Companies Have Been Loading Up On Debt In The Last Few Years

Although total US credit market debt-to-GDP is trailing down the last few years (as shown in this post) non-financial companies have been loading up with debt. A lot of these companies seem to use the money for share buy back programs. A prime example of this is Apple’s (AAPL) recent bond issue but a company like Home Depot (HD) is also doing it. This generally improves a company’s EPS and justifies a higher stock price.

FRED St Louis fed total credit liabilities non financial companies

Dutch House Prices Adjusted For Inflation Are Near The Level Of The Last Top in The 1970s

The Dallas Federal Reserve updated their International House Price Database with the number for the first quarter of 2013 last week. They are tracking house prices since 1975 so this provides for nice opportunity to see where we are standing on a long term basis.

In a in a recent post I mentioned that house prices in the Netherlands are now at 1999 levels adjusted for inflation (blogpost).

These new released numbers from the Dallas Fed show that the Dutch Real House Price Index (house prices adjusted for inflation) are approaching the levels of the last top in 1978. Although I never expect (and hope) that house prices will approach the same level as the bottom of 1985 but it wil be interesting to see if prices will go lower than the top in the 1970s. My argument for this is that Dutch society went in a few decades from having almost only single-income households to now the majority being two-income households. In 2009 the CBS reported that two-income households made up 57% of all households. Two-income households make more money than single-income households. Because of this the amount of money the average household can spend is a lot higher these days and thus they are able to afford a higher price for their house. Source: CBS (PDF)

Dutch house prices adjusted for inflation long term nederlandse huizenprijzen gecorrigeerd voor inflatie lange termijn

Just for reference here is also the chart with the Dutch House Price Index from the Dallas Fed.

Dutch House price index dallas fed long term nederlandse huizenprijzen index lange termijn

Dutch Inflation Near Highest Point In 10 Years

Today the new inflation numbers of the Dutch statistical bureau CBS arrived. According to CBS annual Dutch inflation is now at 2.9%. The main cause for this is the fact that the Dutch government decided to increase the value added tax (VAT) rate in october 2012. (credit: chart)

Nederlandse inflatie juni 2013 Dutch inflation june 2005 - 2013 short term month over month

If you look at the longer term inflation is near the highest point in 10 years. It is even higher now then it was for a big part during the 1990’s. According to CBS Dutch inflation averaged 1,89% during 2002 and 2011. Between 1992 and 2002 inflation averaged at 2.61%. The little peak of 4,5% in 2001 was caused by an increase of the Dutch VAT rate.

Nederlandse NL lange termijn inflatie maand over maand Dutch NL long term inflation month over month CBS

Because of these VAT rate hikes inflation in The Netherlands is now double that of the European average. PDF

inflatie nederland eurozone gemiddelde inflation netherlands dutch eurozone

House Prices In The Netherlands Are Now At 1999 Levels Adjusted For Inflation

House prices in the Nethterlands have been declining since the end of 2008. The total decline has been 20.6% since the top according to CBS.

house prices netherlands month over month decline

In nominal terms house prices are now at 2002 levels.

houseprices index cbs netherlands

Thanks to @mathijsbouman I now have a chart that shows that the average price for a house adjusted for inflation in the Netherlands is now at a level last seen in october 1999. A little calculation that I made based on this chart comes out at a decline of 28% from the top.

House prices netherlands Nederland Adjusted for inflation huizenprijs gecorrigeerd voor inflatie

Interesting about this is that a few years ago the tax on buying a home has been reduced from 6% to 2% so one could argue that prices of houses are even lower than 1999 levels.

The decline has wiped up all the gains that were made in the housing market by using special constructions to finance mortgages such as interest-only mortgages. A product that became popular after 2000 and which helped home prices to increase. Now only mortgages are available where people have to pay of the loan.

Thanks to the decline of house prices the percentage an average household has to spend every month for their house has dropped from 30% of net income to 20% of net income.

betaalbaarheid nederlandse koopwoningen percentage netherlands households spend on housing

Before 1999 home prices rose mainly because many households went from buying a house on one income to buying a house on two incomes. People would buy houses based on 6-7 yearly income instead of 4. It will be interesting to see if that trend will change.

Why Have Luxury Stocks Perfomed So Well The Last Few Years?

Luxury stocks have shown some very stunning results over the last few years. Making new all-time highs the past few months. Which is, of course, very surprising because we are supposedly in a modern day depression with high unemployment and high defecits. You would expect luxury brands to perform very poorly. But the opposite seems true.

I’m going to first show you some charts of luxury stocks and then give you a possible explanation for this.

Compagnie Finaciere Richemont SA. Key brands: Cartier, Montblanc, Chloe, IWC, Piaget, Vacheron Constantin, Baume & Mercier and Lancel.

Compagnie Financiere Richemont SA stock price

LVMH Moët Hennessy Louis Vuitton. Key brands: Louis Vuitton, Marc Jacobs, Guerlain, Givenchy, Moet & Chandon and Hennessy.

LVMH stock price

Burberry Group PLC. Key brand: Burberry.

Burberry Stock Price

Why have luxury stocks performed so well? I tend to think we should look at the buyers of luxury stuff. The top 10% of wage earners and people with a high net worth.

This is an interesting article about income and wealth distribution in America of which I will use a few tables here.

The table below shows the distribution of income and wealth in the US between the different percentiles of the population.

income and wealth distribution

This table shows how the income is divided:

Income distribution in the United States

From the article: “In terms of types of financial wealth, the top one percent of households have 35% of all privately held stock, 64.4% of financial securities, and 62.4% of business equity. The top ten percent have 81% to 94% of stocks, bonds, trust funds, and business equity, and almost 80% of non-home real estate.” This is shown in this table:

Stocks owned by top percent

So we can conclude that the richest 10% of the country own almost all stocks (81%), while the middle and lower class are more dependable on their principal home (60%) for their net worth. While of course a large portion of American society has no or even a negative net worth.

If we now look at how stocks, houses and wages have performed since the 2009 bottom we can see why luxury stocks are doing so well.

The S&P 500, makeing a new all-time high as I write this. Don’t forget dividends:

S&p 500 chart 5 year

House prices in the US (Case-Shiller index):

House prices us Calculated Risk

Wages in the US. Percent change from previous year. You can easily spot that on average wages have grown very slow in the last few years. Barely keeping up with inflation.

Wages US percent change from year ago

The rich 10% of America have profited the most the last few years because stock prices went up while housing and wages remained low. This in turn has resulted in higher stock prices for luxury brands.

Capitalization Weighted vs. Equally Weighted Portfolio’s

I came across an interesting article in the Journal of Asset Management today where a comparison is made between a capitalization weighted (CW) portfolio and an equally weighted (EW) portfolio. In a CW index stocks are weighted for their market capitalization and in an EW index every stock is equally weighted. Most mutual funds use the CW approach for their investment portfolios.

“Figure 1 displays the performance of the DJEURO and the equivalent EW portfolio over the observation period. The cumulative return of the EW portfolio was 38.42 per cent compared with -4.70 per cent of the DJEURO, with a difference equal to 43.12 per cent”

Equally weighted and capitalized weighted dj euro stoxx

“Figure 2 shows the performance of the DJEURO50 index and its EW version. In this case, the cumulative returns of the EW portfolio and of the DJEURO50 index were 11.60 per cent and -16.63 per cent, respectively, showing a difference equal to 28.23 per cent.”

equally weighted and capitalization weighted dj euro stoxx 50

The reason the EW portfolio does better than the CW portfolio is because of the automatically rebalancing every quarter. The EW portfolio follows a contrarian view in that it sells overvalued stocks each quarter to rebalance the portfolio. The EW portfolio is also more diversified because it has a larger share of mid- and small cap stocks in its portfolio unlike a CW portfolio which exists for a large part of large cap stocks.

Berkshire Hathaway’s Performance Is Stunning

Between 1964 and 2012 Warren Buffett has generated a return of 586,817%. That is an annual growth rate of 19.7%.

Below is a chart of the performance of Warren Buffet’s investment vehicle Berkshire Hathaway in the last 20 years.

return berkshire hathaway warren buffet till now

It’s pretty interesting to see how fast Buffet recoverd from the “Dot-com bust“. He wasn’t loaded up on a lot of internet companies. After the crash he even said “I told ya so” to analysts and other investors who had criticized him for not “investing” in some of the dotcom stocks.

It took him almost 4 years to recover from the 2008-09 crash. But he still has beaten the S&P since then. Truly one of the best investors ever.