Rates are on the Move

Significant week for 10Yr US Treasury Notes.

 

10 yr rates jumped over 3% on Friday ending the week at 2.6%.  That puts September's increase up to over 12%.  The gap up out of 2014's wedge points towards significant momentum behind this move.

 

The weekly chart adds a little perspective.  Last week had a solid candle with the Indy's curling up from oversold conditions.  The next significant source of resistance is at 27.  A break of that would challenge the 20 history of lower and lower rates, as seen on the next chart.

Should rates break 27 the next target would be 33.  The monthly indicators have a lot of work to do before they would be supportive of such a move.  The RSI has some support at 50, but the other indys are still pointing south.

King Dollar

The US Dollar continues on the tear that began in July.

 

The Dollar broke out of its long term base and is nearing 2013's highpoint.  A break above 85 would suggest that the next resistance level is 88.  The indys are getting pretty overbought.  A backtest of the breakout area of 84 will be in order before challenging the 2010 high.

A strong Dollar has wreaked havoc on Commodities.

 This daily chart shows the spike in the Dollar.  Commodities of all stripes are getting pummeled.  The Agricultural index, DBA, has been in a downtrend since the first bottom in the Dollar.  Oil, Gold & Copper had held up well until the July bottom.  Curiously, 10yr Treasury Notes had been a beneficiary of a stronger Dollar, until this week. 

Are Commodities Ripe?

Last month's comments out of the ECB regarding the potential for some form of QE launched the US Dollar out of a 12 month trading range.

The strength of the move is undeniable, but the indicators are clearly into Overbought territory.  The strong dollar has been weighing on Commodities.

Early this year, Commodities broke out off a 3 year wedge.  DBA is currently backtesting the breakout as the Indy's have reset.  A move up the ma's would represent a new breakout with a first target of 29. 

 

The Daily chart shows the top of the wedge.  It also reveals a smaller wedge that has formed since the US Dollars July low.  The smaller wedge was broken last week.  The Indy's look like the have room, but there needs to be a break of 26.85 for the big move.  

Corn looks interesting.  After getting whacked for 15% in May-June due to bumper crop reports, it got taken for another 15% after the US Dollars low.  Since then Corn has been wallowing between 25 & 26 on somewhat surprising volume.  It seems that the Indicators need more time to reset but Corn looks attractive above 26.5 with an obvious stop at 25.25.  With the first target of 30 a return of 10% would make a punt worth it.

Other non-agricultural commodities are showing potential bottoms including Oil, Copper & Unleaded Gas.  All ears will be on the ECB this Thursday when they announce their monetary plans.  If they announce QE plans, the size & scope will determine the markets moves.  Some QE is already priced into the US Dollar.  No QE, or, smaller than expected might provide the fuel for the commodities markets to make a comeback.

 

 

Atta Boy Junior!

The Juniors have quietly built a nice base.

After setting a potential base top, the junior miners are testing the ma's on declining volume.  Last week's bar shows a decent looking tail.   The last 2 month's pullback might also suggest a backtest of a June Breakout. 

 

A closer look at the Daily chart reveals a wedge breakout on Friday.  The Indy's look favorable, as do the the ma's.  A move up to 45-46 would set a nice looking Cup & Handle opportunity.

 

Zooming in on the Hourly chart shows the potential for another base with the base.  The Indy's are a bit extended short term which may prevent the Juniors from a breakout here.  A further test of the base top back to the ma's may be in order prior to a breakout.

GDXJ  is a long under 42.  A stop at 40 is a little loose, but for the patient holder the weekly target is 53 offering a decent return.  The shorter term target is 45-46.

 

Interest Rate Update

 

The 20yr down trend in Interest Rates continues.  The monthly indicators are pointing south with the MACD crossing down this month.  

 

The 8yr weekly down trend is also intact with rates down nearly 20% in 2014.  Seems like there is still time before rates get oversold.  24-25 continues to be the line in sand.  Until 25 gets taken out the path of least resistance continues to be down.

Relief at the Pump

Unleaded Gas took a tumble this week.

 

Unleaded Gas started the week with a gap down which ought to provide a short term cap on prices.  In the Puget Sound area prices should tumble after Labor Day.  It certainly would be nice to see prices below $3.75/gallon. 

Housing Perks Up

The Homies put in a strong week.

The Builders finished the week with a full candle adding nearly 5% for the week.  The indicators look set to extend the rally with the STOs heading North after showing POS D.  Just need the MACD to cross to confirm the rally.  If confirmed 28 looks like the target.

Likewise, Lumber looks poised for a breakout.

Lumber needs to make the move this week.  If it does the target is in the mid 400s.

Active Listings Fall

After peaking in September and matching 2012 levels, Active Listings have seen the seasonal decrease into yearend.  This is quite encouraging since listing could have easily kept increasing from the historic lows seen in 2012.  Typically listings don't pickup until March signalling the start of "Selling Season".  Even though inventory levels are only 250 homes away from the record low last year, it seems unlikely that inventory will drop that low during 2014. 

2013 Closings beat 2012 every month until petering out into yearend.  The interest rate spike in May and June may have prodded many fence sitters into buying resulting in the strong sales during the Summer.  Brisk September/October sales suggest interest rates aren't the only factor in sales rates.  Should the market produce sales above 2,200 in January/February inventory will remain depleted setting the stage for price increases. December's Months of Supply at 1.05 serves as a reminder of tight inventories.

In 2013 record low inventories coupled with increasing buyer interest pushed Case-Shiller prices up 14% last year.  After peaking in July prices leveled out thru October.  With weaker sales in November/December and ample inventory, Case Shiller prices ought to drift lower in November/December.  If inventory remain scarce into the Spring, prices are poised for another run up in 2014.  14% increases won't be seen as interest rates will continue to upside appreciation.  7% wouldn't be surprising.

2014 ought to be a good year for Builders/Flippers that can bring inventory to the market during the Selling Season.  Waiting until the Spring to set prices may be a profitable decision.

Implications of Higher Interest Rates on the Real Estate Industry

With interest rates breaking out to new highs it's interesting to speculate on the implications for the Real Estate Industry.

 

As noted here 10yr Interest Rates recently broke an 8 year trendline signalling higher rates ahead.  Curiously, over long term periods interest rate movements don't appear to have a direct correlation to home sales.

This chart of Used Home Sales shows the sharp dropoff in sales that started in 2007.  Used Home Sales continued to drop thru 2012.  This decline in sales was during a period of declining interest rates as seen in the interest rate chart at the top.  Sales of Used Homes began increasing at the beginning of 2013 which was shortly after interest rates turned up.  It seems Home Sales are more tightly correlated to strength in the economy and consumer confidence rather than strictly tied to interest rate movements.  Reasonably higher interest rates don't spell doom for the housing market.

The Homebuilding Industry doesn't appear to be affected too greatly by higher rates either.

 

When rates spiked starting in May, the Homebuilders had just come off a strong run from the 2009 bottom.  As rates quickly jumped 87%, the Homies corrected a mere 14%.  Since the rate run started again in November  both rates and Homebuilder stock prices are both headed up.  Higher interest rates aren't an impediment to higher Homebuilder stock prices.

 

Mortgage refinancing have dropped sharply throughout 2013.  Refinancing is highly sensitive to interest rates changes since most homeowners would voluntarily agree to higher mortgage payments.  The prospects of higher interests rate is going to continue to make life for Mortgage Brokers increasing difficult.  As it stands now, any loans a Broker made since 2011 is now dead money, since few of their clients from then will refi again.   Of course this also suggests than any borrower who intends to stay in their home should refinance now.

Higher interest rates are helping Regional Banks out.

 

Banner Bank's stock price is up 32% since September.  Regional Banks have had difficulty making money in the ultra loan interest rate environment.  Even with a cost of funds from depositors near .3% it is hard for banks to make money lending it out at 4%.  The Fed's pledge to keep short rates near 0% while opportunities to lend it out at higher rates has made regional banks an appealing investment for investors.  This situation ought to entice the Regional Banks back into real estate A&D loans now that they have better rate spreads and more evidence of a rebounded housing market.

 

Income Producing properties prices have rebounded quicker than residential.  Ultra lows interest rates have benefited Cap Rate calculations supporting higher prices.  An increase in interest rates will weaken Cap Rate calculations.  Cash flow will become an increasingly important investment criteria for income producing properties.  Without strong cash flows the standard ploy in a declining interest rate environment of a cash out refi without a paydown of principal will be more difficult to accomplish.   

The prospects of higher interest rates will create many winners and losers within the Real Estate Industry.  The key question remains why interest rates rise.  If it is within the context of an improving economy then the impact on the Real Estate Industry should be taken in stride.  If higher rates are the result of the removal of artificial support from the Fed the outcomes will be significantly different.

 

 

10yr Rates Hit a 2 Year High

Improving economic data and continuing taper blather pushed 10yr rates over 3% this week.

 

The Bull Market in rates continues on with higher highs throughout November and December resulting in a new high for rates this year.   Rates are now up 20% since the beginning of November. 

 

 Not only did rates set a new annual high, they are the highest they've been since 2011.  The new high broke a significant down trendline in place since 2011.  As resistance now becomes support at 2.9%, this ought to set a downside boundary for rates.  There isn't much resistance until rates reach 3.25%.  The indicators are still pointing up leaving plenty of room for rates to get there.

 It's looking like a convincing break of a 7 year downtrend.  All the indicators have room to move up.  The MACD in particular has room after just crossing up.  3.25% by midyear is only a matter of time.

  The bigger question is now how high can they go.  This 20yr chart adds a little perspective.  The 20 year downtrend is clearly evident.  It suggest significant resistance just below 3.5%.  It is unlikely to break such resistance on the first go around.  The most likely scenario is that rates touch resistance late in the Summer and back off thru the end of 2014.  Hitting the upper channel should cause the indicators to reset to Bull Market settings making RSI's in the 30's a thing of the past.