Theme: Housing Market, Property Prices, UK Shares
According to Rightmove, house prices have risen slightly to £227,864 this month.
Despite this upbeat sign, it’s not yet time to dip your toe into most of the beleaguered housebuilding stocks. You see, the housing story doesn’t have the “second wave” of buyers that are needed to drive a sustainable recovery.
The first wave, the rich, are playing ball…
Frustrated with enfeebled savings rates, wealthier investors are pulling out of bank accounts. They are increasingly putting their money to work into buying second and third homes at “bargain prices.”
This return of the well-heeled buyer has underpinned the stabilisation in housing and helps to explain why London and the South are tipped to recover first. The concentration of wealth is higher and the household debt is lower. Indeed, researchers at Savills are optimistic that luxury homes in the south “[will see] modest levels of positive annual growth as early as the end of next year.”
This is helping to steady average UK property prices and, according to Knight Frank, lift Central London values by 3.7%.
The problem is that property’s once-reliable second wave, the first time buyer, is out-of-action. And that’s a major obstacle for the housebuilding sector but does represent one unique opportunity…
“Plankton” is missing from the property recovery
First time buyers – sometimes called the “lifeblood” or “plankton” of the property market – are not buying.
Changes in consumer confidence, unemployment figures and bank lending have created a cocktail of good reasons for first timers to stay away. And with no plankton putting down deposits or providing monthly mortgage repayments house prices cannot keep rising.
As my colleague Brian Durrant recently wrote in The Fleet Street Letter:
“Although sentiment in the housing market has improved in the last three months, it is difficult to see enough new entrants coming through in the next twelve months to provide the basis for a sustained recovery in prices.
“We see further falls this year with the market remaining in the doldrums in 2010.”
In this situation, the simplest move would be to stay away from the sector altogether, but as well as the stocks to avoid, we’ve actually got a play on the “local opportunities” that are available to the smart investor…
Two to sell and one to buy
I don’t need to spend too much time making the well rehearsed case against house builders…
Stocks like Barratt Developments (ticker: BDEV) and Taylor Wimpey (ticker: TW.) have lost an average of 87% for investors since the start of the credit crunch. Investors are advised to only put “danger money” into these stocks. Looking at some of their balance sheets that are submerged in debt, the fundamental picture remains tragic. This is the sector for high risk punting, not sensible investing.
However, one investment idea that is appealing is Savills (ticker: SVS) .
As we have previously stated, the local picture for London and the South is sound. For as long as interest rates are minimal, the rich will continue to invest in houses. Add to this, the weakness of the pound makes London a good property destination for foreign rich investors.
Savills capitalises on this quirk of an otherwise miserable property market. Its UK operations are concentrated on the top end of residential and commercial property. And, something of a rarity in property, it has a net cash position of £45 million. Not being laden with debt has proven to be a good thing in a credit crunch.
Too much of a good thing it seems…
While Savills is more specialist and resilient than its sector buddies, the market already knows this. The stock trades at a very pricey 23 times next year’s forecasted earnings.
We’re adding this one to the watch list and recommend that you do too. We will see in next month’s half year results whether the company can continue its good form. If so, Savills could be the one property stock to buy in property’s continuing bear market.
Best wishes,
Theo Casey
For The Right Side
Editor’s note: Theo Casey is investment director of The Fleet Street Letter. One of the team’s many profitable investments is a "protected fund" that allows you to profit from the rise and fall in the property market as well as many other volatile assets.
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MARKET NOTES
Japanese investors steer clear of the stock market madness
BY FRANK HEMSLEY
For years the Japanese yen moved inversely to the S&P 500 index as the ‘carry trade’ was all the rage. That’s where investors borrowed yen at virtually zero interest rates to fund purchases of riskier, higher yielding currencies and investments.
These trades aimed to profit from the difference between low borrowing costs and higher yield in other investments. And as all this capital flowed out of Japan, the yen declined in value.
But when the financial crisis took hold, money flowed out of stocks and repaid those loans, causing the yen to rise.
In the chart below, we’ve represented the yen with the CurrencyShares Japanese Yen Trust (ticker: FXY; red line) which is an ETF closely tracking the yen’s movements. This is plotted against the S&P 500 Index (green line) for the past two years. You can see that the yen peaked in January this year (circled).
The yen/stock disconnect
If you would like a larger version of this graph please click here
Source: Financial Times
Over two years, the stock market has trended down, and the yen has trended up. But what’s more interesting about this chart is that since the stock market bottomed in March of this year, the yen has also rallied. The yen ETF is up 5% versus the S&P’s 41% gain.
This is a strong indicator of Japanese investor sentiment right now. Japanese investors have not bought into the worldwide appetite for stocks. They are not prepared to pour money into international markets at the moment.
What that shows is that Japanese investors don’t believe that international stock markets offer good value right now. And we agree with them.
The Daily Reckoning – Proceeding into a major structural depression
BY BILL BONNER
Vancouver, British Columbia
Wednesday, 22 July 2009
They’re wrong. We’re right.
Now the Wall Street Journal says “recovery likely in second half.”
And Goldman Sachs calls for a stock market rally similar to the rally in 1982.
Who are we to say they are wrong?
Well... we’re the Daily Reckoning, that’s who. And we’ll say it: they’re wrong.
This ‘recession’ is already the second longest since the first leg down of the Great Depression. That downturn of the early ‘30s went on for 43 months. This one is now at 19 months – officially – which makes it longer than any other since the Great Depression.
Is it over? Is it going away? Is that all there is?
Nope. Nope. Nope.
Instead, we are merely proceeding as we should... into a “deepening structural depression,” as John Williams puts it.
Yes, he uses the D word too. Because a D is what we have. Not an R.
It’s a depression because it requires major structural change. A recession only requires time. And not even much time... just a few months to work down inventories. But a depression takes a lot of time...to restructure industries and rebuild balance sheets. Debt needs to be paid down – or inflated away. And businesses need to redirect their efforts towards a more profitable line of activity.
Both the increase in unemployment and the slump in industrial production are worst than at any time since 1945. As for retail sales and housing starts, they’re the worst in the post-war record books.
The figures tell us that something important is going on. But what’s the key to understanding what it is? And how will it be cured?
This key is to understand that this is a major structural depression. It can’t be cured by more stimulus, because stimulus is what caused it.
This time, we need a real cure... bankruptcies, workouts, deflation, defaults... and maybe, eventually, hyperinflation.
None of those things happen easily or quickly. Businesses don’t want to go bust. Families don’t want to lose their houses. So if they get a lifeline from the feds, they grab it and hold on. And the longer they hold on, the longer it takes to make the structural changes that the economy needs.
The length of time spent in unemployment is now longest since 1948. And consumer debt, at only 12% in 1982, is now at 18% of GDP. “With that kind of debt, there is no question that the feds will implement a tight money policy,” said Marc Faber in his speech here in Vancouver yesterday. Instead, look for easier... and easier... money policies, he says.
We learned – was it yesterday? – that the feds have put up an amount equal to more than 150% to GDP to bailing out Wall Street -- $23 trillion. No wonder Goldman is reporting record bonuses!
“We have to spend money to keep from going broke,” says Joe Biden, a man who is out of his depth in the bathtub.
But when you’ve got that kind of money covering your mistakes... how much restructuring are you going to do? Not much.
“Wall Street Learned Nothing,” is a headline at Forbes, making the obvious point.
The feds still believe in stimulus. And Wall Street still smiles and takes it. That’s why the recovery is still a long way off. Now, the feds are in charge of the money... and in charge of key industries, including automobiles, banking, insurance... and soon, healthcare. They’ll block innovation. They’ll prop up ailing institutions. They’ll provide more and more stimulus.
A growing group of analysts and strategists now calls for another big stimulus package. You see, the current stimulus program hasn’t worked. Why not? Well, because it was not enough... or not properly focused, say economists. In either case, the solution is not hard to figure out. Even Nouriel Roubini says “more stimulus is needed.”
So more stimulus is what we will have... and a collapsing economy... and a falling dollar... and more!
Read on...
To read the Daily Reckoning in full, click here.
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