Monday, September 25, 2006

Economic pulse

From Various Sources-

Don’t get caught in a bear trap on homebuilders:

Home builders saw their shares rally Monday, and many who cover the industry are saying today's numbers from the National Association of Realtors indicate the market may have bottomed. "We disagree," said Bob Hynes, senior market analyst at IFR Markets, a division of Thomson Financial. "This is not the first time we have heard an industry group claim that the market has bottomed. It is also the umpteenth time we have heard that shares are attractively priced."

He pointed out that shares for every one of the 12 home builders IFR follows were trading higher. Pulte Homes was up 2.3%, while KB Home and Toll Brothers each added 1.6%. All three are trading above the 52-week lows they hit in June -- when "there were many more people than now claiming that the housing downturn would be brief," Mr. Hynes wrote in a note to clients warning of a "dead-cat bounce" in the home-builder shares. "Since that time, most home builders have reduced their earnings guidance (some of them multiple times), and the major players are predicting poor conditions well into next year," he wrote.

Economists have noted a bit of disconnect between today's figures on sales of existing homes and other data from the National Association of Realtors. Richard Iley, senior U.S. economist at BNP Paribas, goes so far as to say today's figures are "suspiciously strong." He notes that the NAR's index of pending home sales is down 11% in 2006, while existing sales are down just 4%. The year-over-year rate of decline in existing-home sales is 12.5% through August, but the pending index, as of July, was down 16%. "Expect catch-up in the 'official' NAR resale numbers next month," Mr. Iley wrote.

In short, bad news ahead. Don’t get caught holding those builders.

This isn't the first time we've seen fishy numbers from the National Association of Realtors!!! See here, bottom item.


Where to focus internationally?

The gains from investing in the so-called BRIC economies -- Brazil, Russia, India and China -- have been stellar as those economies have grown rapidly, as financial reform has taken place and as capital has flowed into those nations. Stephen Roach of Morgan Stanley says these countries will differentiate themselves in coming years as they modernize. "As the global economy now moves into more of a cyclical phase, each of these four developing economies and their respective financial markets is likely to be subjected to very different stresses and strains than has been the case in recent years," he writes.

I, for one, don’t expect rate cuts in the immediate future.

Who is right, the Federal Reserve or the market? The sharp plunge in bond yields and activity in the Chicago Board of Trade's federal-funds futures suggest the market sees the next move by the Fed as a rate cut. But last week's Fed policy statement suggested central bankers are still seeing things through a hawkish lens. Dallas Fed President Richard Fisher, who does not have a policy vote, furthered that notion in comments today, saying in remarks in Mexico: "As I sit at the (Federal Open Market Committee) table, I continue to fret more about inflation than I do about growth."

(Note that historically the bank presidents seek rate increases more than the fed governors – rate increases are good for banks –FW)

That's well and good, but the bond market is fretting about growth. Analysts at RT-ICAP point out that dollar flow has shifted into Treasurys in the past few months in anticipation of the Fed ending its tightening campaign.

Meanwhile, the January federal-funds futures traded on the CBOT show the market expects a 5.19% effective yield on the fed funds rate by then, which indicates they're betting (albeit light odds) on rates declining, not increasing. The "key to the future is probably inflationary expectations," RT-ICAP wrote. "Even if the core CPI and core PCE deflator do not abate to 2% [year-over-year growth] or less, as long as real sector activity continues to slow AND inflation expectations don't back up, the FOMC can hold policy steady."

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