Economic News Points to One Winner
10/03/2012 11:04 am EST
Low interest rates are a boon for real estate–related companies, as well as companies hoping to refinance their debt…but hedges like this one are also on the rise, observes Stephen Leeb of Leeb Income Performance.
The four–year anniversary of the Lehman Brothers collapse came and went, with memories of the financial crisis and its economic impact still fresh in our collective consciousness. And, we are sure, equally fresh in the minds of US Federal Reserve Board members, whose decision to embark on a new, open–ended stage of quantitative easing was made earlier in the month.
While the US market has staged a remarkable recovery since then—up nearly 21% from September 15, 2008 levels, and more than doubling off the lows of March 2009—investors clearly remain quite reluctant to invest in stocks, judging by mutual–fund inflows.
These past few days, global stocks were hit by growth worries once again. But the overall action can still be viewed in a positive light, especially if you consider that historically, on average, September has been the worst month for stocks (followed by October). And overall, stocks held their ground through September.
The record–low borrowing costs are helping many companies—just look at how actively US corporations are issuing new debt. Earlier this week, UPS (UPS) raised $1.75 billion; the rates they were able to borrow at were 1.125% for a five–year note, 2.45% for a ten–year bond, and 3.625% for 30 years. Digital Realty (DLR), whose credit quality is lower, earlier this month was able to obtain ten–year bond financing with a 3.625% coupon.
Demand for commercial and industrial loans, as can be seen from the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices, has also increased, due to low rates and easing lending standards. This is encouraging. Lowering interest payments is one way to improve free cash flow, and companies with significant free cash flow can now increase dividends or repurchase stock.
Another encouraging sign is the improved housing picture. Though we are far from the point where we could proclaim that the housing crisis is fully over, in the past few days several signs of the housing recovery have strengthened.
New home demand is picking up, and US home prices are climbing more than forecast. (Here, tight lending standards remain the major obstacle.) Also, new home sales for August declined 0.3%, but that followed an increase for the month of July that was the strongest in more than two years.
A new record for mortgage rates—the direct result of the Fed’s new open–ended QE3 policy—was set today, creating further hope for this battered sector of the economy. On the one hand, lower mortgage rates help consumers save money on refinancing; on the other, they help improve sales and prices.
We learned two days ago that the S&P/Case–Shiller index of property values in 20 cities made its biggest year–on–year advance since August 2010, increasing 1.2%. And while the seasonally adjusted index for pending sales decreased 2.6% in August compared to a month before, this was the highest number since April 2010. As a result, consumer confidence keeps improving, another good sign.
And speaking of new records: another record, also directly related to the sea of liquidity unleashed by the world’s central banks, was set last week. Gold, the asset class that is a direct beneficiary of zero–interest rate policies, has set a new record when measured in euros and Swiss francs. And even in US dollars, gold is now trading near its highs of 2012 and only 7.5% below its all–time high set last September.
We remain big proponents of the yellow metal, and continue to recommend that income investors have exposure to the price of gold.