Today is going to be a bit of a roundhouse review of issues in the news rather than a single topic daily newsletter because a lot of different things are creeping up on us that I haven’t highlighted. So I want to touch upon some of the links we have seen recently.
Here goes
United States. First, I want to focus on the housing issue here. I have written recently that US growth could accelerate, moving back to my default position after the Q1 weather-induced slowdown. The question is whether housing will contribute to acceleration if it comes. On Friday, I said it was unlikely to be a big lift, especially in view of the deceleration in homebuilding and the lack of refi mortgages. The increase in pending home sales in March does say that housing is not about to roll over just yet though. My concern on the housing front is how the increase in house prices is being driven by higher rental prices and cash buyers despite slowing mortgage and housing demand. Amir Sufi and Atif Mian have a new post out highlighting the problem by comparing rental prices to inflation since 2011. And while the numbers cannot isolate rent by income level, they do show rents outstripping inflation, something that has to depress aggregate demand.
Another facet of the housing market worth remembering is the differential in jumbo loan rates and conventional loan rates. Jumbos have been cheaper since November and there are a number of reasons why. One reason is Fannie and Freddie. After getting shellacked during the subprime crisis, Fannie and Freddie, which only deal in prime loans, are tacking on additional fees in order to increase their reserves this go round. And the higher fees are being passed through into higher mortgage rates. Jumbos are not Fannie and Freddie product. So there are no fees. Another aspect here is that lenders are still discriminating in their credit. They cannot get into subprime housing because the originate to distribute model for that segment is dead and so they are restricted to prime loans. To the degree they hold stuff on their books, they want ultra-prime. And that means 740+ FICO credit scores. This gives lenders an entry into providing a wider array of financial services to affluent households, where loan losses are less and fees from the full financial product spectrum are higher. For example, AP reports that “in the first three months of 2014, 37 percent of the money Bank of America lent for mortgages went to jumbos, compared with 22 percent at the same point last year.”
Jumbo mortgagees are now becoming adjustable rate buyers as well. These are the normal loans you find in countries like the UK. The traditional 30-year fixed mortgage is not usual outside the US. but the differential now is huge and it means 20-25% more payment per month for a jumbo loan. I looking for the numbers now but I believe I have seen a stat saying that ARMs account for over 60% of the jumbo market now as a result.
Technology. In the world of Tech, Samsung released earnings and they were buoyed by chips but the mobile numbers were soft, with Samsung ceding market share just as Apple had done. Apple continues to raise debt to avoid income tax repatriation issues. This time it is to raise another $17 billion. I find this part of the US tax code completely warped because personal income is taxed by the US irrespective of source while corporates can game the system by choosing low tax domiciles – and in the case of Ireland, setting up a shell that pays no tax because of Irish tax law on corporation domiciles. It’s a clear case of corporatism because corporations are not treated equally here.
Nonetheless, on the mobile front, what we are seeing is a move toward cheapie handsets as the market becomes saturated. This is what I predicted three years ago and the upshot from an Apple perspective is that the land grab pre-handset margin shrinkage was won by Android so that Apple will suffer from this problem disproportionately. That’s why they are fighting patent wars.
Look at mobile payments as an interesting space. Some analysts are saying Facebook has a leg up here since they are ubiquitous on mobile handsets. I don’t see it since Facebook needs to gather payment information to push this. And I know that Google has had a hard slog to do this as it has tried to get into payments. I see Amazon as best positioned among Tech companies for payments, followed by Google and Apple. Of course Ebay is already king here with PayPal but I am thinking of new technology. Speaking of new payments technology, look at the UK’s Paym, which is a bank-initiated mobile payments system. It has 300,000 adopters already. This is good stuff and shows banks have a leg p in the payments space if they are willing to take it on. I think it means lower fees down the line though because of competition from non-bank competitors.
Also in tech, the cloud space is getting congested with Microsoft upping its corporate offering to 1 terabyte of storage space from the paltry 25 GB they offered before. Can Box and DropBox compete with companies that are potentially willing to sell under cost? I am doubtful. Box, in particular, looks like a company that either gets bought or goes under. It has IPO plans and has yet to earn money. I don’t see it earning money soon and believe it is doing an IPO because it needs cash. This is embematic of a later stage of the tech cycle and says we are well into the frothy stage of the market, despite widespread denials to the contrary. The market is bifurcated with companies like Google, Apple, Microsoft, Intel and Cisco trading at low multiples because they have low growth prospects. the high fliers have ridiculous multiples or are actually loss-making. These companies will come down to earth almost across the board: Twitter, Netflix, Amazon, Tesla, Facebook, etc.
I have run out of time. So that’s it for today.
More on these topics and others soon