Yesterday's New Home Sales report was just awful. Some experts tried to spin to portray the numbers as not being all that bad. Spin all you want, if it looks like a duck, walks like a duck and quacks like a duck, one can be certain that it is not a golden goose. Miller Tabak's Dan Greenhaus called yesterday's New Home Sales report "horrible.
With substantial government stimulus being pumped into the housing markets, why did new home sales fall? The answer is that rising foreclosures are creating bargains in the secondary market. Why buy new for $450,000 when you can buy slightly used for $250,000. The supply if homes continues to be greater than demand. This will keep home prices down and the demand for new homes soft.
Today did not bring with it encouraging economic data. Headline Durable Goods looked, but when one backs out volatile and seldom repeatable aircraft sales, Durable Goods actually fell. Most components other than aircraft came in either negative or below forecast. One possibility for the pull back in Durable Goods is that manufacturers are pulling back while they gauge demand. Judging by recent reports, especially Consumer Confidence, demand is going to soft in the near future.
Some bulls pointed to the increase of 11,000 factory jobs registered in today's Durable Goods report. However, manufacturing only makes up approximately five percent (durable goods manufacturing accounts for seven percent of the U.S. economy) of the U.S. economy. Also, there have been announcements of significant service sector job cuts in recent days. For example: Finance company Ford Motor Credit announced it will eliminate 1,000 jobs. The manufacturing sector is not immune as evidence by Ford cutting 900 jobs at a plant producing Mustangs and the possibility of 3,000 jobs losses should GM close its Hummer brand as is now expected. Folks, until there is significant job growth there will be no v-shaped recovery in the broader economy. In fact, we may have seen the peak of corporate earnings for some time.
What about exports? The remainder of the world is slowing with us. Former IMF economist Ken Rogoff warns that Chinese growth could fall to the 2.00% area as that country's debt-fueled bubble deflates. As I have said before: "decoupling is a myth." In fact, the world is more linked than ever. This is evidenced by the behavior of asset prices.
Early in yesterday's trading session (before Bernanke's testimony began to hit the tape), a reader asked my why equities were rallying in in the wake of poor economic data. I explained that it was due to dollar weakness. The equity market recovery is a result of both a weaker dollar and mega government stimulus (extremely low rates). As long as rates stay low (as Fed Chairman Bernanke says they will) and the dollar remains weak the equity markets could perform well. However, if the data is so poor that it appears that consumers ability to spend will remain constrained we could see a selloff in the equity markets. That should strengthen the dollar. That is what is happening today following poor jobless claims data.
Today's Jobless Claims data was troubling to say the least. It demonstrates that U.S. job growth is nearly non existent. We appear to be treading water at best. Remember, it takes job growth for about 100,000 per month to keep pace with new workers entering the workforce.
Finally, if the markets are a dollar story how does one take advantage of dollar volatility. I am a believer in that the U.S. dollar will be one of the stronger currencies in the near future. When I say this many readers whine about our massive debt issuance, large deficits and inflation being fueled by cheap credit. These critics must understand that the U.S. does not exists in a vacuum. Smaller countries can have debt an currency crises which have little effect on the rest of the world. The U.S. is not Argentina. We sneeze and the world catches cold. This is evidenced by the problems elsewhere around the globe.
In my opinion we have seen a crisis (autumn 2008) and rebound (2009). Now we will move forward based on fundamental growth. This means demand from replacement, efficiencies and population growth. These will increase demand for housing, products and services. That may not lower the unemployment rated back down to 5.00%, but it should, at some point, lower unemployment below 9.00%. What is full employment? That is a moving target, but it is probably higher than what we have seen during the two previous bubbles when experts attempted to convince us that prevailing economic conditions were fundamentally sustainable (while consumer debt rose to record levels).
Trade ideas. GE Cap and BAC 10-year notes. BAC subordinate notes are particularly attractive. I would go long the dollar (or short oil). Look for the curve to remain steep for now, but the next major move will be a bear flattener.
2 comments:
I was thinking of selling my BAC sub notes. I have a cost basis in the 30s though
If you need income they are still good, but price gains will be in smaller increments, if at all.
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