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Rising Bond Yields: The run was nice while it lasted...

By Ian Cooper

It was nice while it lasted, but the ride’s over for the market indices, thanks to rising bond yields upping concerns that a rate cut was out of the question.  Then there’s housing -- still a mess.  And mixed May sales from retailers are raising uncertainties with regards to consumer spending.  Plus, mortgage rates are on the rise, as the 30-year moves to 6.53%.

As for housing and consumer spending, once consumers begin spending less, the economy stops growing, and our beloved stock market rally comes to a screeching halt, and turns south.  Plus, the economy must still contend with the probability that 1.1 million additional home foreclosures will transpire over the next six years as adjustable rate mortgages reset at higher rates. These foreclosures account for about 13% of ARMs originated or refinanced from 2004 to 2006, which equals about $326 billion in debt. 

Tack on news that the 30-year is up for the fourth week to 6.53% from 6.42%.  Lenders are tightening underwriting standards.  Inflation, while allegedly stable, is likely to get worse given higher oil and food costs.  Housing is no longer the “great” alternative investment to stocks.  Pending sales of U.S. homes are dipping.  Personal income fell 0.1% in April 2007 as savings rates fell 1.3%.  And, considering that most of the economy is based on liquidity, which comes from borrowed money, we’re in real trouble.

It’s not looking pretty…  Plus, unsold homes are continuing to exert pressure on rents.  That’s bad news for residential REITS, where sky-high valuations demand strong rental price growth.  In fact, says the Wall Street Journal, “inventories of unsold homes continue to weigh on the U.S. housing market, portending more downward pressure on prices…” Taking all of that into consideration, we’re shorting residential REITS.

Take Care,