More Housing Data

And yet again it came in mixed. The Case-Shiller Home Price Index decreased yet again but in what some economists termed, 'Some regions are struggling to turn things around', some regions actually showed flattening trends. Even nationally, the rate of decline seems to be slowing somewhat. Now the focus turns to buyers and the forces pulling in opposite directions. As home prices have fallen to make homes more affordable, bank lending standards have tightened and mortgage rates have risen, making it more difficult for buyers to obtain financing. Even if prices stop falling, it will be awhile before they begin to rise again and it would require a resolution of Fannie and Freddie issues to give banks enough confidence to lend again. But speaking of confidence, consumer confidence ticked higher for the second month in a row. No, that doesn't mean consumers think the economy is better. Actually, the survey showed that consumers opinion of the current situation is still bleak. However, their assessment of the economy over the next 6 months improved in some categories. A sign of things to come? Perhaps.

Mixed Up Housing Data...

Causes even more confusion and speculation. The National Association of Realtors reported that home resales last month rose 3.1% to an annual rate of five million units. It was higher than expectations which under normal circumstances would be a good thing. But, as we have seen time and time again, bad news is never too far from good news. While home resales increased, it came at a steep price, or rather, a steeply declining price. The median home price decreased another 7.1% to $212,400 from a year earlier and the number of homes on sale increased to a record-high of 4.67 million. My interpretation: there is still a whole lotta supply out there and more homes may be put up for sale, but I think we are finally seeing some buying activity. For months, prices kept declining and buyers kept staying away. But I don’t have a crystal ball anymore (I had to pawn it!) so I won’t even try to predict a bottom for housing.

The Russian Oil Mob and US Housing

As the Olympics come to an end and the final medal counts are tabulated, someone not paying attention may be surprised to see that Russia is third on the list of total medals won. The world has shone a light on China and their flamboyance has lived up to and even surpassed expectations. Some estimates reach $50 billion in total spending by the Chinese in preparation for the Olympics and their desire to showcase this rapidly waking giant has been nothing short of magnificent.

But quietly sitting at third place in total medals is Russia, and the Georgian conflict aside, I think many of us have forgotten that Russia is the second largest oil exporter in the world. Many traders blamed the Georgian conflict for the huge upswing in oil prices this week, which dropped just as quickly by the end of the week when Russian forces began to pull back. While some economists started calling a bottom on oil, Goldman Sachs and others reiterated their $150 price target for oil by the end of the year. If that’s the case, consumers should expect only a temporary reduction in gas prices, if any.

The moral of this story, however, is that perhaps there is too much focus on OPEC and geopolitical tensions in the Middle East with little regard for the impact that Russia has on world oil markets. On a CNBC interview, one trader, when asked about Thursday’s huge price increase (several days after the Georgia conflict began)went so far as to say, “I don’t think many traders realized that Russia is the second largest exporter behind Saudi Arabia.” And these are people that trade oil on a daily basis??

Back at home, the data from the housing sector continues to disappoint although by now at least the results are no longer surprising. The National Association of Homebuilders pending home sales index remained at an all-time low of 16. (At least it didn’t fall further) and housing starts dropped another 11% to a level not seen since March 1991.

The talk now is that interest rates may fall further before rising again and that it will take until 2Q 2009 to begin to see an economic recovery.

This week, watch for additional economic data that may shed some light on the state of the economy and whether it’s nearing a bottom. The GDP number should be revised upward, but it will be interesting to see how personal income has been affected in light of the increase in the unemployment rate.

The Slippery Dollar

Once again we saw oil prices and the dollar moving in opposite directions. Since oil and other commodities are priced in dollars, it would make sense that the weaker the US dollar, the more it costs to buy a barrel of oil priced in US dollars. At some point, however, this relationship, called correlation, will ‘decouple’. Not completely, but the relationship will not be as strong. For example, PPI, a measure of wholesale prices, was reported today well above expectations, which indicates that the inflation issue is still prevalent. If it persists, the FED may have to raise interest rates, resulting in an adverse affect on an already fragile economy, but causing a strengthening of the US dollar. Sure, this may put downward pressure on oil, but global demand, although slowing, is still strong, and many economists are expecting a pick up in demand after the olympics. To hedge our positions, we have exposure to both oil prices as well as dollar strengthening. If they continue to be negatively correlated, the result of our positions will be muted as they move opposite each other. However, as I have mentioned in previous posts, I’m bullish on oil and I am also bullish on the dollar. It’s just a matter of time.

Diving, Housing, and Fay

Well, it’s fitting that I am awake at 1AM watching Olympic diving on TV. As Hurricane Fay heads NNW away from Miami, she has left behind a wonderfully choreagraphed onslaught of wind and rain worthy of a medal. In the financial markets, there wasn’t a whole lot of economic data but the markets, led by financials, sold off heavily. We did get a bit of good news from the housing area. Although the National Association of Home Builders held steady at an all-time low, two out three components improved. The expectations of sales in the next 6 months improved and so did the index of present sales, although the latter improved only slightly. The one component holding steady was the traffic of prospective buyers. If we can get some more buyers out shopping, we might really get the ball rolling in the right direction. Note to foreigners: the dollar won’t stay weak forever…buy now.

Michael Phelps Wins Seventh Depreciating Metal

Congratulations Michael! You just won seven gold medals now worth 10% less than they were worth at the beginning of the Olympic Games. However, it’s better than having won silver medals now worth 20% less than just over one week ago.

According to the Ishares Silver Trust (SLV) and the SPDR Gold Trust (GLD), silver and gold prices have dropped considerably over the last week and even more so over the last month. So one might wonder, what’s the big deal of winning a gold medal? Well, I’m being facetious of course as we all know, or at least can imagine, the glory that comes from being the top athlete in your sport.

With the global economy showing signs of slowing, commodity prices across the board have come down considerably from many of their all-time highs. Where they go from here is a tricky question to answer since some commodities have indeed been driven by global demand, while others are often viewed as a safe haven during economic uncertainty.

Short of hanging it from one’s neck, there really isn’t much use for gold as a raw material, so oftentimes, the price of gold is being driven by what I call, a residual affect of everything else. If you’re not sure about the economy, invest in gold. If you’re worried about inflation, invest in gold. If you don’t have any confidence in the dollar, invest in gold. Ah, and it is perhaps this last comment that has driven gold prices down recently, as the dollar has shown signs of strengthening, and the European Union has shown signs of slowing. If the EU lowers rates to help spur growth, it will weaken the Euro relative to the dollar and give even more momentum to the recent trend.

Overall, I still like the overall commodity trend. Demand for oil, gas, metals, and some agricultural products will not disappear overnight. Perhaps there was some speculation in these markets and the price is returning to a supply/demand balance, but I think the days of $1 gallon gas prices are long gone, and the world as we know it now is more likely to persist than what the world was just a few years ago.

I am not a market-timer so I would never suggest when to get in or out of a particular investment to take advantage of short-term fluctuations. However, the long-term fundamental trend as I see it is to have some exposure to commodities. And, if you can swim 100 meters in less than 50 seconds and someone is willing to give you gold for doing it, don’t worry that it’s worth less than what it was worth at the beginning of the race. Bow down so they can drape it over your head, sing the national anthem, and smile!!

Europe Slows

The european economies may be nearing recession, as the European Union’s statistics agency said GDP for the second quarter contracted 0.2%, increasing the likelihood that interest rates will be lowered in the near future. The implications are that the dollar will continue to strengthen, potentially having a negative effect on one of the few brightspots of the US economy. Although the stronger dollar will increase the purchasing power of US consumers for goods imported from foreign countries, consumers are likely to restrain their spending until the housing and credit crisis subsides. So the likelihood that the stronger dollar will jumpstart consumer spending is minimal. But even worse, export growth, one of the largest contributors to GDP growth, will be driven down by a combination of lower demand from foreigners and higher prices in US dollar terms. It could hurt the US large caps that have fared so well with the weak dollar and expanding overseas markets.

Georgia on My Mind

Well, it's not only Georgia, and the hostilities between them and Russia. I am uncomfortable with the muted affect that this violence has had on the price of oil. It went up slightly today, but the geopolitical landscape in that area of the world is very fragile. We still have a position in commodities with a good portion of it in Oil and Natural Gas.

Export Ambiguity

US export data came in much higher than expected, causing many economists to increase their estimate of 2Q growth to 3%. The weak US dollar has benefitted many US companies with global markets, but exports aren't the 'feel good' driver that most consumers can feel, well, good about!! The higher than expected net exports will be the key driver for GDP growth in the second quarter, but employment weakness is still prescient in the minds of most Americans. For this reason, you still might hear the now-common response to the question, "How are you?", "Well, fine considering the economy!". Sure, it feels bad, but the increase in exports more than likely means that large US companies are still generating sales and will continue to do so if the dollar stays weak. The dollar has strengthened over the last few weeks but it is coming off an all-time low versus the Euro so US goods are still cheap to foreigners. Within portfolios, make sure there is some exposure to the large cap space with international markets. The dollar should continue to strengthen, but it won't happen quickly!

The $50 Trillion Investment

It’s not alternative energy but may alleviate some of our reliance on oil over the long-term. It may also help jumpstart the US economy at a time when many construction workers are being laid off from positions in housing and related sectors. The fastest growing economies are relying on these investments to facilitate and maintain their growth, while developed countries are more concerned with improving productivity, maintaining their standard of living, and keeping their citizens safe.

While US politicians have increased their focus on this segment, the majority of the investments will be made outside the US and the types of investments will vary by geographic region. Nevertheless, a $50 trillion dollar investment got my attention and in the rest of this article, I’ll share some of the details of what I found. (Read More)