By Yaser Anwar, CSC of Equity Investment Ideas
Subprime Effects
- Over the past two weeks subprime lenders have taken a turn for the worse, giving the bears the chance to argue once again that consumer spending is going to dwindle. Historically and in the trailing twelve months, consumer expenditures have lead to 8-10% annual growth in real consumer spending not equity withdrawal extraction.
- Furthermore, Mortgage Bankers Association says that 35% of homeowners own their homes outright, while 47% have fixed rate mortgages. Only 6% are subprime borrowers with adjustable-rate mortgages.
- Hence, its hard to fathom that consumers are near the end of spending just ’cause of a slowdown in home equity extraction, and it seems unlikely that further subprime problems will derail the consumer spending.
- You will agree with me that job growth is the most important factor behind consumer spending. Jobless claims reversed a big chunk of their prior spike with a 27K fall in the Feb. 17 week to 332K vs 325 expected.
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- Furthermore, the level is a lot higher than the 287K level in the Jan. 13 week, on a monthly basis for the payroll report. The comparable 4 week averages for the survey week are also unfavorable, at 328,000 for Feb. 17 vs. Jan. 13’s 307,250. (Source: Econday)
- What worries me with subprime is the spillover effects into the job market. The image below depicts that the worst for the housing related job losses have yet to occur. While some analysts believe building permits have bottomed after falling as much as 1/3rd in 06, single family housing completions have fallen only 9% so far, and will catch up with permits as we progress in 07.
- Unemployment in single family homes and building permits could alone could exceed 500K. So far, job reductions since March 06 have only been 112K.
Global Macro- German VAT Implications
- An increase in the German VAT, from 16% to 19%, took effect on Jan 1st. So far, there has been no clear evidence of any impact from the VAT rate hike on economic activity over the last few months.
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