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| Friday Aug 25, 2006
The way they areTaipan Group's Dynamic Market AlertBy J. Christoph Amberger-- The way they are A Personal Message from J. Christoph Amberger: I’m about to ask you to do something crazy. But if you do, I guarantee it’ll be one of the most rewarding decisions you’ll ever make. In fact, what I’m about to ask of you will actually make you $14,227 richer this year alone! So if you’re willing to hear me out, listen to all the facts, and want to grow your wealth faster than you could have ever dreamed, then please read on... -------------------------- The way they are by J. Christoph Amberger Once you’ve lived in the States for a while, you start feeling that the world outside marches to the beat of a different drummer. Having wrapped up my 17th year as a guest in this hospitable country, I am getting used to doing a double take when reading about the politics and economy back in Germany. Today I had another one of these moments: Germany indeed has gone insane. First of all, a Socialist minister of Finance, Peer Steinbrück, is admonishing Germans to start saving and thinking ahead in terms of retirement. (You have to be familiar with the myopic hand-to-mouth, nanny state mentality of the German Social Democrats to appreciate the magnitude of this shift!) And with good reason: With unemployment still above 10% (not counting welfare recipients and people being “retrained”), German demographics spell catastrophe for pension and healthcare budgets in the years ahead. Americans can sympathize Steinbrück’s alert: “We might have to do without a vacation trip to provide for later,” he was quoted as saying. Chancellor Angela Merkel, on paper a conservative, was shocked to hear the man talk sense. She publicly chastised her finance minister for such outrageous thinking! He had to publicly apologize for uttering such blasphemy! Currently, another politician -- this time a conservative -- is taking flak for daring to suggest that recipients of unemployment insurance should not be entitled to... drumroll, please... vacation money. Looking at the statistics that suggest that America’s image abroad has suffered greatly over the past five years, may I suggest an alternate view? How about the possibility that America really has been constant... and it’s people abroad who have been gradually losing their marbles?
Housing’s Hiccup by Steven Lord There has been a lot of commentary regarding the deceleration in the housing market, especially since last Thursday when numbers came out regarding home sales that were much worse than expected. And to make things even more poignant, foreclosures in three states reached levels not seen since 1979. The media dutifully squeezed the “news” in between rambling on about John Mark Karr -- probably the most “guilty unless proven innocent” case any of us will see in a long time. But to me, the biggest news here is that the housing slowdown is actually news. Honestly, is anyone truly surprised that after over 500 basis points of Fed rate hikes, the nutso activity in the housing market is cooling? The minute the Fed started raising rates a few years ago, housing’s fate was sealed. This was especially so since activity in many areas (including mine) had reached a point of ludicrousness -- my wife and I missed a house in Westchester County, New York, because the other folks bid $30,000 more than asking price, were paying cash and gave the homeowners a case of extremely expensive wine to seal the deal. And this was three years ago… There was simply way too much froth in the real estate markets, far too much liquidity sloshing around looking for a home (literally) and too many people borrowing oodles of money at interest rates that had not been seen for generations for it to end any other way. Housing is vulnerable to shocks (in both directions) mostly because it is so illiquid. When someone wants to sell stock, they just call their broker or go online. In the vast majority of cases, they are free of the stock inside of a few minutes. Houses are at the other end of that spectrum, often taking months to sell in normal times. Moreover, housing can start a self-fulfilling price spiral much more quickly, since all it takes is a few people putting their houses on the market at the same time to dramatically increase the supply of available property in an area. Other people see it, think they had better move quick if they’re still going to get out near the top, and -- poof! Instant oversupply. In my town there were a grand total of five houses for sale a year ago, and they were all going for over $1 million. Now there are fifteen... and they’re not moving. You can imagine which direction prices are going. The biggest impact in this type of slowdown is usually seen in the home building stocks like Lennar and Toll Brothers, who are still putting up MacMansions with abandon. This is because development projects take years from start to finish, and the building companies can’t just hit a switch and stop building. The houses you see going up now, whether they are sold or not, were put in motion back when the sector was still going vertical. The result is to dramatically increase the supply of new homes at exactly the same time a large number of people are putting existing homes onto the market. Which, of course, pushes prices down across the board. However, I do not think the decline in housing is going to be the economic Armageddon many people fear. This is for a variety of reasons: 1. Houses are not like stocks: They serve a principle human need (shelter) and the vast majority of people have owned their house for years, meaning any decline they suffer is really only giving back some of the paper gains they experienced during the boom. Considering the kind of rub-your-eyes appreciation many folks have seen over the past five years, they are probably still miles ahead of the game no matter how severely housing corrects. 2. The level of cash being taken out of properties has remained constant in spite of higher rates and a weakening housing market. To me, this means that rates have not risen prohibitively high, and also that people have still significant equity in their houses from which to draw. Aside from the high-profile markets near big cities, on the coasts or in areas where vacation homes and condos make up a large portion of the real estate market, I think most families will see prices more level off than fall off a cliff. Remember, it’s usually tied to a dramatic increase in supply. 3. The yield on the 10-year Treasury note has fallen back under 5%, something very few people are talking about. Mortgages key off of the 10-year rate, and recent moves will trickle through to mortgages by the fall and take some pressure off all those adjustable rate loans. 4. While the foreclosures made for good headlines and tear-jerker “news,” by and large, they are the result of the hurricanes or because people bought houses they couldn’t really afford in the first place. Little of it seems to be related to a broad-based economic slowdown, which is the cardinal difference between now and 1979.
Remember, a higher interest rate environment often exposes excesses within markets, and housing is no different. The higher rate environment flushes out these excesses from a systemic perspective and brings things back to historical norms. Six percent for a 30-year mortgage seems high by the standards of the past several years, but it is still literally rock-bottom when viewed in the context of the past 50 years. If anything, from an economist’s perspective, the slowdown in housing means the “system” is working. The one area I agree with bears watching is consumer spending, since a lot of durable goods purchases -- computers, DVD players, $5,000 TVs, campers, etc. -- over the past few years have been primarily financed by cashing out the equity created by appreciated house values. If rates rise further, prices fall further, or both, it is highly probable that this sort of consumption support will wane, leaving the economy without its previously significant driver. So far the data suggests cash-out refinancings remains solid, so as of now there is little sign of this spiral developing. But it definitely merits observation, as significantly reduced consumer spending would have an equally significant effect on the overall economy.
---------------------------- Alloy Inc, Avanex Corporation, Culp Inc, and Restoration Hardware Inc are releasing earnings. Sign up here:
Unlock Dates for September 2006 Keep an eye on Tim Hortons Inc. and Himax Technologies for significant sell-offs. You may want to short shares or buy puts on these two positions. Brought to you by Extreme Volatility Speculator
Upgrades and Downgrades OmniVision downgraded by CIBC World Markets from Sector Outperform to Sector Perform. Universal Health downgraded by UBS from Neutral to Reduce. Blue Nile upgraded by Matrix Research from Sell to Buy. Louisiana-Pacific upgraded by Credit Suisse from Underperform to Neutral. Brought to you by GRESSOR.com ---------------------------- |
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