Sound bite: A bucket of cold water to start the summer for Financials

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Highlights from the June 1st US Market INK Report

Our US Banks Indicator remains positive, sitting above the 100% level (at which point there are the same number of stocks with key insider buying as there are with selling). Nevertheless, after a nice rally over the past few weeks, the bottoming of our US Banks Indicator suggests that much of the rally in the group may be over for now. A bottom in an indicator often coincides with a top in associated share prices. The counter argument could be made on traditional technical measures. From a technical chart perspective, new highs in the banks do look possible, particularly with the SPDR KBW Bank ETF (KBE*US) trading above its 20, 50 and 200 day moving averages. It also put in a new 3-month high earlier this week.

 

That said, from an insider sentiment perspective, at this point a breakout to new highs looks challenging for not only the banks, but also the Financials in general. We suspect summer Fed action will not help matters.

The Federal Reserve's determination to serve up a rate hike over the next few months, in our view, is probably more focused on containing financial risks in the real estate sector than it is about an overheating economy. Fed officials have already expressed concerns about financial risks in the commercial area. Now, the residential space may also be getting their attention. Last week, Bloomberg reported on a glut of condos in the Miami market. The last thing the Fed wants is to see more stories like that popping up across the country.

In that respect, the Fed likely hopes that the coming rate hike will serve as a bucket of cold water on hot spots in the real estate space. That could put a damper on the real estate group over the next few months (notwithstanding some rejigging of S&P sector classifications which carves out real estate on its own). It could also take some steam out of the banks if investors begin to view the Fed's rate hike as being more targeted towards containing a real estate bubble than a reflection of strong economic growth. If the economy-sensitive Materials ETF rolls over as we head towards a possible rate hike, expect the banks to follow suit.

OECD Warns Policy Makers on Housing Market Inaction, Debunks "it's supply, stupid"

Speaking of condo gluts, or at least potential condo gluts, for months I have been talking about the need for policymakers at all levels to undertake a coordinated show of force to restore some sense of order to the Vancouver housing market. Yes, I know the province has a task force looking at the real estate brokerage industry, but Victoria cannot solve this on its own. Yes, I know that CMHC has tightened lending requirements. But, as with all "macroprudential" efforts from Ottawa on this file over the years, they have failed. 

Now, for those of us concerned about housing inflation in both Vancouver and Toronto, we have found some support from the OECD. In the notes on Canada in its Economic Outlook released Wednesday, the organization says that with respect to housing rules and measures, they must be "tightened further and targeted regionally."

For those federal and provincial politicians who don't understand the message, here is what they are saying: get together now and coordinate policy to cool things off.

The other important points made by the OECD relate to what's helping drive local housing price hyper inflation. In particular, the OECD report says, "Very low borrowing rates have encouraged household credit growth and underpinned rapidly rising housing prices, particularly in Vancouver and Toronto, which together are a third of the Canadian housing market." Meanwhile, "lack of supply" does not make their list of concerns. Instead they say, "At the national level, housing starts are running at the higher end of demographic requirements and housing investment is robust, especially in British Columbia and Ontario".

The focus on monetary policy is an important point for those of us living in the Lower Mainland to understand. Recent concerns about the influx of foreign capital have been well aired. But less appreciated is the damage being inflicted by Bank of Canada monetary policy. Vancouverites concerned about home price inflation are right to hold both local and provincial leaders to account for their response to the crisis. But as the Billy Joel song goes, "they didn't start the fire."

It was Ottawa that fired up the market through a combination of poorly conceived immigration policies and reliance on the central bank to juice the economy via ridiculously low interest rates. So far, the central bank has been silent on housing market inflation. The OECD may help prod some accountability from them, but ultimately if we as citizens do not hold Stephen Poloz to account for the effects his policies are having on our city, we will not get the answers we really deserve.

Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time. If you missed the live broadcast, catch the replay here: http://bit.ly/1Vzj1Hx.

 

 

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