Mel's Blog

June 27 Extension to Operation Twist

June 27th, 2012 8:25 PM by Mel Samick

Sports fans are debating whether LeBron James won the NBA title last week or was it "The Miami Heat", and soccer fans wondered if "The Battle of Bailout" was actually played on a soccer field as Germany put Greece out of the Euro, (read Euro Cup Tournament) by a score of 4-2 in a quarter-final match at Euro 2012. The Dow Jones is still hovering around the 12,500 level consistent with the same level last month. The S&P 500 volatility index, VIX, has barely crossed the 20 percent level despite all of the world-wide turbulence. Remember-the VIX reading was above 30 percent until the fourth-quarter of 2011. The Ten-Year Treasury rate has inched down from the 1.70 range last month to a more recent 1.60 range. Is it that the markets are smart enough to see the future unfolding or are they just tiring from all of the swings and cycles in the economy?

Slowing global growth, risk of a European implosion, and rising geo-political risks didn't slow down stocks last week. Equities continue to remain an enigma. Although indices were slightly lower week-over-week, there doesn't seem to be a real sense of fear in the market. This comes only a few days after the Fed opined that the economy is unlikely to improve this year, as well as the major downgrade to U.S. banks from Moody's. Further, the Fed is also worried that the economy is under threat from Europe's debt crisis and from the prospect of sharp spending cuts and tax increases that will kick in at year's end unless Congress acts. All of the significant drivers are still the same-old-same-old, mainly Europe debt and the employment situation. So, news last week from Greek elections, the FOMC, and weaker than expected economic data failed to provide any "new" information to the markets, which seem to be resigned to the fact that all these events will take much longer to unfold, and that with upcoming November elections, no new policy changes will materialize in the U.S. The Fed's decision to only extend "Operation Twist" and not add more aggressive stimulus disappointed the stock market. However, despite the stock- market decline, there was hardly any "fear" that usually accompanies such a drop - as the VIX Index barely traded north of 20 percent. Familiar old news from Europe will continue to be the main driver for some time until a resolution regarding policy can be found. No one knows for just how long.

For those who desire to be a part of economic longevity, they should learn from the survey report on those who have lived more than 100 years. The report - "100@100 Survey" - begins with some startling numbers. As of late 2010, the U.S. had an estimated 72,000 centenarians, according to the Census Bureau. By the year 2050, that number - with the aging of the baby boom generation is expected to reach more than 600,000. Need clues to reach 100? Centenarians point to social connections (not Facebook), exercise and spiritual activity as some of the keys to successful aging. Among surveyed centenarians, almost nine in 10 - fully 89% - say they communicate with a family member or friend every day; about two thirds (67%) pray, meditate or engage in some form of spiritual activity; and just over half (51%) say they exercise almost daily. Who knows if one starts to follow these clues, she/he might get to find out the final resolution in Europe and possibly the end of this economic cycle!

Meanwhile, scientists at Stanford University are developing iBrain, a tool which picks up brain waves and communicates them via a computer. Maybe someday they can potentially hack into someone's brain. Any thoughts? Still want to be 100? We're building technology that will allow humanity to have access to the human brain for the first time. I'm wondering how the next generation would keep any secrets and of course, liars beware!

There were a few positives coming from the housing sector and energy prices.

· U.S. homebuilder sentiment moved upwards in June to its highest level in five years, the National Association of Home Builders said on Monday.

· Home equity in the first quarter rose to $6.7 trillion, the highest level since 2008, as homeowners taking advantage of record-low borrowing costs to refinance their loans brought cash to the table to pay down principal.

· Building permit issuances increased from 723,000 in April to 780,000 in May. It was the largest number of permits issued since September 2008 and was well above the consensus estimate of 725,000.

· U.S. house prices rose 0.8 percent on a seasonally adjusted basis from March to April, according to the Federal Housing Finance Agency's monthly House Price Index. For the 12 months ending in April, U.S. prices rose 3.0 percent.

· Oil fell below $80 a barrel for the first time in eight months and Brent crude slipped under $90 as economic reports increased concern that demand will slow amid rising supplies.

Even though rates are at record lows, many borrowers have yet to refinance. Figures from CoreLogic, a housing data provider, show 20.5 million of 39 million creditworthy "prime" borrowers are paying rates of more than 5 percent while just 5.7 million households are enjoying rates of less than 4 percent. In theory, more than 20 million borrowers could be refinancing. But because of the fall in house prices, these prospective borrowers are faced with the daunting reality of insufficient available equity to exercise a refinance option. So, the Fed's "Operation Twist" intended to keep rates low may lead to somewhat lackluster results.

Mel

Information provided by NYCB Capital Markets

Posted in:General
Posted by Mel Samick on June 27th, 2012 8:25 PM

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