06/18/07 Good day… The currency markets returned to a more “normal” trading pattern Friday with the dollar, as measured by the dollar index, moving back down to levels we were at a week ago. In contrast to last week, when we had a plethora of data, which tended to be dollar positive, we have very little data due out this week, and it will likely be negative for the United States. Today we will see the NAHB Housing Market Index, which is not a market mover. Tomorrow we will get housing starts, building permits, and ABC consumer confidence all of which will be dollar negative. Wednesday we will see the MBA Mortgage Applications number, followed by the weekly jobs data, the leading economic indicators, and the Philadelphia Fed Index on Thursday.
So this week’s data will focus the markets’ attention back on the very weak U.S. housing market. I read over the weekend that one of the biggest homebuilders in the St. Louis area had a number of mechanic’s liens filed against their projects last week. The builder said these types of things happen all the time, and the unpaid bills were due to a few closings that got delayed. And what do you think delayed those closings? I don’t know for certain, but it is more than likely prospective buyers are finding it harder to get the loans at the terms they want. The lenders are beginning to close the spigot that has been flooding the housing market with cheap money. While I realize that one builder in a relatively small market doesn’t make a trend, I have to believe this is being repeated across the country, and probably with greater frequency on either coast, where housing had taken a much more dramatic move up.
Another sign of the deteriorating housing market is the number of days houses are remaining on the market. I live in a relatively nice neighborhood just 15 minutes west of downtown St. Louis. Over the past five years, houses in our neighborhood were typically sold within a week of the “for sale” sign going up; and many before they were even advertised. There are currently three homes for sale in our neighborhood of approximately 43 homes and all three have been for sale for about a month now. This sluggish demand is keeping builders focused on getting rid of unsold homes before they take on more new projects. The housing market has not hit bottom, and as I read it, the market is starting to gain speed on its downward path. Builders have a lot of inventory, and prices will likely fall further. Housing will remain a drag on the economy, as the bottoming-out is likely to be pretty far away.
On Friday the U.S. equity markets got a boost from the CPI numbers, which rose less than forecast in May. The 0.1% increase in core consumer prices, which excludes food and energy costs, followed a 0.2% rise the prior month. Separately, the U. of Michigan reported that consumer confidence fell, and Fed figures gave conflicting signals on the strength of manufacturing. These reports continue to confirm our thoughts that the FOMC will not move rates anytime soon and that the U.S. dollar will get back to its long term downward trend. San Francisco Fed President Janet Yellen seems to agree with my view of the current risks to our economy. In a speech over the weekend, Yellen said she is concerned that investors are underestimating risk, given the recent losses in subprime mortgages, soaring inflows into hedge funds and the leveraged-buyout boom. A tremendous amount of leveraged liquidity has flooded the markets, creating asset price bubbles and the possibility of run away inflation.
In an article over the weekend, economist and professor Nouriel Roubini blames the Asian central banks for much of these current global imbalances. According to Roubini, ten years after the collapse of Asian governments’ overvalued currencies in 1997, the remedies they embraced to prevent a recurrence may have only traded one set of risks for another. Their “never again” determination has led them to new extremes: Artificially low currencies, a record $3.4 trillion in reserves and export-dependent economies. “The currency and financial policies in Asia today risk planting the seeds of a new and different financial crisis. It’s a dangerous system both for these countries and for the global economy.” So how do you protect yourself? Diversification across asset classes. Don’t get caught with all of your investments in one asset class or even one currency.
As I said up top, almost all of the currencies rebounded versus the dollar on Friday and continued to move up over the weekend. For the year, the Icelandic krona (ISK) continues to be the best performer followed by the commodity driven currencies of Canada, New Zealand, and Australia. The oil rich country of Norway rounds out the top five currencies versus the dollar in 2007. These currencies have benefited from a combination of strong exports and central banks that have been able to guide their economies through some pretty trying times. It is easy to see why our WorldEnergy CD has been so popular; it includes three of these top five currencies.
The euro (EUR) hit a one-week high versus the dollar on speculation that ECB President Trichet will today signal that policy makers will keep pushing interest rates higher. Several ECB council members have been hinting that interest rates in Europe are set to go higher, and Trichet, who speaks in Montreal today at noon, will likely confirm this hawkish stance. The Bundesbank today said the pace of economic growth in Germany was “remarkable” in the first quarter, while a separate report tomorrow may show German investor confidence rose to the highest in a year. The ZEW report of investor confidence is expected to point to robust growth, which will propel the euro back over 1.35 later this week. All signs point to an aggressive interest rate policy by the ECB, which will continue to support the euro.
Currencies today: A$ .8412, kiwi .7537, C$ .9331, euro 1.3404, sterling 1.9814, Swiss .8063, ISK 62.31, rand 7.1125, krone 6.02, SEK 7.0362, forint 186.57, zloty 2.836, koruna 21.344, yen 123.43, sing 1.5375, HKD 7.8189, INR 40.767, China 7.6323, pesos 10.7745, dollar index 82.72, Silver $13.31, and Gold… $658.10
That’s it for today… According to his family, Chuck is doing great and will be going home sometime today. He has been taking walks and is apparently biting at the bit to get out of the hospital. We had a great weekend here in St. Louis, I spent Father’s Day morning running a triathlon in which I beat my goal. The rest of the day was spent sitting on the couch and watching our inconsistent Redbirds battle back from being down 5-0 in the first inning to score double digits and pull out a win. Hope everyone has a great start to the week.
Chuck Butler — June 18, 2007
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