We returned to our winter home in Florida a few weeks ago and one of the first things that struck me was how truly unhappy and even desperate many Americans are. The good news is there are indications that the worst may be over.
Most Canadians don't fully comprehend just how bad things have been in the States. We were fortunate enough to escape the worst ravages of the recession and our real estate market held firm even through the worst of the world financial crisis. Of course, we've all seen the news reports about the gravity of the U.S. situation but until you actually come here and talk to people you can't fully appreciate the depths of despair.
South-west Florida, where we stay, was one of the hardest-hit areas and in some ways is a microcosm of America's woes. Lee County, which includes the cities of Fort Myers and Cape Coral, enjoyed an incredible but highly speculative building boom during the early years of this century as developers carved out huge gated communities from cheap scrub land and sold them off at increasingly absurd prices.
It was a classic bubble situation and when the recession hit it broke not with a pop but with an explosion. Lee County has been near the top of the national list of the highest rates of foreclosures for the past two years. In January alone, another 851 families lost their homes. The situation has become so bad that the county has an official website where people can go to bid on foreclosed properties that are being auctioned off. It makes for pathetic reading: homes that were once worth more than $350,000 have seen their assessed value plunge to less than $75,000 in some cases. The eventual selling price may be less than that.
Unemployment hovered around the 13% mark for most of 2010. To put that in perspective, Lee County had one of the lowest unemployment levels in the U.S. as recently as 2005-2006, when the jobless figure was in the 2%-3% range. To make matters even more difficult for those seeking work, a bill has been introduced in the Florida legislature that would require the state's unemployed people to perform at least four hours of unpaid community service each week to qualify for benefits. The idea is to reduce the spiraling cost of Florida's unemployment benefits system which is currently running a $2 billion deficit.
Given these numbers, it should come as no surprise that a recent poll found that one in five Floridians is seriously considering leaving the state. You can't eat sunshine!
However, there are signs that things are starting to get better, both locally and nationally. The headline in last Thursday's local paper read: "Glut of new homes is whittled". The article went on to say that the huge surplus of unsold houses left over from the building boom that ended in 2006 has been cut almost in half from its peak in late 2009. This inventory has depressed real estate prices throughout the region; once it is cleared the markets can start returning to normal.
Nationally, credit agency TransUnion reported a small drop in the percentage of homeowners that are behind in their mortgage payments by more than 60 days. Investors have regained confidence in the stock market, with the major U.S. indexes off to their best start in several years. Industry leader Delta Airlines increased its fares for business class and first class, an indication that demand for high-end travel is picking up. The manufacturing index of the Federal Reserve Bank of Philadelphia almost doubled from January to February. Inflation has replaced deflation as the main concern for policy makers, with the U.S. consumer price index rising by a greater-the-expected 0.4% in January.
The minutes of the January meeting of the Federal Reserve Board's Open Market Committee (FOMC), which were released last week, confirm that the recovery is in place and gaining traction. Studies by staff members found that consumer spending rose strongly in the final months of 2010, industrial production posted solid increases in November and December, and business investment in equipment and software was on the rise.
"Because the incoming data on production and spending were stronger, on balance, than the staff's expectations at the time of the December FOMC meeting, the near-term forecast for the increase in real GDP was revised up," the minutes said. The expectation now is that the U.S. economy will grow by between 3.4% and 3.9% this year while the unemployment forecast was revised down slightly.
There are three important implications for investors in all this, as follows.
1. The window of opportunity is closing for Canadians who want to take advantage of what may be a once-in-a-lifetime confluence of low interest rates, a strong loonie, and depressed U.S. housing prices to buy a vacation property. We now appear to close to the bottom of the market and, if current trends continue, U.S. home prices may gradually start to rise later this year.
2. A great deal of cash has been sitting on the sidelines waiting for signs of improvement in the U.S. economy. That money is flowing back into equities, pushing indexes higher. As Glenn Rogers points out in his column this week, it is getting hard to find bargains any more but that is not likely to stop the flood of new cash. This reinforces my view that U.S. markets will outperform the TSX this year. If you haven't already benefitted, it's not too late but don't delay any longer.
3. The TSX will feed off positive momentum in the U.S. market even though the make-up of our Composite Index is far different than that of the Dow or the S&P 500 given our top-heavy weightings in resources and financials.
So let's hope that the positive signs we are seeing in the U.S. are true indicators that the long-awaited recovery has begun - both for the sake of our investments and because it would mean an easing of the financial pressures that so many Americans are experiencing. - G.P.
Most Canadians don't fully comprehend just how bad things have been in the States. We were fortunate enough to escape the worst ravages of the recession and our real estate market held firm even through the worst of the world financial crisis. Of course, we've all seen the news reports about the gravity of the U.S. situation but until you actually come here and talk to people you can't fully appreciate the depths of despair.
South-west Florida, where we stay, was one of the hardest-hit areas and in some ways is a microcosm of America's woes. Lee County, which includes the cities of Fort Myers and Cape Coral, enjoyed an incredible but highly speculative building boom during the early years of this century as developers carved out huge gated communities from cheap scrub land and sold them off at increasingly absurd prices.
It was a classic bubble situation and when the recession hit it broke not with a pop but with an explosion. Lee County has been near the top of the national list of the highest rates of foreclosures for the past two years. In January alone, another 851 families lost their homes. The situation has become so bad that the county has an official website where people can go to bid on foreclosed properties that are being auctioned off. It makes for pathetic reading: homes that were once worth more than $350,000 have seen their assessed value plunge to less than $75,000 in some cases. The eventual selling price may be less than that.
Unemployment hovered around the 13% mark for most of 2010. To put that in perspective, Lee County had one of the lowest unemployment levels in the U.S. as recently as 2005-2006, when the jobless figure was in the 2%-3% range. To make matters even more difficult for those seeking work, a bill has been introduced in the Florida legislature that would require the state's unemployed people to perform at least four hours of unpaid community service each week to qualify for benefits. The idea is to reduce the spiraling cost of Florida's unemployment benefits system which is currently running a $2 billion deficit.
Given these numbers, it should come as no surprise that a recent poll found that one in five Floridians is seriously considering leaving the state. You can't eat sunshine!
However, there are signs that things are starting to get better, both locally and nationally. The headline in last Thursday's local paper read: "Glut of new homes is whittled". The article went on to say that the huge surplus of unsold houses left over from the building boom that ended in 2006 has been cut almost in half from its peak in late 2009. This inventory has depressed real estate prices throughout the region; once it is cleared the markets can start returning to normal.
Nationally, credit agency TransUnion reported a small drop in the percentage of homeowners that are behind in their mortgage payments by more than 60 days. Investors have regained confidence in the stock market, with the major U.S. indexes off to their best start in several years. Industry leader Delta Airlines increased its fares for business class and first class, an indication that demand for high-end travel is picking up. The manufacturing index of the Federal Reserve Bank of Philadelphia almost doubled from January to February. Inflation has replaced deflation as the main concern for policy makers, with the U.S. consumer price index rising by a greater-the-expected 0.4% in January.
The minutes of the January meeting of the Federal Reserve Board's Open Market Committee (FOMC), which were released last week, confirm that the recovery is in place and gaining traction. Studies by staff members found that consumer spending rose strongly in the final months of 2010, industrial production posted solid increases in November and December, and business investment in equipment and software was on the rise.
"Because the incoming data on production and spending were stronger, on balance, than the staff's expectations at the time of the December FOMC meeting, the near-term forecast for the increase in real GDP was revised up," the minutes said. The expectation now is that the U.S. economy will grow by between 3.4% and 3.9% this year while the unemployment forecast was revised down slightly.
There are three important implications for investors in all this, as follows.
1. The window of opportunity is closing for Canadians who want to take advantage of what may be a once-in-a-lifetime confluence of low interest rates, a strong loonie, and depressed U.S. housing prices to buy a vacation property. We now appear to close to the bottom of the market and, if current trends continue, U.S. home prices may gradually start to rise later this year.
2. A great deal of cash has been sitting on the sidelines waiting for signs of improvement in the U.S. economy. That money is flowing back into equities, pushing indexes higher. As Glenn Rogers points out in his column this week, it is getting hard to find bargains any more but that is not likely to stop the flood of new cash. This reinforces my view that U.S. markets will outperform the TSX this year. If you haven't already benefitted, it's not too late but don't delay any longer.
3. The TSX will feed off positive momentum in the U.S. market even though the make-up of our Composite Index is far different than that of the Dow or the S&P 500 given our top-heavy weightings in resources and financials.
So let's hope that the positive signs we are seeing in the U.S. are true indicators that the long-awaited recovery has begun - both for the sake of our investments and because it would mean an easing of the financial pressures that so many Americans are experiencing. - G.P.
