Tucson Mortgages Home Loan News 12-30-2019
Week of December 23rd, 2019 in Review
The Stock market must have been on Santa’s nice list this year, as it moved higher Christmas week and has posted gains of almost 30% over the course of the year so far. Mortgage Bonds continued to trade in a sideways pattern, with interest rates still at very attractive levels.
With Stocks seeming to set all-time highs every day now, it makes sense that investors are feeling very optimistic. Investor sentiment is and has always been a very important indicator. Some of the greatest investors of all time were contrarians, meaning they try to do the opposite of the crowd. A contrarian investor believes the people who say the market is going up do so only when they are fully invested and have no further purchasing power. At this point, the market is at a peak. When people predict a downturn, they have already sold out, so there is plenty of money on the sidelines to push the market higher.
Here are a few of the greatest contrarian investors of all time…you should recognize a few listed below:
- Warren Buffet – “Be fearful when others are greedy. Be greedy when others are fearful”
- Baron Rothschild – “Buy when there’s blood in the streets”
- Sir John Templeton – “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
CNN has a very reliable contrarian indicator called the Fear & Greed Index. Just a year ago, the index showed a reading of 5, which is in the Extreme Fear range. According to the contrarian mindset, this would have been a strong buy signal. And sure enough, Stocks have gone up nearly 30% so far this year. Just this past week, the index rose to 92, which is a reading of extreme greed. Stocks may very well continue to move higher, but this is something we should keep an eye on, as it would point to a pullback in Stocks. If that were to occur, Bonds would likely be the beneficiary and rates would move lower.
Stealth QE (Quantitative Easing)
Stocks have gone up for a few reasons, one being the Phase 1 trade deal with China, and another being the Fed. The Fed has been performing what we call “Stealth QE”, meaning that they are quietly adding stimulus into the market. The Fed has been buying, on average, just over $100B per month of Treasury Bills in order to inject liquidity into the market, which is how they have been quietly adding stimulus into the market. Because the Fed has been buying a significant amount of Treasury Bills, short term rates have been kept extremely low. Just how much is $100B per month? At the height of the Fed’s stimulus run they were investing $85 Billion in MBS and Treasuries…so this is even greater than that.
As a result of the buying and short-term rates falling, the yield curve has righted itself, with shorter term maturities yielding less than longer term maturities. Remember not long ago the yield curve was inverted, where shorter term maturities were yielding higher than longer term, which is also a recession indicator. Because short term rates have been financially engineered lower, its very hard to get a return anywhere except the Stock market. For this reason, investors have been forced to buy more Stocks, which has pushed them even higher.
The Housing Scoop
New Home Sales, which measures signed contracts on new homes, were up 1.3% in November at a 719,000 annualized pace. It’s always important to look deeper than just the headline which is something the media rarely does. In this case, the 1.3% gain looks strong, but doesn’t tell the whole story. The previous report, which was for October, was revised lower from 733,000 to 710,000. When factoring in the negative revision, sales actually dropped about 2% month to month. The current level of New Home Sales is still very strong, but we bring this up to show how the media and many others get it wrong and don’t fully understand how to interpret the data. Looking at the bigger picture, New Home Sales are up a very strong 17% year over year.
The Median Home Price was reported at $330,800, up 7.2% year over year. This is another metric that causes confusion. The Median Home Price means that half the homes sold above that number and half beneath it. While home prices are going up due to appreciation, this metric can be skewed if more higher priced homes sold Vs. lower priced homes or vice versa. The media explained that it was a bad thing that prices were up 7.2%, however if you were to tell any homeowner their home rose 7.2% in price, they would likely be thrilled. Often the media looks at home sales and homeownership as a driver of the economic activity and not as an investment for the consumer.
Inventory levels remain very tight, with only 323,000 new homes for sale at the end of November. With higher prices and lower levels of inventory, one could argue that the current level of sales show just how strong the housing market is.
What To Look For This Week
This week is another Holiday shortened week. Stocks will have a regular trading day on Tuesday, but the Bond Market will be closing early at 2:00 pm ET. Wednesday both the Stock and Bond Market will be closed for the New Year’s Day holiday.
There will be a few housing reports scheduled for release, including Pending Home Sales, The Case Shiller Home Price Index, and The FHFA House Price Index. Pending Home Sales will give a reading on signed contracts on Existing Homes, while the Case Shiller and FHFA reports will show home price appreciation. Although these are important housing reports, they will not move the markets. This means that technical analysis will continue to play an even more important role this next week.
After trading in a sideways pattern for quite some time, Bonds have broken above their 50, 25, and 100-day Moving Averages. If Bonds can hold onto these gains and remain above these levels, there is significant upside potential until the next ceiling at 101.904. If Bonds move lower, the aforementioned moving averages should provide some support. The Stock market will also have an impact on Bond trading. If Stocks have another blockbuster week, it may be hard for Bonds to gain ground. In short if they sell off, Bonds will likely be the beneficiary.