Perspectives from Above the Noise – Week of March 25, 2013

3 Stories in the global economy that should not go un-noticed

Markets finally snapped their winning streak last week on concerns of Eurozone trouble. Cyprus desperately needed Eurozone bailout money to recapitalize its failing banks. The Cypriot parliament voted down the original Eurozone proposal that would have taxed all bank accounts to raise additional funds, but was able to clinch a last-minute deal with international lenders that will recapitalize the country’s ailing banks with €10 billion in rescue funds.

On the home front, Congress finally ended the threat of government shutdown by approving a bill funding the government through the end of 2013. While sequestration cuts are still ongoing, the bill will ease some of the pain of mandatory cuts.

For the week, the S&P lost 0.24%, the Dow slid just 0.01%, and the Nasdaq trimmed 0.13%.

Here are the 3 stories this week that rose above the noise:

Home Prices in 20 U.S. Cities Climb by Most Since June 2006

The recovery in the housing sector remains on track, as this morning’s S&P/Case-Shiller report showed property values in its 20-city index rose 8.1 percent in January 2013 from January 2012, the largest year-over-year growth since June 2006. Gains were broad-based, with all 20 cities in the index showing a year-over-year increase, led by a 23.2 percent surge in Phoenix.

Average home prices are now back to their autumn 2003 levels, though that still leaves them down about 30 percent from the 2006 peak. Home inventories also remain at low levels as the supply of homes for sale sat at 1.94 million in February, more than a million units less than the average in the five years leading to the 2007-2009 recession. Historically low mortgage rates should continue to spur future housing demand may lead to further increases in home values.

Stocks Still More Attractive Than at Prior Peaks

Prior to this year, the S&P 500 eclipsed 1550 in 2000 and 2007, but equities are priced more attractively today than during the two prior peaks, as Seth Masters points out in this Barrons’ article. Currently, the S&P 500 is trading about 13.7 times the forward 12-month’s earnings, below 15 times forward earnings in 2007, and well-below 25.6 times forward earnings in 2000.

Additionally, the yield on the U.S. 10-year Treasury has dropped from 6.2 percent in 2000 to 4.4 percent in 2007, and is currently below 2 percent. The low interest rate environment is driving investors into riskier assets, including equities, in order to generate higher returns. The dividend yield on the S&P 500 index is above the 10-year Treasury yield today, but was significantly below 10-year Treasury yields in 2000 and 2007.

Sympathy for the Devil Named Angela

A recent article in the Wall Street Journal gives an interesting perspective on the politics of the recent crisis in Cyprus, shedding light on European politicians’ inability to deal effectively with their ongoing sovereign debt crisis. Lately, economists have asked why the gap is so wide between what is good policy and what the public will support.

According to the article, most Europeans, even today, would be better off if over-indebted governments were allowed to default in accordance with the relevant bankruptcy precepts. But it apparently can't happen in societies so trained to look to politicians to overrule the laws of arithmetic and economics whenever those laws are inconvenient.