Financial Bubbles | timiacono.com - Part 3

The latest Gallup survey on investment preferences in the U.S. puts real estate ahead of gold and stocks for the first time in at least a few years in yet another example of how most people (at least in the U.S.) simply follow established trends.

Interestingly, those favoring real estate as the best long-term investment rose to as high as 50 percent a decade ago when the prior housing bubble was inflating.

There’s also a breakdown of preferences by income, age, and political party affiliation. Not surprisingly, those with higher incomes favor stocks and real estate over other investment choices and the appeal of gold goes up as income goes down.

By a wide margin, younger Americans think more highly of Savings accounts/CDs than do other age groups, but the most interesting part of this survey (at least to me) was how views toward equity markets change  based on party affiliation. Some 30 percent of Democrats think stocks are the best investment, but only 26 percent of Republicans agree, yet just 19 percent of independents also see it this way.

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The Commerce Department reported(.pdf) that U.S. housing starts rose 2.8 percent last month, from an upwardly revised seasonally adjusted annual rate of 920,000 in February to 946,000 in April, however, this was below the consensus estimate of 955,000 that was expected, at least in part, due to better weather in the spring after a severe winter.

After jumping in February in anticipation of warmer temperatures in most parts of the country, permits for new construction actually declined last month, falling 2.4 percent from a downwardly revised rate of 1,014,000 to 990,000.

Both measures of U.S. homebuilding activity came in below consensus estimates that were a bit higher than they would otherwise have been, working on the assumption that there would be a larger spring bounce than usual, however, that was not to be.

On a year-over-year basis, permits for new construction – a key leading indicator for the industry – rose 11.2 percent, however, housing starts are actually lower than a year ago, down 6.4 percent, in what was the widest contraction in almost three years.

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Retail Sales Surge on Spring Thaw

The Commerce Department reported(.pdf) that U.S. retail sales jumped 1.1 percent in March, the biggest monthly increase since September 2012, as Americans released pent-up demand that resulted from an unusually harsh winter.

Last month’s gain was slightly above elevated estimates, exceeding the level of spending last November before the bad weather set in, and the February data was revised upward, from a gain of 0.3 percent to 0.7 percent, all signs of improving underlying demand.

Auto sales drove the overall increase in spending with a 3.1 percent boost last month, this following an upwardly revised gain of 2.5 percent the month prior. Excluding motor vehicles, sales rose 0.7 percent after a gain of 0.3 percent in February.

Gasoline station sales actually dropped 1.3 percent (though they’ll be going back up next month based on recent price increases) and, excluding both autos and gasoline, retail sales rose 1.0 percent.

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Risk Appetite Not What it Used to Be

In this item by Humble Student of the Market (i.e., fellow Seeking Alpha contributor Cam Hui), readers are alerted to a disconcerting topping pattern in one measure of the risk appetite for U.S. stocks, though it’s important to point out that a similar “risk off” development almost exactly a year ago did little to stop the fun that was had by all.

More specifically:

The recent carnage in the high flying Biotech and Social Media stocks are well-known, but the technical effects of the damage is likely to be long lasting. The chart below shows a composite index that I built based on an equally-weighted long position in the NASDAQ 100 and Russell 2000 (high beta risk-on index) minus an equally weighted short position in the defensive sectors of Consumer Staples, Telecom and Utilities (low beta risk-off index), where the composite Risk Appetite Index is set at 100 on December 31, 2011.

As the chart shows, the Risk Appetite Index has violated an uptrend and has started to roll over. This picture of fading risk appetite forms a negative divergence when compared to the SPX, which remains in an uptrend.

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