Month: July 2012

By MoneyMorning.com.au

A family friend working in real estate recently told me:

‘Well, there are plenty of sellers, and also plenty of buyers,

…but never the twain will meet.’

It’s a tough challenge to bridge the expectations of the two parties.

But right now, buyers have the upper hand. They know there’s a fair chance that all they have to do to get a better price – is wait.

And if the recent analysis on the Melbourne property market is right, it will be worth their while waiting a bit longer…

The average capital city property is already down by around 8% from the start of last year. But it seems that sellers are finding it hard to accept that this figure could possibly apply to their home too. Which is part of the reason ‘never the twain will meet’.

This is the latest chart from the Reserve Bank of Australia (RBA) showing what’s happening to property prices around our main cities. This was updated a few weeks ago, so should be pretty current.

Most Australian City Property Prices Trending Down

Talking about ‘the Australian property market‘ is a bit like talking about ‘the stock market’. It overlooks that it is made up of many very different sectors. For example, property in the city of Brisbane has fallen around 10% from its peak – but Victorian regional property prices in regions like Bendigo have actually increased by 8% in the same time.

But I want to specifically take a look at the Melbourne property market, which is starting to look pretty ugly.

Melbourne Property Prices Falling Sharply

This is the blue line on the left hand side of the chart. I’ve circled it to highlight it.

Melbourne property prices are rolling over really quite sharply now, and are tracing the steepest decline of all the cities by far.

So what’s happening in Melbourne to cause it to suffer more than the other cities – and how much worse can it get?

Morgan Stanley Equity Research summed it up in a report yesterday, saying:

‘…with record levels of stock on market, and record levels of dwellings under construction, the Victorian residential market is precariously poised for continued pricing pressure.’

According to SQM research, the record level of ‘stock on market’ in Melbourne is now sitting at around 41,000 unsold houses (and 14,000 apartments). This level of stock has been increasing steadily, and is now double what it was just two years ago.

A note from Goldman Sachs a few weeks back suggested that the true clearance rate for Melbourne property at the time was in fact 11.8%, rather than the official 55.8%. Apparently the properties with no bids aren’t used in the final calculation…which is a bit like being on a diet – but not counting the food that no-one sees you eat.

As for ‘the record levels of dwellings under construction’, the number of apartments under construction is now about 80% above the long-term average.

The Melbourne property market was a favourite for developers, but it now looks like they might have got a bit carried away.

For years, we’ve had the property bulls banging on about a ‘housing shortage‘. Your regular editor, Kris Sayce, has taken that argument to pieces countless times since 2009.

Now we have recently heard from the National Census that Australia’s population is about 1% less than thought. The result is that the National Housing Supply Council’s estimates of a 228,000 undersupply of housing, could actually be an official oversupply to the tune of 341,000 properties.

So we now officially have too much supply at a national level, but even more so at Melbourne level – but what about demand?

Debt versus Demand in Melbourne Property

Debt is the lifeblood of the property market, but people are now borrowing less. The size of the average loan is 4% less than it was a year ago, and the number of loans made is starting to contract for the first time in decades. With the housing boom driven by available debt and rampant property speculation, the opposite is also true. The falling property market will partly be a factor of debt contraction.

So Melbourne’s case is a particularly potent mix of oversupply and weak demand.

And this comes at a time that Melbourne is the least affordable city in the country.

It has a long way to fall to return to the historic trend. But if you think the outlook for Melbourne already looks bad…it gets worse.

Melbourne property prices are in fact so bloated, that Melbourne scored as the 4^th most unaffordable city in the WORLD. This is measured from the 325 major global cities in Demographia‘s recent survey.

This puts things in context, and shows just how much scope there is for Melbourne property to come back to a more sensible level.

Speak to 10 commentators, and you’ll get 10 different opinions of what Australian property prices will do next. But Morgan Stanley’s Equity Research team is one of the few institutions that called it pretty much spot on. I sold my property last year based on their views, so I like to keep an eye on their research.

And their prediction is for more pain in the residential property market.

On top of whatever happens in the second half of this year, they see a fall of 12% in 2013, and then a drop of 9% in 2014.

Assuming the market creeps down a bit more during the second half of this year, to finish 10% below the peak, then by the end of 2014 these predictions would see the market fall by a compound total of 28% under the peak.

With so much stock on the market, and buyers sitting on their hands, the stage is certainly set for some fireworks in the coming months and years.

Dr. Alex Cowie
Editor, Money Morning

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By MoneyMorning.com.au

Markets across the globe tanked on Friday, with fears over the Spanish economy as the primary driver.

So what’s gone wrong this time?

The bond markets have almost closed to Spain.

Spain’s situation is rapidly deteriorating. On Friday, Spain’s benchmark index, the IBEX, dived by nearly 6%. The euro, meanwhile, slid sharply. It’s getting close to a two-year low against the dollar.

But the real problem is Spain’s borrowing costs.

Investors are concerned that the ‘no-strings’ deal to give its banks €100bn in aid from the European bail-out fund in fact had plenty of strings attached. In other words, the “doom loop” between sovereign and banking sector hasn’t been decisively broken.

If the Spanish economy still has to stand behind its broken banking sector, then that means no one in their right minds would invest in Spanish bonds. Because if the Spain takes bail-out money from the European authorities, then existing private sector creditors will be pushed down the queue.

Yes, I know that the Europeans said at the last summit that this wouldn’t happen. But if you believe that then you’re probably in the market for Spanish timeshare flats too.

So a disappointing bond auction on Thursday spooked buyers. And it only got worse on Friday, when the Valencia region asked for emergency assistance from the central government. On top of that, the Spanish economy now expects to be in recession until 2014.

Spanish ten-year borrowing costs spiked to a near-record high for the euro era, rising to just below 7.3%.

No Respite for the Spanish Economy

But the real problem is the short-term borrowing costs. Five-year borrowing costs hit 6.88%, a new record.

This matters. Up until now, even if it was too expensive to borrow over ten years, Spain could have borrowed over shorter periods at lower rates. That way it could buy itself time until some sort of longer-term solution had been reached.

Now, as one City expert put it: ‘To all intents and purposes, Spain is now frozen out of the bond markets.’

What happens now?

That’s scary. Money is fleeing Spain (and the other “troubled” states). Bond yields in many ‘safe’ countries are turning negative. In other words, people are willing to accept a small loss – even before taking inflation into account – to lend to these countries.

This isn’t as odd as it seems, by the way. If you have a large quantity of money, and all you care about is the return of your capital, rather than the return on your capital, then there aren’t many places to put it.

You can’t trust a bank: deposit insurance only goes so far, and what if you can’t rely on the government who backs it? As for corporations – they can go bust, or be targeted by governments.

All that really leaves is governments that won’t go bankrupt. So you park your money with the likes of Germany and Switzerland. Or maybe even the UK: yes, sterling might plunge if there’s too much money-printing, but right now, you’ll take that risk against the danger of the euro imploding.

Effectively, you are paying a premium for security. And in this kind of environment, for a lot of people, security looks worth paying for.

The Big Question: What Happens Next?

As we’ve often said, the eurozone crisis is about politics, not economics. People – the voters – still want the euro. To realise that, you just need to look at the comeback campaign of Italy’s Silvio Berlusconi. The FT quotes Italy’s former defence and foreign minister, Antonio Martino: ‘Berlusconi has been cured of his anti-euro ideas. He is convinced that going back to the lira is not a quick fix.’

As political opportunists go, Berlusconi is up there with Tony Blair. So the fact that he’s changed his take on the euro suggests that he knows it’s not a vote-winner.

The trouble with the euro is that every pathway is painful. That makes it hard to see the path that politicians will take – which is always the path of least resistance.

But letting the Spanish economy go bust is not that path. If Spain goes, the euro can’t survive. And that’s not yet an option for the eurozone elites.

It still seems to me that the likeliest way forward (although this is not a high conviction call) is that Greece gets thrown out. Using the casting aside of Greece as cover, the rest of the eurozone – Germany in particular – can then push through a deal to unite the remaining members more closely.

John Stepek
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

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17-07-2012 – Dr. Alex Cowie

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16-07-2012 – Dr. Alex Cowie

Why the Eurozone Will Sacrifice Greece to Save the Spanish Economy

USDCAD remains in downtrend from 1.0445, the rise from 1.0065 is treated as consolidation of the downtrend. Further rise to test 1.0249 key resistance is possible, as long as this level holds, we’d expect downtrend to resume, and another fall towards 1.0000 would likely be seen. On the upside, a break above 1.0249 will indicate that the downtrend from 1.0445 has completed at 1.0065 already, then the following upward movement could bring price to 1.0350-1.0400 area.

Daily Forex Forecast

By The Sizemore Letter

When I tell readers that Spanish stocks are still cheap, I can’t help but recall Chevy Chase’s 1970s Saturday Night Live skit in which for weeks after his death, Chase announced “breaking news” that “Generalissimo Francisco Franco is still dead.”

Spanish stocks are still cheap, as they have been for over a year, but they have gotten quite a bit cheaper as 2012 has progressed. Spain’s economic woes have become a test of the European Union’s resolve, and judging by the market’s action this year, the EU is failing it and dragging down Spanish stocks in the process.

European stocks were down big on Monday after suffering deep losses on Friday. The catalyst? More bad news out of Spain.

The region of Catalonia—one of Spain’s wealthiest—joined Valencia in what is becoming a long list of regions needing bailout funds from the central government. But more than any specific news, it is the vicious cycle of rising bond yields that is both a cause and a symptom of the crisis.

Spain’s 10-year bond yields rose above 7.5% to a new euro-era high, as did the spread between Spanish yields and German yields. The higher yields rise, the more difficult it becomes for Spain to service its debts…thus causing investors to panic, sell their bonds, and send yields even higher.
Cycles like these are generally only broken by default, devaluation or a bailout. Default is unlikely and devaluation is impossible unless Spain leaves the Eurozone, which I do not view as being likely. This leaves bailout. Spain’s €100 billion banking sector bailout is already in progress, but a full sovereign bailout is looking more and more to be a foregone conclusion. The sooner it happens, the sooner we can all get on with our lives.

For investors, the far more pressing question remains: What does any of this mean for Spanish stocks?

The bullish argument for Spain is compelling. The large, publicly-traded stocks that dominate Spain’s market—such as Sizemore Investment Letter recommendations Telefonica ($TEF), Banco Santander ($SAN) and BBVA ($BBVA)—have globe-spanning operations and get the lion’s share of their revenues and profits from outside Spain. The economic woes plaguing the mother country matter relatively little.

Furthermore, Spanish stocks are shockingly cheap. The IBEX index trades for roughly half its 2007 value and at levels first seen in the late 1990s. Looking at the numbers, we see that Spanish stocks are cheaper than every other major European market—even cheaper than Greek!

Source: Financial Times

According to the Financial Times’ estimates, French, German and Italian stocks all trade for 12 times earnings and sport dividend yields of between 3.4% and 4.9%. Spanish stocks trade for just 9.8 times earnings and offer a dividend yield, at 8.1%, that is so high it looks like a typo.

To put that in perspective, Spain’s dividend yield could be cut in half and it would still be roughly double that of the United States.

It is truly a strange world in which we live when Spain’s globe-spanning blue chips trade at lower valuations than Greek stocks, which tend to cater to Greece’s weak domestic economy and carry the very real risk that Greece will be booted from the Eurozone.

The problem with my argument is that most of this was true a year ago. The numbers were slightly different, but Spanish stocks were significantly cheaper than most other world indices. That they have continued to get cheaper is a major source of frustration for investors.

The important thing to remember is that Spanish stocks are being driven lower by macro concerns and not by any news specific to the companies themselves. Spain’s large, liquid stocks are being used as a proverbial punching bag because, frankly, they make an easy target.

Is there risk involved in buying Spanish shares at current depressed prices? Of course. One risk I recognize is that paralysis in the Spanish capital markets will make it difficult for a company like Telefonica to raise needed funds (Santander and BBVA have access to the ECB for funding needs, so I am less worried about them). And with Spanish regulators banning short selling in the domestic market, I am mildly concerned that U.S.-listed ADRs will bear the brunt of selling (the ADRs of the Spanish stocks I mentioned are not affected by the short selling ban).

All of these are risks that must be acknowledged. Still, the attractive prices on offer make these risks worth taking. They may get cheaper in the short term, but I see gains of 100-200% over the next 18-24 months as being very likely in Telefonica, Banco Santander and BBVA. I continue to recommend buying all on dips, though be patient and wait for the dips to run their course.

Disclosures: Sizemore Capital is long BBVA, SAN and TEF

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By The Sizemore Letter

Listen to Charles Sizemore discuss the Fed’s game plan, investing in the rental housing market and the economics of some very naughty vice industries on Straight Talk About Money.

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By TraderVox.com

Tradervox.com (Dublin) – There is one event scheduled for release this week from Switzerland which has given the pair quite a quiet week. Last week, the US and Swiss data did not impress the market with US unemployment and Manufacturing numbers registering a below-market-expectation performance; on the other hand, the Swiss ZEW Economic Sentiments was in the negative territory.

This week, the KOF Economic Barometer report will be released on Friday at 0700hrs GMT. This is an important Index as it comprises 12 economic indicators in the Swiss economy. The Index came in at 1.0 level in June. The market expects this trend to continue with 1.24 points expected. The pair is expected to trade within range this week with no breach of critical levels.

Some of the technical levels to look at this week include from the top, the resistance line of 1.0368 has not been tested since August 2010. The next resistance line would be the one at 1.0220 followed by 1.0136; this resistance line has not been breached since September 2010. The other resistance line that has not been tested since 2010 is the one at 1.0066; which completes the highest level resistance lines. The pair is expected to remain below these resistance levels during the week.

The other resistance lines that have shown firmness this year are include the parity line and the weak resistance at 0.9915 which held firm last week despite the Swiss Franc showing some weaknesses. This week, the pair will continue to test this like with a slim chance of breaking it. After this resistance line is the line at 0.9783, which was touched as the pair dropped from its high last week.

Support levels for the cross include support at 0.9719. This support has strengthened over the week as the pair moves higher. 0.9510 has provided the pair with strong support; it has held strong since earlier this month. Other support levels for this pair are 0.9412, 0.9317, and finally 0.9250.

The market expects the pair to remain neutral this week, with movement held within range of 0.9719 and 0.9915.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

Article provided by TraderVox.com
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By Central Bank News
    The Bank of Israel left its interest rate unchanged at 2.25 percent, as expected by most economists, saying the recent decline in the value of the shekel against the dollar should help buffer the country against a weaker global economy.
    The BOI also said that inflation over the past year was one percent and an increase in commodity and energy prices should push the rate up to near the center of its 1-3 percent range.
    “Against the background of the previous month’s interest rate reduction and the recent weakness of the shekel, which are expected to assist the Israeli economy to deal with the difficulties it faces, the Monetary Committee assessed the factors noted above and voted to leave the interest rate unchanged this month,” the bank said in a statement.
     The Israeli central bank has already cut rates twice this year for a total of 50 basis points, the most recent 25 basis-point cut was in June.
     Economists are expecting the Israeli central bank to cut rates by another 25 basis points later this year but only a few were speculating that the rate cut could come as early as today.
    The bank said the shekel had fallen by 2.6 percent against the dollar since it’s last monetary policy meeting in June while it had risen 0.5 percent against the euro. The lower shekel improves the international competitiveness of Israeli exports.
    Inflation, as measured by the consumer price index, fell by 0.3 percent in June, below forecasts, pushing the annual inflation rate to 1.0 percent from 1.6 percent in May. The bank said inflationary expectations call for inflation of 2.1-2.2 percent in a year.
    The bank took note of the deterioration in Europe’s economy and a slowdown in the global growth rate.
    “The level of economic risks from the world following developments in Europe remained high, and with it the concern of negative effects on the domestic economy,” the bank said, adding that several central banks had already cut interest rates this month along with the central banks of the UK and Japan increasing their bond purchase programs.
    www.CentralBankNews.info

By Central Bank News

    This article reviews the monetary policy interest rate activity of the world’s central banks during the first six months of 2012 until the end of June.
    Of the 89 central banks that we monitor, 48 (54%) kept their monetary policy interest rates unchanged, 29 banks (33%) cut rates and 12 banks (13%) increased rates.
    The dominant theme among the major central banks that kept rates on hold was the limitation of interest rates, the traditional tool of monetary policy, in stimulating economic growth when consumers, banks and governments are reducing their debt.
    Of those banks that cut rates, the main reason was to stimulate economic activity at a time of a slowing global economy amidst heightened uncertainty from the euro area debt crises.

    In the tightening camp the average interest rate increase was 102.1 basis points, with a 50 basis point increase being the most common (4 out of 12), and 5 hiking rates by more than 100bps.
    Most of the countries hiking rates were in lesser developed regions, where it is common for general price levels to be more sensitive to food price inflation and uncontrollable movements in exchange rates; in addition a few of these countries had relatively strong growth, e.g. Mongolia. Malawi hiked rates the most, lifting its monetary policy rate by 300 basis points, while Ghana 250bps, Cape Verde 150bps, Mongolia 100bps and Iceland 100bps were among those making the highest interest rate increases.

    As noted, the dominant theme was for interest rates to remain unchanged; particularly where the limits of monetary policy stimulus has been reached e.g. in the US, Japan, and Europe. However, among emerging markets, and selected developed markets, the emphasis was more on easing policy to help provide good conditions for growth within a challenging global environment.


    Indeed, for most central banks that cut rates or kept rates at stimulatory levels, the rationale was to provide a pre-emptive measure in response to the euro crisis and its negative impact on confidence. Meanwhile, other reasons for the rate level was a response to a slowing economy; particularly among those with a higher exposure or sensitivity to international trade.


    The inflation picture was also a key determinant, as rates of annual consumer price inflation began to ease around the world, with some pundits warning of deflation in Europe and the US; while Switzerland did in fact experience deflation.


    Heading into the second half of 2012, it is likely that most economies will regain momentum following softening in growth through the first half. The key downside risk emanates largely from the European sovereign debt crisis, and the extent to which it can be contained, and default – and associated bank panics – avoided.

    But there are upside risks too; monetary policy settings are broadly very accommodative, and businesses have anecdotally held-off from investment decisions, and now have stronger balance sheets; banks have broadly experienced similar trends. Meanwhile, growth is likely to rebound in the second half of the year in China, and other emerging markets.


    So it could well be that towards the end of the year inflation becomes more of an issue than sustaining economic growth. But it wouldn’t take much for growth and inflation to remain subdued for the remainder of the year, so unchanged interest rates may remain the dominant theme.


    In any case, keep checking the central bank news website for timely monetary policy updates.


    Source: www.CentralBankNews.info

By Central Bank News

London Gold Market Report
from Ben Traynor
BullionVault
Monday 23 July 2012, 06:30 EDT

WHOLESALE gold bullion prices fell to $1569 an ounce during Monday morning’s London trading – 0.9% off Friday’s close – as stocks, commodities and the Euro also traded lower and US Treasuries gained, following news that two Spanish regions plan to ask for bailouts.

Silver bullion fell to $26.88 an ounce – a 1.9% drop on where it ended Friday.

Volumes of gold bullion held by exchange traded funds (ETFs) saw net losses last week, while on the currency markets this morning the Euro hit a new two-year low against the Dollar Monday, dropping below $1.21. As a result, the US Dollar Index, which measures the Dollar’s strength against other major currencies, hit a new two-year high.

“The great danger for the gold price is the stronger Dollar, because of its long-term negative correlation to gold,” says Eugen Weinberg, head of commodity research at Commerzbank.

“That’s definitely still dampening the interest of investors from the United States…but in Euro terms, gold is trading near six-month highs…it’s more about Dollar strength than gold weakness.”

European stock markets sold off sharply this morning, with the Euro Stoxx 50 index of blue chip companies down around 2.5% by lunchtime, and Spain’s Ibex down 5.3%.

Yields on 10-Year Spanish government bonds meantime set a new Euro-era record Monday, rising above 7.5% following news on Friday that Valencia’s regional government will ask Madrid for a bailout. On Sunday, the Spanish region of Murcia said it too will seek aid, with newspapers reporting several other regional governments plan to make similar requests.

Spain’s biggest region, Catalonia, is “working very hard to pay bills normally”, its economy minister Andreu Mas-Colell told Italian newspaper La Repubblica.

“But the pressure on our treasury is very high because the markets are closed [to us].”

Elsewhere in Europe, officials from the European Commission, European Central Bank and International Monetary Fund – collectively known as the ‘troika’ – are due to visit Athens tomorrow to assess progress meeting bailout conditions.

“If Greece doesn’t fulfill those conditions, then there can be no more payments,” German vice chancellor Philipp Roesler said Sunday, adding that the idea of Greece leaving the Euro “has long ago lost its terror”.

“There is no firewall around Greece,” counters Paul Donovan, senior economist at UBS.

“Or, if there is, it is constructed of high quality, dry kindling wood doused in gasoline. If Greece goes other countries seem certain to leave…if politicians have lost a sense of terror over the prospect of a Greek exit it suggests that politicians have lost any comprehension of economic reality.”

In New York meantime, the difference between bullish and bearish contracts held by noncommercial gold futures and options traders – the so-called speculative net long – rose slightly in the week ended last Tuesday, Commodity Futures Trading Commission figures show. The number of speculative long and short positions both fell however.

“Overall positioning in gold remains weak,” says a note from Standard Bank.

“We are skeptical about the sustainability of any gold rallies over the short term.”

The world’s biggest gold ETF the SPDR Gold Shares (GLD) saw a second straight day of outflows on Friday, sending holdings of gold bullion down to 1254.6 tonnes, just above where they were six months ago.

“ETFs are increasingly skeptical about gold,” says Standard Bank, noting that gold ETFs worldwide saw a 13.7 tonne decline last week, the biggest weekly drop since March.

“A lot of fund managers are just content sitting on cash without loading up on anything at all,” adds one trader in Singapore.

“They are happy to be in as stable a portfolio as possible.”

“Evidence of a significant response from physical buyers is needed first,” says a note from UBS, “before the investment community can be expected to follow suit.”

UBS adds that its gold sales to India “do not indicate any improvement as yet and neither does combined gold volumes on the Shanghai Gold Exchange, which have been 30% below average this month.”

India needs to see a “social and cultural revolution” in its attitude towards gold, according to the deputy governor of the central bank.

“Ninety percent of the gold demand is jewelry or to offer to God,” KC Chakrabarty told an audience in Mumbai over the weekend.

“Both have to stop… Wearing gold as an ornament was a culture when you were a rich society, when you were contributing to 30% of the GDP of the world. Today, we have become a poor country, we need to change our culture.”

Ben Traynor
BullionVault

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.