At long last, home prices stop falling… details on the first annual gain since 2006
Yet industry insiders (and plain common sense) say “don’t celebrate yet”
The case for commodities: Fry, Mayer, Amoss and Knuckman highlight which to buy and why
How the Greeks (and S&P) just slammed U.S. stocks
Plus, Dennis Gartman offers a microcosm of Europe’s mess: Belgium
Another big sign of recovery to start today’s 5. Along with the unemployment rate, we’ve been watching house prices closely. They just eked positive for the first time since December 2006, this morning’s Case-Shiller index indicates:
Every dog has his day, and at last the dirty old hound that is American housing has wagged its mangy tail. The Case-Shiller 10-city index is up 1.6% since February of last year. The 20-city has risen 0.6%. Whooppee!
Can these data be trusted? Sure. No market can rise forever. Neither do markets crash in a straight line. But we aren’t celebrating, not just yet. Neither are the people behind this index:
11 cities of the 20-city index saw year-over-year declines.
“Further,” notes S&P’s David Blitzer, “in six cities, prices were at their lowest levels since the prices peaked three-four years ago. These data point to a risk that home prices could decline further before experiencing any sustained gains. While the year-over-year data continued to improve for 18 of the 20 MSAs and the two Composites, this simply confirms that the pace of decline is less severe than a year ago. It is too early to say that the housing market is recovering.”
This chart might be a better representation of what’s really happening… that year-over-year gain looks pretty silly plotted this way:
The real home price index report to watch won’t come out until July. That’s when Case-Shiller will update May (next month's) prices, the first month since the spring of 2008 that the U.S. housing market will not manipulated by the government homebuyer tax credit.
In all, 1.8 million buyers have taken advantage of these $8,000 free tax credits, at an expense of $12.6 billion to the US Treasury. Those numbers are just through February.
That program is supposed to expire this Friday. The National Association of Realtors (NAR) estimated last week that 44% of March homebuyers would NOT have purchased a home without the credit. That doesn’t bode well for the rest of 2010.
But home price speculation isn’t on our editors’ minds this week. In fact, scanning our many publications, there’s a notable trend. Maybe it’s coincidence — but we doubt it: A confluence of Agora Financial thinkers are making a strong case for commodities today.
“Most commodity prices bottomed out in mid-February,” begins The Daily Reckoning’s Eric Fry, “which is exactly when the Federal Reserve hiked the discount rate to 0.75% — the first increase in the discount rate in more than 3½ years. From its February lows to the present, the CRB Index of commodity prices is up 8%. The CRB's advance is not just an "oil thing." Most commodities are advancing, including the long-slumbering agriculture complex.
“Several price indexes are validating these recent inflationary signals coming from the commodity markets. The producer price index (PPI) is up 6% year over year; import prices are up 11.4%, and the ISM's prices paid index has more than doubled during the last 12 months.
“Perhaps these price trends are inspiring the Fed to begin ‘tightening’ — i.e., raising interest rates. Whatever the Fed's exact motive, it has begun to raise rates… and that's enough of a reason to begin buying commodities.”
We’ll be keeping a lazy eye on the Fed over the next two days, as they gather for another FOMC interest rate meeting. The Street doesn’t expect any changes in rate or release language, but the Fed can’t hold out forever, especially with the “great” retail and housing numbers we mentioned last week.
If you ask the gamblers in Chicago, Fed rate futures currently give 44% odds that U.S. interest rates will be 0.5% by the end of September.
Can material prices really climb while the threat of deflation still lingers? Indeed they can, warns our Dan Amoss.
“Raw materials prices can remain stubbornly high despite a weak economy,” Dan explains. “High prices are driven by the fact that governments and central banks are handing out claims on production — in the form of new money supply and deficit spending — without adding to aggregate supply. Businesses and households that rely on government largesse are consuming more than they produce. This is a recipe for higher prices.
“Promoters of the world’s crazy, unconventional monetary policies (usually bankers) like to blame rising prices on things like droughts, floods, OPEC and labor unions. But when they do so, they fail to imagine what might happen to prices if the broad supply of money and credit were relatively fixed. If so, it’s likely that rising prices in one sector of the economy would have to be offset by falling prices in another.
“Demand typically falls in response to rising prices (depending on the ‘price elasticity’ of demand). But when government deficits, easy money and easy credit (rather than income and savings) drive demand, we could easily see persistently high consumer prices in a weak economy.”
And a Catch-22 for policymakers: If you follow their reasoning, the government is the only actor in the economy that can spend its way back to health during a crisis. Yet their policies continue to prolong, even deepen, the imbalances they’re trying to compensate for.
Damned if they do, damned if they don’t. All the while, the deficits and debt pile up. Addison is making his way to D.C. for the Peterson Foundation Fiscal Summit tomorrow. We’ll hear what he has to say on Thursday.
So, as an investor, commodities appear to be a reasonable hideout. If you agree, then “buy uranium,” Chris Mayer wrote in his Special Situations update yesterday afternoon:
“When you start digging into the micro stories of global uranium production — Kazakhstan, Niger, Namibia — you start to doubt the world’s ability to meet uranium demand at current prices.
“For years, the mines have produced uranium well short of demand. The difference has been made up by existing inventories — those old Cold War stockpiles. Most of these are from Russia. Robert Mitchell of Porter Capital makes a good case that these stockpiles are about gone. ‘It is likely that the Russians don’t have much usable material left, which is why they have the right to purchase 6,000 metric tons of uranium per annum from the Kazakhs. Further suggestive of their poor ore position, they have purchased 20% of Uranium One so as to access additional material.’
“The U.S. has a stockpile, too. Mitchell points out that this is less than it seems. The U.S. has about 59,000 metric tons, but mostly made of tails (or spent fuel). The usable quantity is only 16,538 metric tons. And much of the tails are ‘held in a variety of cylinders, many of which can’t be moved because they no longer comply with DOT. The DOE doesn’t even know what the assays are for most of their tails — they guess.’
“My guess,” Chris concludes, “is the stockpiles run out sooner than expected, leaving a yawning gap for the industry to make up. And the industry will do that only if prices rise to make these marginal projects in Namibia and elsewhere economic.
“We’ve made the demand case before, too, and we won’t rehash it here. Suffice it to say that a slate of new nuclear plants means a robust demand for uranium for years to come. There are few commodities positioned as well for the next several years.”
Gold has been loafing around lately, trading lightly between $1,140-1,160 over the past two weeks. Ditto with oil. Crude has been within a buck or two of $85 a barrel all month. Most commodities, in fact, have had an uneventful April.
As we reported late last week, cotton is one exception: “July Cotton futures have recently made new yearly highs and jumped over 20% since February,” reports our resource trader, Alan Knuckman. “In comparison, the price for December cotton barely in the fields has risen only 10% in that same time period. The commodities markets are showing that consumers want the product now and are willing to pay up.
“China is the world’s biggest cotton producer, but rain and cold weather have had a negative impact this year. U.S. farmers had shifted acreage from over 15 million acres in 2005 to under 10 million last year, into more profitable corn and soybeans crops as cotton prices declined. The cotton export restrictions from India, the world's second largest producer, announced yesterday add even more pressure.
“China needs more cotton than it produces as an end-user. As long a China's strong growth continues, upward price pressure will remain.
“We’ll be looking to buy deferred month call options on dips because of the supportive fundamentals. Looking for the demand to carry over, as time elapses, would make the current out-of-the-money options actually in the money when distant months become the front cash cotton contract.”
For the Alan’s specific trading advice, including buy and sell recommendations, look here.
Stocks opened flat, as traders waited for news from the Goldman Sachs grilling on Capitol Hill and tomorrow’s FOMC meeting. We don’t expect much out of either.
And as we noted yesterday, Greece continues to implode. Greek bond yields rose for the eight day in a row today. The 2-year, which we charted yesterday, is up another 100bps or so, to over 15%. Yikes.
“One more wrench has been tossed into the [euro] machine,” fellow e-letter author Dennis Gartman writes today. “The government in Belgium has fallen; the prime minister, Mr. Leterme, has tendered his resignation and the king has accepted it. Neither he, nor the king, had a choice. It now appears that elections shall be held in early June… perhaps in late June at the latest… just in time for Belgium to assume its role as president of the EU July 1. Talk about confusing!
“Mr. Leterme’s resignation and his government’s collapse is not the first time that his Flemish Christian-Democratic government has failed or has nearly failed. In the spring of ’08, Mr. Leterme’s five-party coalition appeared destined for failure, only months after the election that brought it to power; however, the king refused to accept Mr. Leterme’s letter of resignation and asked that the prime minister try to forge a majority.
“The Flemish, because of their far superior numbers, have held power for years, to the obvious dismay of their Wallonian compatriots. Further, the per capita income of Flanders is far larger than is that of Wallonia, making the conflicts between the two people all the more awkward and all the more certain…
“We see Belgium’s problems in microcosm as emblematic of Europe’s problems in macrocosm. If Belgium, with only two languages to deal with, cannot accommodate governance, then what of Europe generally?”
You’ll recall from yesterday, Rob Parenteau is looking for a 20-30% correction in the euro versus the dollar.
And that was before S&P downgraded Greek debt, as it did just before we went to press today. The S&P 500 dropped 1% on the news… signs that this Spartan crisis is finally starting to turn heads here in I.O.U.S.A.
At BBB+, S&P now considers Greece a “junk” debtor. If other agencies follow S&P's lead, we suspect Greece’s goose is cooked.
Rest assured — more on this tomorrow.
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