The Mess That Greenspan Made - Part 20

The latest issue of the Iacono Research Weekend Update has been posted to the website and is now available for subscribers here.

There will be no changes to the model portfolio or the buy ratings this week, but last week’s covered calls sales are reviewed in the following discussion topic:

The executive summary is as follows:

Fading confidence in equity markets and surging demand for Treasuries were the surprise stories for financial markets as U.S. shares notched all-time highs, prompting a broad sense of fear that caused the stock market to reverse course and end the week little changed. U.S. economic reports were mixed but the outlook for global growth was disappointing, leading to more calls for more stimulus around the world.

Emerging market stocks added to their recent gains on the hope that central banks will take steps to boost growth and REITs continued their remarkable winning streak. The natural resource sector was mixed with the price of energy products and precious metals moving higher while related shares lost ground and the model portfolio rose 0.5 percent, now up 4.8 percent for the year.

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Big Usually Means Ugly

According to this LA Times story that was accompanied by the somewhat disturbing graphic reproduced below, after a short absence, McMansions have returned to Southern California.

The report opens with the instant classic “When the going gets less tough, Americans get stupid.” And it gets better from there, prompting some mid-2000s flashbacks from yours truly who sold a couple years before home prices peaked in the Golden State and had to sit back, as a lowly renter, and watch it all play out in slow motion.

If they’re doing what they did last time, it’s not just the size of the house that boggles the mind, it’s the ratio of the size of the house to the size of the lot which, in many cases made people like me just stop and laugh loudly when passing by.

Amazingly, being able to reach out the window of your 4,000 square foot home and shake hands with your neighbor who’s doing the same thing doesn’t bother some people.

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Pew Research has compiled a pretty intriguing report on what burgeoning student loan debt is doing to the finances of those young Americans who pursue higher education. There are lots of good charts packed with, sadly, unsurprising data about what a burden this debt is for those just starting out in their careers.

Student debt burdens are weighing on the economic fortunes of younger Americans, as households headed by young adults owing student debt lag far behind their peers in terms of wealth accumulation, according to a new Pew Research Center analysis of government data. About four-in-ten U.S. households (37%) headed by an adult younger than 40 currently have some student debt—the highest share on record, with the median outstanding student debt load standing at about $13,ooo.

An analysis of the recent Survey of Consumer Finances finds that households headed by a college-educated adult without any student debt obligations have about seven times the typical net worth ($64,700) of households headed by a young, college-educated adult with student debt ($8,700). And the wealth gap is also large for households headed by young adults without a bachelor’s degree: Those with no student debt have accumulated roughly nine times as much wealth as debtor households ($10,900 vs. $1,200). This is true despite the fact that debtors and non-debtors have nearly identical household incomes in each group.

I have no idea whether my college loan experience was typical at the time, but back in the early 1980s I had racked up about $7,500 in student loans when I picked up my diploma and began my first job as an engineer making $30,000 a year.

My guess is that most college graduates today who enter the workforce with college loans to service would be quite happy with a 4-to-1 ratio of annual income to debt, which makes paying this off quite manageable. That ratio is probably a lot closer to 1-to-1 today.

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Housing Starts, Permits See Big Rebound

The U.S. housing market received some rare good news this morning as the Commerce Department reported(.pdf) that housing starts and permits for new construction both exceeded analysts’ estimates by wide margins, though the gains were due largely to multi-family home construction as activity for single-family homes was little changed.

Housing starts jumped 13.2 percent, from an upwardly revised annual rate of 947,000 units in March to 1.07 million units in April, far above expectations for an increase to a rate of 980,000 units and some 26.4 percent higher on a year-over-year basis.

Housing permits rose 8.0 percent, from an upwardly revised rate of 1.00 million units in March to 1.08 million units in April, considerably better than expectations for an increase to a 1.02 million rate and 3.8 percent higher than a year ago.

In both cases, the surge was due almost exclusively to volatile multi-family home building (of five or more units) where starts jumped 39.6 percent and permits rose 19.5 percent. Single-family home starts rose just 0.8 percent last month and permits edged 0.3 percent higher, making the headlines for this report much less than meets the eye.

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