Halloween is here! There are a few more days to buy candy, carve a pumpkin, and figure out what costume to wear. Hope everyone has a safe and fun time on Friday.

THE KEY ECONOMIC LANDMARKS WE PASSED

1. Housing

News from the housing market continues to stir mixed emotions. Existing home sales increased to the highest annual rate for the year while new home sales barely squeaked out an increase off a lower than previously reported number for August. All cash deals and investor purchases ticked up a bit in September but remain lower than in 2013. In the various regions, the Midwest was the weakest with a decline of 5.6% while the West shot higher by 7.1%. Home buyers received an unexpected gift this year as rates fell nearly back to levels seen late last summer. Additionally, lenders are starting to relax standards ever so slightly. As prices rise, sellers will continue to enter the marketplace and investors will exit when distressed properties become more scarce.

New home sales took a breather after shooting higher in August and only remained positive due to a nearly 40K downward revision. Inventory levels over the last three months are better after dipping to a low of 4.4 months supply in May. Builders seem to be focusing less on building fewer more expensive homes (which has kept prices elevated). Median prices sank from $286,800 in August to $259,000 in September. The number of new homes sold for less than $200,000 accounted for 31% of the total last month compared to an average of 23% for the year.

Housing will reach a better balance when existing home prices edge up, new home prices compress, and supply of both are higher. The price gap stands at ~$50,000. Looking at Figure 1, you can see the gap has been stubbornly high in the last few years and well above the average level seen in the last housing boom.

Figure 1

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The Journal has a cool housing market tracker worth checking out.

2. CPI: 0.1% vs 0.0% est (MoM)

Even with the plunge in energy prices over the last few months, prices for consumers rose by 0.1% in September. Energy dropped 0.7% while food and shelter increased 0.3%. While the index for all categories is up 1.7% in the last 12 months and below the Fed target of 2%, there are areas heating up. Food and shelter are both up 3.0% in the same time frame. I have some level of concern about rising shelter costs because of the current housing market environment. It is going to take a few years to bring more first-time homebuyers back into the equation and get Johnny and Susie out of their parents’ basements. In the meantime, people will have to rent. Figure 2 below shows the jump in shelter costs

Figure 2

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LAST WEEK’S MARKET IN THE REAR-VIEW:  “LL Cool J was wrong”

In his famous song, “Mama Said Knock You Out”, the 90s rapper starts the song by saying “Don’t call it a comeback.” Last week looked like a comeback to me. Across the board, equities broke out of their bottom ranges and ended the week in a nice shade of green. Corporate earnings and upbeat economic data from aboard helped give a boost while fears of Ebola in the U.S. and shootings in Canada caused a few jitters.

Returns for the Week*

  • Small Caps: Russell 2000 Index: 3.37%
  • Mid Caps: S&P 400 Index: 4.18%
  • Large Caps: S&P 500 Index: 4.12%

*Returns represent price change

LOOKING THROUGH THE WINDSHIELD

Economic

Another month is about to end and 2014 is drawing to a close. We will see our usual dump of month-end economic reports this week, although some will hit the wires early next week (e.g. ISM Manufacturing). More consumer oriented data is on the docket as well so let’s hope our fellow citizens kept their wallets open for another month. I do not expect the Q3 GDP release to be a shocker on the downside and I think I speak for most when I say I hope to see a three handle. Chicago PMI will be a precursor to ISM next week. We are all awaiting data current enough to show whether the rising dollar and drop in eurozone growth are negatively impacting the domestic economy.

Market

The trajectory seems to be up for equities with volatility (as measured by the VIX) collapsing from highs reached two weeks ago. It is too early to say we are going to sustain these levels as the possibility of a test of lows is always in the works. The recent sell-off took us out of the trend channel when looking at a longer dated chart, but the bounce back has been sharp. A resumption of the prior trend too early would do little to quiet the bears in the crowd. Sometimes we get too caught up in the charts and the history instead of thinking about the why and the now. The difference between a chart looking good or looking bad could simply be a matter of scale or the time period selected.

SCHEDULE

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