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Warren Buffett spent $5.1 billion on Berkshire Hathaway share buybacks – a sign that he’s confident in the market at these levels?

  • The Dow Jones Industrial Average (DJIA) climbed 233 points on Monday.
  • Warren Buffett announced $5.1 billion Berkshire Hathaway share buybacks – a sign of confidence?
  • Trump signs executive order extending unemployment benefits and other stimulus measures.

The Dow climbed 3.8% last week to end with its best weekly performance since June. We kick things off on Monday with more of the same on Wall Street. The Dow Jones Industrial Average (DJIA) rocketed more than 200 points higher.

Investors might be taking cues from Warren Buffett who gave the markets a fair dose of confidence over the weekend. The Oracle of Omaha announced $5.1 billion worth of share buybacks at Berkshire Hathaway. Bloomberg’s Katherine Chiglinsky summed up why this matters:

This quarter really showed us that Buffett is not just sitting on the sidelines.

Video: Warren Buffett bets on… himself

Far from sitting out this rally, Buffett has been quietly putting his capital to work, albeit in his own company. It’s a cautious vote of confidence many have been waiting for.

Dow leads the stock market today

Dow futures opened strong on Sunday evening, and momentum carried over into Monday’s trading session. As of 9:55 am ET, the Dow Jones had gained 233.36 points or 0.85% to climb to 27,666.84.

The Dow Jones shot higher on Monday. | Source: Yahoo Finance

The S&P 500 rallied 0.2%, while the Nasdaq edged 0.17% lower after another blistering run last week.

Warren Buffett gets off the sidelines

Buffett was suspiciously quiet when the crisis began back in March. He only made one public move: selling his airlines. Many commentators saw his silence as a sign that another crash was coming.

In true Buffett fashion, however, he was making quiet, cautious moves. He bought more Bank of America stock and struck a natural gas deal. Now, it turns out he bought back $5.1 billion Berkshire Hathaway stock through May and June.

If you take all of those together, it shows that Buffett is willing to put some of his money to work in this climate.

Even though Buffett is staying “close to home,” as Chiglinsky put it, it shows a level of confidence in the stock and the broader market at these levels.

To put it into context, the $5.1 billion buyback is the biggest in the company’s history for a single quarter. It’s more than Buffett bought back in the whole of 2019.

Trump executive order gives stock market strength

After Congress failed to reach an agreement on the next relief package last week, President Trump took matters into his own hands. He signed a series of executive orders extending the stimulus measures.

Crucially, the unemployment benefit boost will continue, although it’s now $400 per week instead of $600. Trump extended the moratorium on evictions and delayed student loan interest repayments until the end of the year.

Video: Trump signs executive orders on stimulus

Trump also signed an executive order granting a payroll tax holiday for Americans earning less than $100,000 per year. The order will be effective from August 1st “most likely.”

Traders will want to see a full package from Congress, but the executive orders should provide a temporary bandaid after much of the support measures ran out in July.

Dow cheers strong data from China

There was also good news out of China this morning. Industrial activity is back at pre-coronavirus levels. The data showed that deflation also eased in July. Florian Ielpo, head of macroeconomic research at Unigestion said the numbers were a boon for the global economy.

China is so much in advance in this process of lockdowns and exiting lockdown, that any good signs for the Chinese economy is essential (for the world economy).

It’s hoped that European and American industrial output will follow suit as the pandemic eases.

Author: Ben Brown

Source: CCN: Dow Soars as Warren Buffett Makes a Bold $5 Billion Move

Morgan Stanley analysts say the stock market needs to go through a 10% correction before the bull market can continue.

The Dow Jones Industrial Average (DJIA) looks nervous on Tuesday morning as stocks trade flat.
Morgan Stanley’s chief equity strategist predicts a 10% correction before the recovery continues.
As nerves grow, analysts increase their gold targets above $2,000.

After a phenomenal rally yesterday, global stock markets are taking a breather. The Dow Jones Industrial Average (DJIA) edged slightly lower on Tuesday following a nervous open.

But there could be a bigger correction to come. That’s according to Morgan Stanley’s chief U.S. equities strategist Mike Wilson. In his latest research note, he predicted a 10% correction in the near-term.

We think the most likely outcome remains a 10% correction in the broader index.

The red line marks a 10% drop in the Dow, if Morgan Stanley analysts are correct. Source: TradingView

Wilson and his team believe the selloff will be led by the very stocks that drove the rally: tech stocks.

The note comes on the same day the Nasdaq closed its 29th all-time high this year.

Dow struggles as Tuesday’s session dawns

The wild optimism of Monday has worn off and U.S. indexes are treading water this morning.

By 9:39 am ET, the Dow had lost 40.34 points or 0.15% to trade at 26,624.06. The move lower comes ahead of a key earnings report from Disney.

After a big rally on August 3, the Dow edged lower on Tuesday. | Source: Yahoo Finance

The S&P 500 dipped 0.16% to 3,289.46. The Nasdaq slid 0.18% to 10,882.65 to round out a hesitant day for U.S. stocks.

Morgan Stanley still bullish despite 10% drop warning

Wilson has been eerily accurate throughout the last few months. His team called the bottom just a week before the Dow hit its lowest point in March. Wilson maintains we are in the first innings of a new bull run, but the market needs some time to cool off.

Once the correction is complete we expect the bull market to continue to broaden out.

So far, the recovery has been driven by ‘stay-at-home’ tech stocks. Wilson would like to see a larger rotation into banks, cyclicals, mid-cap and small-cap stocks before the real bull market begins.

Watch: Analysts remain cautious on stocks

Many other investors share Morgan Stanley’s caution. Ali Malik, investment advisor at Bank of Singapore, told Bloomberg this morning that his firm is cautious going into the rest of the year.

We are still invested in equities, but we are neutral. Having seen the market run up as much as it has from the March lows, we remain very cautious going into the second half of the year.

Like Wilson, Malik cited the upcoming U.S. election as a possible headwind for stocks.

Is gold sending the Dow a warning?

As investors grow cautious on stocks, they are ramping up their price targets on gold. The ‘safe haven’ hit another record high in yesterday’s session. Analysts see the metal pushing past $2,000 to as much as $2,200. Michael Hsueh from Deutsche Bank believes $2k is imminent for gold:

We had targeted $2000 in Q3 of next year, but now it looks quite certain we’ll be able to reach that level some time this year, if not next month.

Hsueh said the gradual slide in the dollar and declining real rates in the U.S. are strong catalysts for further growth in gold.

Maybank Group Wealth Management’s Eddy Loh said he wouldn’t be surprised to see some profit-taking in the near-term. But all the major drivers remain in place for the mid-term.

In terms of gold being an effective hedge against market volatility and geopolitical tensions, I think that function still remains. So we won’t be surprised to see gold prices surpass the $2,000 mark or higher.

The demand for gold could be a warning sign for the equity markets. Some doomsday analysts still expect a final ‘melt-up’ in stocks before an 80% selloff.

Author: Ben Brown

Source: CCN: Dow on Edge as Morgan Stanley Predicts 10% Wipeout

The stock market is cooling off after yesterday’s blistering rally, but BMO Capital Markets sees a return to all-time highs by early 2021.

Dow Jones Industrial Average (DJIA) futures fell 136 points overnight after back-to-back gains.
Wall Street analyst who nailed the March bottom sees another 9% upside in the stock market as momentum continues.
Traders await a fresh round of jobless claims data, expected to come in at 1.8 million this week.

The stock market looks set to open slightly lower on Thursday. Traders are taking a breather after a monster rally this week. Dow Jones Industrial Average (DJIA) futures were down 136 points this morning.

This is likely just a cooling-off period, according to Brian Belski of BMO Capital Markets. This morning he re-iterated his bullish position on stocks and sees another 9% upside from here.

The best thing we’ve seen in the last couple of weeks is that we’re starting to see a broadening out. So value stocks, small cap stocks, and not just technology stocks lead.

Despite signs that traders are getting greedy, there’s still room to run. Belski says he’s “not prepared to say [stocks are] overbought yet.”

Dow Futures Cool After Blistering Rally

U.S. stock futures are taking a much-need break overnight after yesterday’s gains. Dow futures contracts were 136 points (0.52%) lower at 5.59 am ET.

Dow Jones Industrial Average (DJIA) futures slide after yesterday’s monster session. Source: TradingView

S&P 500 futures were down 0.55% while Nasdaq Composite futures dropped 0.33% after closing near record highs in yesterday’s session.

Stock Market Could Go 9% Higher From Here

Belski was one of the few investors to nail the March bottom. In fact, he wrote a note to clients on March 23rd – the absolute bottom of the trough – predicting a 40% – 50% bounce back.

We’re almost there, and we stand behind our 3,400 target by the end of first quarter of 2021.

His S&P 500 target implies another 9% rally for stocks from here, and a new all-time high for the index. Of course, Belski warned that stocks “are not linear” and we are likely to see a handful of drawdowns and breathers before we get there.

Belski re-iterates his 3,400 target for the S&P 500, which would mark a new record high. Source: TradingView

Some Investors Have Been “Way Too Bearish”

Belski also dismissed the the chorus of investors who repeatedly call for a deeper stock market correction. He said those investors, specifically macro and quants, have “quite frankly been too bearish.”

This market rally, he claims, has been powered by more than just Fed stimulus. Fundamentals matter, and American companies have the edge:

US stocks are best positioned in the world.

And there’s plenty of money left to push the market higher. As Belski pointed out, investors still have billions of dollars of cash sitting on the sidelines waiting to deploy.

80% Probability The Dow Is Lower Next Year?
Across the street at Citibank, analysts are not so optimistic. Chief equity strategist Tobias Levkovich said their models point to an overwhelming likelihood that stocks are lower next year.

Our sense from our panic-euphoria model, which is flashing euphoria again is suggesting almost an 80% probability that markets will be down in the subsequent 12 months as opposed to up.

Citi’s ‘euphoria’ chart suggests an 80% chance of downside in the coming 12 months. Source: Citi

John Stoltzfus at Oppenheimer Asset Management admitted that stocks were definitely taking a “leap of faith” at these levels. But that this recovery isn’t “uncharacteristic for markets that are coming out of a significant market crash.” It looks a lot like 2009 and the start of a new bull market, he added.

Stock Market Braces For New Wave Of Jobless Claims

All eyes are on this week’s jobless claims data again today. We’re expecting a further 1.8 million claims, taking the total well above 45 million since the crisis began.

However, the more important number to watch is ‘continuous claims.’ Now that many are back to work, continuing claims paints a more accurate picture of the economy. This figure is calculated by the number of people actually receiving unemployment checks. Continuing claims are trending down, suggesting that we’re over the worst of the economic fallout.

Elsewhere today, the European Central Bank (ECB) will announce its interest and deposit rate decision. We’re expecting no change to the rate, but an increase in the bond purchase program.

Author: Ben Brown

Source: CCN: Dow Futures Drop But a Blistering 9% Jump Awaits, Predicts Analyst

Beijing retaliates against Trump’s Hong Kong barbs by reportedly halting U.S. agricultural imports, threatening an already-fragile trade deal.

  • The Dow Jones Industrial Average (DJIA) struggled on Monday morning.
  • China aggravated tensions by some halting U.S. agricultural imports, threatening trade deal.
  • The White House turned off all external lights in a historic moment last night amid growing protests in the capital.

The U.S. stock market whipsawed overnight, erasing a heap of gains ahead of the opening bell. Despite an initial bounce in the futures market, the Dow Jones turned bearish after China yanked a key part of the phase one trade deal.

As Bloomberg reports, Chinese government officials have ordered state-run agriculture firms to halt U.S. purchases including soybeans and pork.

State-owned traders Cofco and Sinograin were ordered to suspend purchases… Chinese buyers have also cancelled an unspecified number of U.S. pork orders.

China to halt U.S. soybean and pork imports. | Source: Twitter

The move is believed to be retaliation for the White House’s latest stance over Hong Kong. Chinese agriculture purchases are a crucial part of the Sino-American trade deal, throwing the entire deal into disarray.

Dow Turns Bearish After Wild Overnight Session

A wild night for the futures market turned into a disappointing day for U.S. stocks. All of this comes off the back of a weekend of civil unrest across America. Ongoing protests turned violent in many U.S. cities, including Washington D.C.

As of 9:53 am ET, the Dow Jones had lost 19.97 points or 0.08%, pushing the index down to 25,363.14. The DJIA had fallen more than 100 points immediately after the opening bell.

A wild overnight session for Dow Jones Industrial Average (DJIA) futures set the index up for a disappointing start to June. | Source: Yahoo Finance

The S&P 500 also recorded slight losses, dipping 0.06% to 3,042.57.

The Nasdaq managed to tick 0.12% higher to 9,500.95.

U.S. – China Tensions Could Bring Stocks “Back To Earth”

While stocks have rallied in the face of ongoing domestic crises, analysts agree that China tensions could still blow a hole in this market. Bloomberg reporter Dani Burger noted this morning that China was the biggest worry for the strategists she spoke to.

The real risk here is stocks exposed to China… US stocks that have a lot of sales, where they sell to China, or China exposure in general have outperformed from the bottom so this is the real risk. If we get increasing tensions, those stocks have done extremely well so they might fall back down to earth.

The White House has increasingly ramped up the rhetoric on China in recent weeks. Last week, Mike Pompeo stoked tensions by declaring that Hong Kong was no longer politically autonomous from China. That might sound like a small distinction, but it allows the White House to yank Hong Kong’s special trade status. It was a provocative move that angered China. As Iris Pang at ING commented at the time:

China will retaliate on this. It’s more the Chinese retaliation that I’m waiting for and worried about, because I don’t know how they will retaliate.

Well, China retaliated. The decision to halt U.S. agriculture purchases is the slap-back many investors feared.

Dow Unfazed By Riots

The stock market was heading for a positive open this morning before the China selloff at 4:40 am. It suggests that traders were broadly unfazed by the ongoing protests and riots across the country this weekend. As Burger explained, that shouldn’t come as too much of a surprise:

We saw in the 1960s that civil unrest doesn’t always lead to turbulence in the market.

Markets can easily shrug off civil unrest and focus on the bigger picture. However, the scope of the protests throughout America is staggering. Demonstrations broke out in 140 cities this weekend. The National Guard was deployed in 21 states.

The White House has gone dark with unrest accelerating across cities in the United States | Source: Twitter

In Washington D.C., the White House went dark as protests turned violent. In a rare move, the external lights were turned out as fires raged near Washington Monument. The authorities imposed an 11 pm curfew while U.S. Marshals and the Drug Enforcement Administration arrived to assist the National Guard.

Huge Stock Market Volatility Still To Come

Although the riots didn’t trigger an immediate drop in the Dow Jones or S&P 500, traders are beginning to price in more volatility. The VIX, which tracks expected volatility in the S&P 500, is showing a huge spike in October options positions.

If one thing is going to have a really big impact right now, it’s political risk. And you can see that very clearly when you look at the VIX curve… Investors bidding up [October options] for the election period… That right there is political tension that keeps getting priced in, especially over the weekend – Dani Burger.

In other words, the riots are causing traders to hedge their risk going into the November election.

Author: Ben Brown

Source: CCN: Dow Outlook Darkens After Bloomberg Drops Bombshell China Report

The Dow Jones Industrial Average (DJIA) just did something the stock market hasn’t seen since 2008. That’s not a good sign.

  • The Dow Jones wiped out a 900 point gain and closed lower on Tuesday, a whopping intraday reversal not seen since the 2008 crisis.
  • The recent ‘relief rally’ is fading as the focus shifts to dire economic data and corporate earnings this month.
  • Health experts say we may have to impose lockdowns again in December if the coronavirus comes back.

The U.S. stock market is battling rollercoaster levels of volatility. Yesterday, the Dow Jones Industrial Average (DJIA) made a round-trip of almost 2,000 points – something it hasn’t done since the 2008 financial crisis.

The Dow Jones soared almost 900 points at yesterdays open, before wiping out the entire day’s gains to close 963 points lower than its intraday high. | Source: TradingView.

The wild volatility suggests we may not have carved out the bottom of this rout yet. When this last happened in October 2008, the stock market was still five months from its lowest trough. Instead, the recent bounce is likely just a ‘bear market rally’ according to JP Morgan analysts.

There is reason to be cautious as this looked to be a relief rally ahead of next week’s start of Q1 earning season and before data reveals the depth of the virus impact.

The long-term reality of living in a world with coronavirus is beginning to set in on Wall Street. In one particularly dire warning, Dr. Janis Orlowski, chief health care officer of the Association of American Medical Colleges, said this morning we should prepare for more lockdowns at the end of the year.

We have to prepare ourselves to go through a similar exercise in the fall, in the late fall.

Dow Swings Higher After Tuesday’s Wild Ride

The Dow Jones opened with a bang, rising more than 300 points despite suffering a mixed futures session. The delay of the European stimulus had a negative effect in the early hours, but the index later recovered.

As of 9:46 am ET, the Dow had gained 311.08 points or 1.37% to trade at 22,964.94.

The Dow opened to triple-digit gains after Tuesday’s wild ride. | Source: Yahoo Finance

The S&P 500 rose 1.02% and 1.05%, respectively.

Stock Market Rebound: Just A Relief Rally?

The stock market’s impressive bounce off March 23 lows has some investors predicting a quick V-shape recovery. But that optimism is starting to fade. JP Morgan analysts said the move higher was triggered by funds heading their portfolio risk, not a show of true strength.

Data shows the recent move higher has been accompanied by short covering and de-risking rather than active risk taking on the long side.

There’s evidence that individual investors are ‘buying the dip’ after a 30% plunge. Unfortunately, this is usually a contrarian indicator as retail investors often end up on the wrong side of the trade. As Peter van der Welle at Robeco explains, true market bottoms are built on complete despair, not hope.

From a sentiment angle, recent exceptional bounces suggest that investor sentiment is still in the denial phase, rather than in the phase of capitulation that paves the way for a new bull market.

Brace For More Coronavirus Lockdowns Next Winter

The relief rally enjoyed an extra boost from news that coronavirus cases were leveling off in Europe and New York. While this is good news, the market may not have priced in the second wave of infections.

There’s pressure mounting on New York to reopen, despite the city becoming the epicenter of the U.S. outbreak. | Source: REUTERS/Eduardo Munoz

Dr. Janis Orlowski said this wave could end by May, but a second wave will return in the winter. We should expect further lockdowns by December 2020.

There’s not going to be a vaccine that’s going to be ready in 6-8 months… Be ready to stay at home. Understand what that means… We’re going to do this again and we’re going to be smarter and better at doing this.

Dow Jones Reality Sets In

Yesterday’s reversal is perhaps the first sign that reality is beginning to set in on Wall Street. Corporate earnings are just around the corner. The numbers will be brutal. Economic data and unemployment figures will continue to shock.

Some investors are still clinging to the ten-year bull market, as Albert Edwards at Société Générale explains.

This optimism is the legacy of a long bull market. Investors can’t conceive that the Fed will ‘allow’ the stock market to collapse. Think again.

Perhaps the bulls are right. But a painful month of coronavirus deaths, corporate earnings, and economic data lay ahead. Let’s see what happens.

Author: Ben Brown

Source: CCN: Dow Jones Just Did Something Unseen Since 2008… And It’s Not Good

The European Covid-19 epicenters of Italy and Spain are emerging from the worst of the virus and cautiously looking at how to ease lockdowns. Will the US follow soon?

  • The Dow Jones Industrial Average (DJIA) struggled after apocalyptic unemployment statistics wiped out strong pre-market gains for U.S. stock futures.
  • Coronavirus cases continue to grow exponentially in the U.S. but Europe points to potential recovery.
  • Case numbers retreat in hard-hit Italy, Spain, and Germany with talk now moving to re-opening the economy.

The U.S. stock market struggled on Thursday after an apocalyptic jobless claims report reversed what looked to be a striking recovery for the Dow Jones Industrial Average (DJIA).

America is still ravaged by exponential growth in coronavirus cases, but there is hope in Europe. New Covid-19 cases have peaked and are now declining in the worst-hit nations of Italy, Spain and Germany.

Source: Bloomberg / John Hopkins University Center for Systems Science and Engineering.

Officials are now beginning to cautiously plan exit-strategies and analysts are plotting economic recovery models. Arnab Das from Invesco said we will ultimately see a ‘square-root-shaped recovery’ when the virus subsides.

I don’t think we should expect a kind of sustained, very rapid, very complete V-shaped bounce. I think what we should expect to see maybe is a bit more like a square-root where we have a V-shaped bounce back and things calm down, and gradually recover again.

Dow Wobbles After Jobless Claims Report Pummels Stock Market

Wall Street looked set to snap two straight days of declines as U.S. stock futures rose more than 2% in overnight trading.

Then the Labor Department released its weekly jobless claims report, which showed that a record 6.6 million Americans had filed for unemployment insurance.
As of 9:56 am ET, the Dow had lost 140.35 points or 0.67% to drop to 20,803.16.

It looked like the Dow Jones would open to strong gains, but a brutal jobless claims report sucked the air out of the market. | Source: Yahoo Finance

The S&P 500 and Nasdaq fell 0.22% and 0.31%, respectively, though the Russell 2000 crept to gains of 0.15%.

Investors knew Thursday’s jobless claims report was going to be ugly, but hardly anyone expected it to be this ugly.

Last week’s jobless claims report was devastating. This week’s was even worse. | Source: CNBC

The Dow Jones economist estimate was 3.1 million, a slight decrease from last week’s historic 3.3 million claims. Goldman Sachs was considerably more bearish, forecasting 6 million claims, but even that undershot the mark.

Before the coronavirus outbreak, weekly jobless claims had never exceeded 695,000. Today’s print is 10 times as large as the financial crisis peak of 665,000.

Coronavirus Cases Decline In Worst-Hit Regions

The Labor Department’s jobless claims report overshadowed genuine progress in Europe’s fight against Covid-19.

The worst appears to be over in the epicenter of Europe’s coronavirus outbreak. Italy and Spain have both reported sustained declines in the number of new cases over the last week. Pinar Keskinocak of the Georgia Institute of Technology said the numbers are promising.

It is encouraging to see the slowdown of the spread in some areas, thanks to strong measures, especially physical distancing.

Infection rates are also slowing in Germany, Netherlands, and Switzerland. As a whole, Europe will likely hit its peak in a matter of days, according to modelling by Global Macro Investor’s head of research Remi Tetot.

Although Italy has extended its lockdown, talks are now turning to safely re-opening the economy. However, that can only be done with widespread testing. Keskinocak explains:

[Nations must be] cautious about relaxing interventions in any area until rapid widespread testing is available, we have a better understanding of who is infected, and who has been infected and recovered.

Will The U.S. Follow In Italy’s Footsteps?

The decline in Italian cases brings hope to the U.S. which has always been a few weeks behind the European epicenter. Following the Italian trajectory means cases will continue to climb, but should peak soon. Richard Martinello at the Yale School of Medicine explains:

It seems like we’re following the same trajectory that we’ve seen in areas such as Italy. So here we’re anticipating that over the next number of weeks we’re going to see a substantial increase in the number of infected.

Remi Teto’s model would see New York cases peak around April 12th and then level off. After that, talks could centre around re-opening some parts of the economy. A discussion that would inject more optimism into the stock market.

What Will The Dow Jones Recovery Look Like?

With a possible end in sight, investors and analysts are scrambling to map out the stock market’s recovery. Arnab Das was confident that the brutal 30% plunge in U.S. indexes won’t descend into a 2008-style financial crisis.

The central banks are doing everything they can and it seems to be working to keep the financial markets and the financial system operating … We probably won’t have a financial crisis in a systemic sense like 2008/2009.

But we shouldn’t expect a quick bounce back to normality, he added. Social distancing measures are likely to be lifted in waves, so the stock market should reflect a more gradual recovery.

Eventually what we should have is a recovery. A bit of a bounce back as pent up demand is released. And then over time the economy normalised as a public health crisis comes to an end.

Author: Ben Brown

Source: CCN: Dow Recoils as Labor Apocalypse Eclipses Europe’s Coronavirus Recovery

By flooding the market with money, the Federal Reserve just accidentally pushed mortgage bankers to the brink of bankruptcy.

The Fed’s rate cuts and a quarter-trillion purchase of mortgage-backed securities brings a seismic sledge-hammer to the industry. | Source: REUTERS/Carlos Barria/File Photo

  • The Federal Reserve just bought $250 billion of mortgage-backed securities in a bid to strengthen the markets.
  • But the move caused a tsunami of margin calls across the mortgage banker industry. Some warned they could go bankrupt within days.
  • Homebuyer demand has dried up and millions of mortgage delinquencies loom.

The Federal Reserve unloaded its bazooka of stimulus all over the markets in the last two weeks. But there’s some major collateral damage. By flooding the markets with money, they may have accidentally trigged a housing market crash.

The Mortgage Bankers Association (MBA) warned of ‘large scale disruption’ to the housing market and accused the Fed of using a ‘sledgehammer.’

This is a collapse of the system.

How The Federal Reserve Almost Broke The Housing Market

Here’s how it works. Mortgage bankers hedge themselves against interest rates going up. If rates go up, the hedge makes sure they don’t lose money from customers who locked in a lower mortgage rate.

It’s a standard practice across the industry and almost never causes any problems.

Until now.

As part of the coronavirus stimulus action, the Fed bought $250 billion worth of mortgage-backed securities in a space of two weeks. For perspective, that dwarfs the amount they bought during the housing crisis by $80 billion.

Now Mortgage Bankers Face Bankruptcy

By flooding the market with money, the Fed forced down rates. Problem is, that just blew up the hedge.

Mortgage bankers are now getting margin calls and need to pay tens of millions of dollars to meet them. Even well capitalised lenders are on the brink of going under because of it. In a letter to regulators, the MBA wrote:

Margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the week. For a significant number of lenders, many of which are well-capitalized, these margin calls are eroding their working capital and threatening their ability to continue to operate.

Housing Market On The Brink

This isn’t the only seismic shock to the housing market since the start of the coronavirus pandemic. Home buying demand has all but evaporated in the last month. Year-on-year growth in the housing market slumped from 27% in January and February to 1% in March.

Zillow, a company that buys property to resell, has suspended all purchases.

Meanwhile, a record 3.3 million people registered unemployed last week. Even with the government’s promised $1,200 check, many households won’t be able to pay the mortgage. A tsunami of delinquencies is coming.

And just look at this chart which tracks Canadian commercial real estate. The price collapsed over fears of widespread defaults.

The Vanguard FTSE Canadian Capped REIT Index ETF which tracks commercial real estate plunged in March. | Source: TradingView / Ben Rickert

The Airbnb Bubble Just Popped

The housing market is also buckling under the massive unwind of Airbnb rentals. With travel effectively ground to a halt, Airbnb properties are empty. Anecdotal reports suggest this is a bubble waiting to pop.

One reveals:

My neighbor is an Airbnb super host. She is on forums with other hosts. Many of them have 10+ mortgages. 0 guests are booking their properties. They are running out of cash.

Many Airbnb hosts are operating flimsy empires, leveraged up to the eyeballs on cheap mortgages. If the coronavirus pandemic drags on, many thousands will default.

We’re already seeing the effects spill out on the housing market. With no short-term bookings, Airbnb hosts are flooding the regular rental market. London just saw a 45% rise in rentals hit the market. It’s 64% in Dublin and 78% in the British tourist town of Bath.

The housing market is under pressure from almost every angle and the cracks are starting to show. Let’s hope this isn’t 2008 all over again.

Author: Ben Brown

Source: CCN: Did the Fed Just Accidentally Trigger a Housing Market Crash?

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