Dear Clients & Friends,
The regular newsletter will not appear this week as our travel schedule takes us to Paris this week for the inaugural meeting of the Global Interdependence Center’s Global Society of Fellows. However, we include a brief note below that confirms we have seen nothing in the recent data to dissuade us from our view that much of the recent strength was due to mild weather and the economy will return to a muddle through in Spring.
Most of the data this week was on the very weather sensitive housing sector and it largely disappointed to the downside, especially considering that February weather continued very mild by historical standards. In particular, the details of the housing starts report confirm trends that we first spotted in January. Housing starts were strong at 698,000 in February, but only because of another surge in multi-family construction to 241,000. Single family starts fell sharply from an average of 506,000 in December and January to 457,000 in February. Meanwhile, he number of houses completed in February remained low at 421,000 in February after a very low 389,000 in January. This two month average of just 405,000 is in sharp contrast to the stable 452,000 average posted over the previous five months. To us this is a clear sign that builders shifted crews from finishing homes to starting them, with the actual number under construction rising only marginally from 236,000 on average in the fourth quarter to 242,000 in February. Since the early construction on a house is typically worth less than the finishing touches, it is unlikely housing will provide any lift to the first quarter.
Meanwhile, the high frequency initial claims data declined only slightly to 348,000 after an upward revision to 353,000 last week. Revisions have been steadily upward in recent weeks and we believe this week will mark the sixth just north of 350,000 after its revisions. Again, claims have not reversed and housing data was still better than before November, so we believe we are returning to a muddle through at 2.35% real GDP growth rather than a payback period or a continuation of strength. The growing weakness in Europe and its associated drag on China only exacerbate the downside risks.
We spent time in New York this week and were shocked by the streets peripatetic focus. Most agree that the fiscal calamity coming in January s a major risk, but it is outside their current time frame! The French elections and Spanish fiscal situation should become the next dominant concerns. We will report first hand on the mood in Paris when we return next week.
McVean Trading & Investments, LLC