Alchanati Campbell & Associates
Dodd-Frank, all-cash, the summit in Singapore, costly gas prices, oil, and mortgage rates.
The Market. A red day for the S&P 500 and the DOW left the two juggernaut indices entering memorial weekend at 2,721.33 and 24,753.09, respectively. The tech heavy Nasdaq was green for the day, ending the week at 7,433.85. Also in the red for the day is Crude Oil (67.50) and Gold (1,301.20). And of course, that darn VIX is green.
This was an eventful week, both on Wall Street and on the political front with various headlines to drive the market. However, despite all the news, the up-and-down week had the market feeling a bit...boring? No, that’s not right. Stagnant? That sounds slightly better. Either way, we're here to talk about it before clocking in for some summertime fun.
Rollback of Dodd-Frank. Just 10 years ago, the 2008 US financial crisis almost brought down the global financial system and safeguards were put up to prevent a repeat. But now, Congress is deregulating banks and loosening the safeguards. The Crapo bill was passed this week: raising the asset level at which banks start to face stricter regulation, banks will soon no longer need to have public annual stress tests (AKA banks will have the ability to take on more risk), and relaxes a rule that requires banks to hold more capital against some of the riskiest commercial real estate loans.
All-cash offers. Ribbon is a start-up that launched last week. Their contribution to society: giving the cash-offer advantage to everyone. When purchasing a home, all-cash offers are 97% more likely to be accepted than the “mortgage application route”. Cash offers remove much uncertainty associated with obtaining a mortgage for the transaction. The National percentage of homes sold to cash buyers was about 30% in the first quarter of 2018. Ribbon provides a guaranteed offer to facilitate all-cash transactions in exchange for a 1.95% fee. Ribbon backs the buyer so it can make an all-cash offer and secure their property and then the buyer gets financing for the home either before or after closing the deal.
Kim got stood up! Trump canceled his planned June 12 summit with North Korean propaganda referencing a potential nuclear clash with the US. Fears of not concreting a denuclearization pledge from North Korea caused Trump to cancel. The summit would have legitimized Kim and would have made Trump look weak. US markets reacted to this news by jumping up and down less than a percentage point.
The costliest driving in 4-years. The price of regular-grade fuel has climbed 47 cents (19%) since the beginning of 2018; highest since 2014 due to a spike in crude oil prices. The spike in oil prices was due to OPEC teaming up with Russia in slashing production and the US exiting the Iran deal. The last time gasoline exceeded this much, inflation-adjusted consumer spending increased. A correlation between higher gas prices and an increased amount of household spending might sound strange, but households are not fazed by higher gas prices because of the favorable response from tax cuts, a decrease in the unemployment rate, and a moderate pick up.
Liquid Explosive Dinosaur. Okay, Okay. So maybe the title above isn't the most correct description of oil. But, the inner kid inside all of us wants to believe, okay? Lets get down to it.
Many analysts would say that oil has been the dominant driver of the market this week over the ongoing love saga between Donald Trump and Kim Jong-Un, which is saying something. Oil prices took a spill this week, as both Brent and West Texas Intermediate finished down for the week. While there many factors influencing oil prices, as we've discussed in past weeks, this most recent plunge can largely be attributed to an increase in production from some major players. St. Petersburg is playing host to a pivotal meeting between energy officials from Saudi Arabia, the United Arab Emirates, and Russia to discuss output. These nations are looking to ease up on production curbs as the price per barrel has rallied to concerning amounts. For the past years, oil output amongst OPEC and friends has been reduced by roughly 1.8 billion bpd (barrels per day). This agreement is set to expire in the upcoming year, and it looks like the parties involved are already discussing ramping up production for the back half of 2018.
Why exactly do they want to do this?
A few reason, and the everyday consumer is probably one of them. Think about it. For as long as most people can remember, people have been non-stop discussing oil prices. Constantly and consistently, people are afraid that the price of an oil barrel is rising to high. Khalid al-Falih, Energy Minister of Saudi Arabia, has voiced that this consumer distress is on their radar. Another reason relates back to simple supply and demand economics. Oil is a commodity, and like everything, it is not perfectly inelastic. For those that don’t know, if a good is "inelastic", than changes in price will not cause a relative change in quantity demanded. While oil, or more effectively, gasoline, is definitely inelastic, i.e. people will still purchase it if the prices rise, it has a breaking point. It can be argued that nothing in this world is perfectly inelastic (lets not get into a discussion about immortality), and oil is no exception. If the price rises to much, the quantity demanded will go down. The recent events in Iran (U.S. pulling out of the nuclear deal, in which new sanctions will hurt their production), along with turmoil in Venezuela, has production reaching a dip that might push the price of oil past the point. By increasing quantity supplied and reducing the price per barrel, demand can be stabilized. At least that’s the plan.
Interest on the rise. The housing market is booming. Housing prices are predicted to go up 5.5% in 2018 to a median value of $220,800. Despite this animal-spirits, market prosperity is coming at a cost. As of Q4 2017, the US owned $9.9 trillion in mortgage debt with the average amount of $137,000 in mortgage debt per borrower. Because of this, many at the FED have suggested that they will begin to increase interest rates. Many predict that the FED will increase interest rates in their next meeting on June 12-13. Some of these predictors include mortgage lenders. Mortgage interest rates on 30-year fixed-rate mortgages have jumped nearly a full percent increasing from 3.81%, in November 2016, to 4.66% as of May 24, 2018. If the FED follows through with their increase, credit card users will likely owe an extra $6 billion in credit card interest. The FED’s open deflationary posture has suggested that credit will be harder to come by in the future.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.