Economic Update (Monday, December 14, 2020)

[Lloyd Segal]

Economic Update
Monday, December 14, 2020)

Emotional intelligence, an important concept for investors to understand, is loosely defined as being able to recognize the feelings of others— and then leverage that insight to manage relationships and decisions. This ability leads to empathy, an especially critical element at a challenging time like this. Many of the key issues around COVID are supercharged with emotion and opinion. This creates a trap in believing that everyone sees the pandemic as you do, or at least should. We all know people who are caught in this trap. They move along concerned only about their own perspective and not that of anyone else. The first step in deploying empathy is controlling your own emotions. Giving in to negative emotions like fear, anger, and frustration—and especially letting them drive your actions— usually makes a tough situation even worse. A better course? Yes, recognize and regulate your emotions, listen to other people, see their feelings as legitimate, try to understand things from their point of view, and shape your actions to meet their needs. With empathy in mind, let’s wash our hands, put on our masks, social distance, look forward to the new year (and vaccinations), and get under the hood…

Consumer Price Index. The Consumer Price Index (“CPI”) rose 0.2% in November. Following a brief pause in October, consumer prices rose faster than the consensus expected in November and are now up at the fastest six-month pace in nearly a decade! With prices up at a 4.0% annualized rate since May, inflation is running above the Federal Reserve's inflation target of around 2%. This stands in stark contrast to the annualized decline of 1.6% through May earlier this year (during the pandemic). However, don't expect this to change the Fed's plan to keep short-term rates near zero for the foreseeable future. Given the drop in prices earlier this year during the worst of the pandemic and related shutdowns, consumer prices are up a tepid 1.2% versus a year ago. Still, the recent burst of inflation hints at the impact the massive 24.2% increase in the M2 money supply in the past year is having as supply chains continue to recover. The typically volatile food and energy categories largely offset each other in November, as energy prices rose 0.4% and food prices declined 0.1%. A dig into the details shows prices broadly rising across categories, led by housing (+0.3%), household furnishings (+0.9%) and apparel (+0.9%), which were partially offset by lower prices for medical care (-0.1%) and autos (where prices declined -0.1% for new vehicles and -1.3% for used cars and trucks). You can expect inflation to continue to rise in the months ahead toward the 2.0% annual pace of inflation that was in effect before the Coronavirus wreaked havoc on global economies. However, underlying fundamentals point to a higher risk of rising inflation than after the 2008 recession. Ironically, the Coronavirus pandemic is the first recession on record where personal income has actually increased, due to government stimulus checks and boosted unemployment insurance payments that replaced more than 100% of lost wages for many workers.

Mortgage Rates Hit All-time Lows. Mortgage rates continued at the lowest levels on record — extending the opportunity borrowers have to refinance their loans and lock in this cheap cheap cheap financing. The 30-year fixed-rate mortgage averaged 2.71% for the week ending Dec. 11, matching the record low set the week prior, Freddie Mac reprots. Lat week's average represented the 14th time rates had dropped to an all-time low in 2020. What a crazy year! A year ago, the 30-year loan rate was over a full percentage point higher (average rate of 3.73%). The 15-year fixed-rate mortgage also remained unchanged from a week ago, averaging 2.26%. Meanwhile, the 5-year Treasury-indexed hybrid adjustable-rate mortgage fell seven basis points to an average of 2.79%. Even as mortgage rates have fallen to new lows in recent weeks, long-term bond yields have risen. Historically, mortgage rates track the movement of these bonds, particularly the 10-year Treasury. So when Treasury yields dropped, so too do mortgage rates. But this year, amid the COVID-19 pandemic, that relationship deteriorated. Mortgage rates are now falling or remaining at new lows as Treasury yields are climbing. See, I said it was a c-r-a-z-y year! In fact, demand for mortgages has been so strong for so long, that to stem the tide of borrower requests, lenders have been forced to keep rates above where the market would normally indicate. But because the gap (or “spread”) between Treasury yields and mortgage rates had grown so large, there’s less pressure for mortgage rates to increase alongside rising bond yields. That’s good news for you as it extends your opportunity to refinance and lock in today’s record-low rates. Around 19 million borrowers could see lower monthly mortgage payments if they were to refinance at today’s levels. Are you one of them?

Jobless Claims Surge to 3-Month High. BAD NEWS:New applications for unemployment benefits jumped to a nearly three-month high, owing to an increase in layoffs after a record surge in coronavirus cases as well as to filing delays tied to the Thanksgiving holiday. Initial jobless claims surged by 137,000 to 853,000 in the seven days ended Dec. 5, the Bureau of Labor Statistics reports. Another 427,609 applications for benefits were filed through a temporary federal-relief program that expires at the end of the year. New jobless claims rose the most in the states of California, Texas, Illinois and New York, where coronavirus cases have risen again. The number of people receiving benefits through programs administered by the states also rose for the first time in almost three months. These so-called “Continuing Jobless Claims” climbed by 230,000 to a seasonally adjusted 5.76 million in the week ended Nov. 28. These federal claims have more than tripled since August as people who’ve exhausted state benefits shift to the federal program. It’s a sign that a growing number of Americans are threatened with long-term unemployment. But the pandemic is not the only thing distorting the claims data. The weekly totals are also prone to large swings due to filing delays around holidays from Thanksgiving through New Year’s Day. The record increase in coronavirus cases has put more strain on the U.S. economic recovery, with many cities and states reimposing restrictions and some businesses being forced to sideline workers again. Layoffs could remain elevated for months as businesses cut back and become more cautious about hiring again, at least until vaccines are broadly disseminated or the surge in coronavirus cases loses steam.

Foreclosures Dip. ATTOM Data Services released its “November 2020 U.S. Foreclosure Market Report,” which shows there were a total of 10,042 properties with foreclosure filings (i.e. default notices, scheduled auctions or bank repossessions) in November 2020, down 14 percent from October. But, more dramatically, down 80 percent from a year ago! Nationwide one in every 13,581 housing units had a foreclosure filing in November 2020. States with the highest foreclosure rates were Florida (one in every 7,109 housing units with a foreclosure filing); Illinois (one in every 7,285 housing units); Oklahoma (one in every 8,128 housing units); New Mexico (one in every 9,236 housing units); and Delaware (one in every 9,310 housing units). Among the 220 metropolitan statistical areas with a population of at least 200,000, those with the highest foreclosure rates in November 2020 were Champaign, IL (one in every 3,636 housing units with a foreclosure filing); Shreveport, LA (one in every 3,806 housing units); Macon, GA (one in every 3,947 housing units); Davenport, IA (one in every 4,038 housing units); and Evansville, IN (one in every 4,296 housing units). A total of 5,256 U.S. properties started the foreclosure process in November 2020, down 13 percent from last month and down 79 percent from a year ago. While foreclosure starts are down in many states across the nation, a few states did see monthly increases in foreclosure starts in November 2020, including Missouri (up 18 percent), Indiana (up 14 percent), Georgia (up 4 percent), Arizona (up 1 percent), and Texas (up 1 percent). Among metropolitan areas with a population greater than 1 million, those with the greatest number of foreclosure starts in November 2020 were New York, NY (454 foreclosure starts); St. Louis, MO (208 foreclosure starts), Chicago, IL (207 foreclosure starts); Miami, FL (151 foreclosure starts); and our very own Los Angeles, CA (147 notice of defaults recorded).

LA Malls Brace for the Grinch. Mall owners’ reluctance to bring back longstanding holiday traditions comes as no surprise right now. After all, L.A. County remains in the state’s toughest tier of Covid-19 restrictions because the coronavirus is widespread. In Southern California region (including L.A), Gov. Gavin Newsom has allowed indoor shopping centers to remain open, but they must limit store occupancy to 20% and close common areas and food courts. During the Christmas season, the foot traffic that normally comes to see Santa percolates out to the rest of mall, and the mall provides a steady stream of customers visiting Santa. It’s a very symbiotic relationship. It appears that the pandemic only reaffirms this co-dependency that dates to the 1890s. But the foot traffic at malls nationwide is down while online purchases are picking up. Ecommerce sales in the United States totaled about $60 billion from Thanksgiving through Cyber Monday, a 22% increase compared to the same period in 2019, according to Salesforce.com. Meanwhile, the National Retail Federation reported that the number of in-store shoppers on Black Friday dropped by 37%. The new local guidelines and restrictions will certainly change where Santas will be located this year and how photography operations will be handled. Best practices will include daily temperature checks, symptom-screening protocols for Santas (and children), as well as requiring reservations and social distancing for taking photos. But how do you take your photo with Santa when he is six feet away? Right now, communities are craving a sense of normalcy, and there is nothing more beloved than the long-standing tradition of seeing Santa at the mall over the holiday season. But this year will definitely be different. Ho! Ho! Ho!

Speed Bumps for LA’s Food Trucks. It’s going to be a cold dark winter for local food trucks.On Nov. 25 Los Angeles County ordered all restaurants and breweries to close for outdoor dining. That, unfortunately, includes food trucks. The pandemic is pounding the local food truck industry. More than half of the gourmet food trucks in L.A. are already out of business. Now, with the latest safer-at-home orders, food truck owners and workers could be in for an even tougher ride in coming weeks. Los Angeles is the hub of the food truck industry with 2,700 licensed vendors. But a halt on events, concerts and festivals, along with the fact that many of the city’s office workers have shifted to remote work at home, have all taken a toll. Food trucks were once big draws across Los Angeles, including in Westside commercial districts, with regular weekly events on Main Street in Santa Monica and monthly First Friday affairs on Abbot Kinney in Venice. But with those festivities and countless others on hiatus, food truck owners are now plying their trade primarily in residential communities, from Marina del Rey to Studio City, in an effort to stay afloat. Another problem is the booking agencies and the high costs they charge. These middlemen, which are used nationwide, coordinate with cities and festivals to book trucks for certain spots. Some bookers charge higher fees for more in-demand areas. Trucks have the freedom to book spots on their own, and usually do this by contacting office buildings or festivals and concert venues. But agencies can be a more reliable option for both trucks and for venues that need trucks since the clientele and spots are set, and venues don’t have to worry about trucks canceling or failing to show up. But with the added cost of commissaries, permits and parking, truck owners find it hard to keep up financially, pandemic or not. “It’s an American dream, taking home-cooking and putting it on four wheels,” One trucker says. “But the reality is you work 12, 16 hours a day, and it’s a pretty tough life.” According to another trucker, monthly fixed costs for a food truck range from $4,000 to $5,000, a figure that includes parking, leasing, and basic maintenance. But that figure doesn’t include labor or food costs. With the pandemic and stay-at-home orders, it just impossible for food trucks to survive, and many won’t.


Extended Stay Properties Are Filling Up. It’s no secret that the hospitality industry has been hit hard by Covid-19, which has forced many hotels to temporarily close and others to permanently shutter. But one type of hospitality property is faring better than others: extended stay hotels and residences. Occupancy levels were 72% at extended stay properties in the third quarter. At traditional hotels, meanwhile, the levels were only 42% during that same period. Extended stay properties have delivered for owners because they provide fewer services, which keeps operating expenses low. And they’re popular with guests because they tend to have fewer people coming into their rooms, which is preferable during a pandemic. The average length of stay at these properties is six to seven months but can range anywhere from 30 days to one year. Extended stay hotels are also picking up new customers who are staying for shorter periods and now see the properties as an alternative to traditional hotels. These properties have high occupancy rates because people want to stay in rooms with kitchens and living spaces. For large hotel chains, extended stay properties are delivering returns. Residence Inn (Marriott International’s extended stay brand) had the smallest decrease in revenue per available room of any Marriott property during the third quarter. Home2 Suites by Hilton and Homewood Suites by Hilton (Hilton Worldwide Holdings’s extended stay brands) have seen two of the three smallest revenue per room decreases across Hilton’s properties in the third quarter. Extended stays are also being used for different purposes. One of CGI’s properties (another major player) is located near UCLA, making it a prime location to accommodate hospital patients, health care workers and students. The company’s other two locations are in Hollywood where there is strong demand from the entertainment industry. And despite Covid-19, there is still a lot of construction going on in L.A. Some contractors who want to stay near job sites are turning to extended stay properties. They require a kitchen and more room. Remote office workers may also choose to escape a large household full of distractions by posting up at an extended stay property. The big question now is if corporate travel will start back up once a Covid-19 vaccine is widely available or if more events will continually to be hosted virtually.

Virus Surge Crunches Airport Traffic. The region’s airports were expecting a major boost from the Thanksgiving 10-day travel period, with the airlines planning significant increases in flights. But, alas, the increase never materialized, thanks to the November surge in coronavirus cases that prompted many people to cancel travel plans at the last minute. Aircraft boardings at Los Angeles International Airport saw only a slight bump over the holiday. And the year-over-year percentage decline in boardings for the Thanksgiving travel period at the three regional airports — Hollywood Burbank, Long Beach and Ontario International — barely budged from October’s depressed levels. The disappointing November results come on top of another lackluster month for passenger traffic at the region’s four airports for October. While passenger numbers continued their slow climb back from the coronavirus-induced plunge in the spring, the percentage drop from last year remains consistent with year-over-year drops in previous months. Overall, just under 2.5 million passengers went through the gates at all four airports in November, a decline of 71% from 2019, paced by an identical percentage drop at LAX. These declines closely matched the year-over-year falloff seen in September and October. In mid-November, hopes were high among officials at the four airports that these year-over-year percentage drops would shrink considerably over the 10-day Thanksgiving holiday travel period, which includes the weekends before and after the actual holiday. (Thanksgiving is typically the busiest 10-day stretch in the entire year, including the peak summer travel season and the Christmas/New Year’s holiday period.) In previous years, the Thanksgiving holiday also represented a bonanza for eateries and gift shops inside airport terminals, as well as car rentals, rideshare and taxi services. Last year, a record 3.21 million passengers went through the gates at LAX during the two-week period that included Thanksgiving. That would have meant flight levels running about 52% of last year’s total; the number of flights is a rough proxy for the total number of passengers aboard those flights. But actual boarding data for the Thanksgiving holiday period released by the federal Transportation Security Administration on Nov. 30 revealed a much bleaker picture.

Doug Emhoff’s Boyhood Brooklyn Apartment. Douglas Emhoff, Kamala Harris’s husband, will soon become America’s first male vice-presidential spouse (aka “Second Gentleman”). That’s a lot of adjectives for someone who seems like a pretty normal husband, particularly after the otherworldly marriages of Melania Trump and Mother Pence. Although a Los Angeles entertainment attorney, Emhoff is really a New York kid. He was born in Brooklyn, and his family background is rather an archetypical New York family life. His parents, Mike and Barbara Emhoff, have been married for 61 years. They are known Costco entusiasts. Their daughter-in-law does a loving and absolutely hilarious impression of her first in-poerson encouonter with Barb. For the early years of Douglas’s life, the Emhoff family lived in the building at 1480 Ocean Avenue in Midwood where Barb was a local tennis champion. His parents moved there around 1962, a couple of years before Doug was born. It’s a solid-looking building near Avenue J, a couple of blocks from Brooklyn College, middle-class then and middle-class now. Rents today are about $1,600 for two bedrooms, with some Section 8 tenants. The area was predominantly Jewish at mid-century, and today it has a lively mix of many immigrant groups and a sizable Orthodox population. (Though the East Midwood Jewish Center, a synagogue a block and a half away, remains Conservative, as it was back then.) Apartment-rental sites don’t show any listings at 1480 for the past several years, but a call to the management company revealed that the most recent arriving tenant signed a lease in June, and a representative explained that people tend to find apartments there by word of mouth. Ironically, back then nineteen-year-old Bernie Sanders was living only 11 blocks south of the Emhoffs, on East 26th Street. Nine-year-old Chuck Schumer was only five blocks further away, on East 27th.

John Wayne’s Riverside Ranch. Are you looking for a ranch in Riverside County by chance? If you are, a huge ranch once owned by famed Western actor John Wayne is trying to corral a buyer. The 2,000-acre spread recently listed for $8 million. Dubbed “Rancho Pavoreal,” the compound is found in Sage, a small agricultural community south of Hemet and east of Temecula. The property is fenced and cross-fenced with horse trails winding through the acreage, and sweeping views of the mountains and valleys beyond. At the center sits a stucco ranch house with three bedrooms and three bathrooms in 3,000 square feet. Other amenities include a barn and three wells. Though naturally designed as an equestrian compound or cattle ranch, the listing suggests other uses for the land such as a shooting range, sports camp or private retreat. Nicknamed “Duke,” Wayne worked from the 1920s into the golden age of Hollywood, and appeared in 179 film and TV productions over the course of his decorated life. His scores of Western credits include “The Alamo,” “Stagecoach” and “The Man Who Shot Liberty Valance,” and he won an Academy Award for 1969’s “True Grit.” Tatiana Novick of Coldwell Banker Realty holds the listing. When he wasn’t relaxing on his yacht in Newport Beach, the Duke could be found riding the trails at Rancho Pavoreal.

Breaking Bad Fans Keep Tossing Pizzas on Roof. Fran Padilla and her husband, Louis, have a unique “pizza problem.” The pizza problem is with their home in Albuquerque, New Mexico, they’ve owned for over four decades. The problem is that their home was used as the White family home in the TV show "Breaking Bad." The home is famous (or should we say infamous) for the time a frustrated Walter White (Bryan Cranston) improbably threw a whole pie onto the roof. "We've had pizzas on our roof. We've had pizzas on our driveway. Pizzas everywhere until we're sick of looking at pizzas," Fran Padilla told NPR in March. Later in the interview she added, "I'll sit outside with a shotgun in a rocking chair. You know, like Granny from 'Beverly Hillbillies, but it doesn’t seem to stop them.'" Jackie Sandoval is the co-owner of "Breaking Bad RV Tours" along with her husband Frank. The couple is close with the Padillas and it's been Frank's job at times to scrape and scrub the unwelcome pizzas off the roof. "Frank had to remove three pizzas off of their roof that some teenagers had thrown on it just the other day. I don’t get it. Won’t they rather just eat them?" Jackie Sandoval says. At the height of the show's fandom, around 200 people would pass by the Padilla household every single day to gawk at the real-life White residence. Now that number has come down, but fanatics continue to make the pilgrimage. Jackie says, "We also put up 'Stay Off Property' warning signs in her front yard to discourage people." If you're a real fan of "Breaking Bad," don't be the one who knocks on the Padillas' door and certainly don't be the jerk making a mess on their roof. Breaking rules is only kind of cool (ignoring all the murders) if it leads to you becoming a multi-millionaire drug kingpin. But, in real life, you're just wasting perfectly good pizza. 

This Week. Looking ahead, investors will continue watching Covid case counts, progress on vaccines, and negotiations for additional government stimulus. Beyond that, the next Fed meeting will take place this Wednesday (12/16). Retail Sales will be released on Wednesday as well. Since consumer spending accounts for over two-thirds of all economic activity in the US, the retail sales data is a key indicator of growth. Housing Starts, always important to investors, will come out on Thursday (12/17).

Weekly Changes:

10-year Treasury: Fell 0.10 points
Dow Jones: Fell 300 points
NASDAQ: Fell 100 points

Calendar:

Wednesday, 12/16: Fed Meeting
Wednesday, 12/16: Retail Sales
Thursday, 12/17: Housing Starts