception.

In the first table, we show the price to cash flow ratio for all the food retail companies in the MSCI World index.  At 8.5x, the industry as a whole is selling at a 20% discount to the overall index.  In the second table, we show price to sales ratio for all the food retail companies.  At .2x sales, Safeway is among the cheapest companies, along with Kroger and Casino (a French grocer).

In both displays, it is easy to see the high regard in which investors hold Whole Foods.  At 19.5x cash flow and 1.5x sales, it is far and away the most expensive large food retail company in the world.

Price to Cash Flow - World Food Retail Companies, 10 Year


Price to Sales - World Food Retail Companies, 10 Year

An Update on European Economic Policy Uncertainty

Last fall, we noted the relationship between positive European equities market performance and a reduction in policy uncertainty:



So what does policy uncertainty look like in Europe's largest economies?






Overall, policy uncertainty has fallen from highs reached in 2011/2012.  As of now, this indicator would seem to bode well for European equity performance.  So far this year, gains have been modest for most of MSCI Europe with better performance in Denmark, Ireland, and Greece:

"The Warren Buffet Indicator" At Most Extreme Level Since December 2000

The ratio of the market value of equities outstanding to nominal GDP aka "The Warren Buffet Indicator" is at the highest level in about 13 years. This ratio became associated with Warren Buffet after he remarked in a 2001 Fortune Magazine article that this "is probably the best single measure of where valuations stand at any given moment". The numerator comes from the Flow of Funds so we will have to wait until March 6th to confirm that this relationship has moved to an even higher extreme in 4Q13. But regardless, you can add this to the list of valuation measures that show stock valuations are at lofty levels.

A Threat to Growth in Switzerland?

The ZEW survey of economic expectations for Switzerland, released today, declined for the second month in a row:



Cited as the primary reason for the moderation was a little publicized referendum passed by Swiss voters last week that seeks to instate significant curbs on immigration.  In a country where it is not uncommon for at least half of a company's employees to be of a nationality other than Swiss, there is concern that the legislation could hamper overall growth.

Oil Most Significant Factor in 1 Week Stock Performance

Our factor scoring work reveals that stock price correlation to oil was the most significant factor in determining performance over the last week, with an R-squared of .95. The correlation to treasury bonds was the next most important variable followed by ROE.



Over the last month, however, fundamental factors have been the big determinants of performance as valuation metrics and analyst estimate revisions rose to the top of the list.

Danish Alert

Over the years, we have assembled a variety of indicators that help us understand movements in stock prices.  One of the more unusual indicators is the relationship between the S&P 500 and Denmark consumer confidence.  In 2000, Danish consumer confidence peaked in June, leading the peak in stock prices by three months.  In 2006, Danish consumer confidence peaked, giving a one year forward signal of the peak in the S&P 500.  In August 2010, once again, Danish consumer confidence peaked one year ahead of the intermediate decline in August-October 2011.  Recently, Danish consumer confidence appears to have peaked once again.  If history is any guide, and if Danish confidence stays down, this indicator represents an early warning flag for 2014 stock performance.

Lumber Prices May Signal A Bounce Back In February's Housing Starts

Housing starts for January missed by a considerable margin this morning. Consensus estimates were in the range of 950K while the actual number came in at 880K. Perhaps more worrying was the fact that building permits, a leading indicator for housing starts that is usually not as affected by bad weather, was also below expectations (937K vs consensus estimate of 975K). The silver lining is the lumber prices have held steady over the past few months which may signal that housing starts in February could improve back towards the 1 million range.

Va Bene?

Following the latest in Italian political drama, we thought we would take a quick look at the Italian equity market, in general, and the MSCI Italy, in particular.  Performance has not suffered too terribly and, in fact, MSCI Italy is second only to Ireland over the last year:



Within MSCI Italy, the Industrials sector has shown the most positive performance, led by the Aerospace & Defense sub-industry:




There is just one company in this group in Italy, and we can see the outperformance in our point-and-figure methodology:



Over the last year, Finmeccanica has had an average daily gain of 0.26%.  While this doesn't sound like much, when compared to the worst performing MSCI Italy stock's average daily loss of 0.05%, it makes quite a bit of difference:

Deconstructing Japanese Equity Performance

Over the last last month, Japan has been the worst performing country in the MSCI World index, down on average 5.25%.

MSCI Country Performance


Underneath the surface, the distribution of sector performance shows that while the export-oriented industries have performed poorly recently, the non-export industries have escaped most of the damage.

MSCI Japan Sector Performance


This puts a premium on stock selection as there are only a combined 45 companies in the MSCI Japan health care and consumer staples sectors.

Number of Japanese Companies in MSCI World Index

Are US Housing Prices About To Drop?

This morning the NAHB Housing Market Index showed a large 10-point drop in January. This is, in fact, the largest decline on record for the Housing Market Index. Traffic of  perspective buyers also had a large decline. The nine point decline in the traffic of perspective buyers is tied for the largest on record. (Feb 1994 and Oct 2001). The NAHB Housing Market Index has fluctuated with housing prices over the past 20 years. If this is a start of new downward trend in the HMI than housing price momentum may be about to fall as well.