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Five Things You Need to Know: Wall Street's Dark Poole of Blood, 100% Prime Subprime Complacency?, Speaking of an Economy Levered to Consumption..., Five Things Mailbag, FOX Business "Friendly" TV


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Wall Street's Dark Poole of Blood

St. Louis Federal Reserve President William Poole this morning said that while inflation should moderate this year, if the core rate settles above 2% then prepare for Fed action to bring it down.

  • Poole's inflation comments are hardly news; inflation will likely moderate (which we believe is true since there isn't any inflation), and he's looking for a long-term Core PCE around the 1.5% level (with a settle above 2% viewed as unacceptable). Fine.
  • Rather, we want to focus on his housing comments.
  • We said yesterday that we believe almost everything these days - inflation, economic growth, bullish and bearish arguments for and against equities - revolves around whether or not housing has "stabilized."
  • Poole noted this morning that the current housing slowdown has not occurred against the backdrop of an economy-wide recession, when especially large declines in real residential fixed investment typically occur.
  • He cited the customary datapoints supporting the "stabilization" thesis:
    - New single-family home sales rose in December.
    - National Association of Home Builders' housing market index now at its highest level since July 2006
  • However, he added, "While recent data seem to point in a favorable direction, we must recognize that the housing market is not out of the woods yet." We agree.
  • Moreover, in reading Poole's speech, we came across the following paragraphs that somehow escaped notice of most media outlets. Rather than sounding positive, these comments are actually downright cautionary:
    "A special word of caution is in order concerning housing data. Starts and permits data are routinely affected by weather variations, especially in the winter. To an unusual degree, sales data are affected by cancellations, which occur when buyers walk away from sales contracts. In published data, canceled sales are not subtracted from new sales to create a net sales series. Moreover, canceled sales are not put back into the data on the inventory of unsold new homes. Anecdotal reports clearly indicate that cancellations have been material. Thus, official data overstate net sales of new homes and understate the inventory of unsold homes."
  • Poole also added the following: "[F]avorable recent news on the inventory of existing homes for sale may well have been influenced by discouraged homeowners taking their properties off the market rather than by actual sales."
  • Ok, so has housing stabilized or not? Well, this sounds definitive to us: "It remains to be seen what this year will bring, but at a minimum we can say that we do not have evidence as yet that home prices have stabilized."

2. 100% Prime Subprime Complacency?

According to Bloomberg, an index of credit-default swaps surged yesterday on news of problems at HSBC and New Century, suggesting the perceived risks of owning low-rated subprime mortgage bonds is rising.

  • The so-called ABX Index, an index used to create swaps based on 20 BBB- rated bonds sold in the second half of 2006 and consisting of home loans to the riskiest borrowers fell 1.7% on Thursday, the lowest since it was created on Jan. 18, Bloomberg said.
  • The ABX index's level means that investors must now pay about $728,000 per year to protect $10 million of bonds against default when using the contracts, the article said.
  • Ok, this is the subprime market. There's a reason high-risk borrowers are, um, high-risk, right?
  • Check out this letter from Minyan "Dale" Griffith:
    "I agree with the idea that the sub-prime is going to cause problems for someone somewhere, but let me be a bit cynical. Seems to me that most of this paper has been sold to Asia - maybe Asian buyers didn't understand they're getting BBB- paper amalgamated into A paper. So they take it on the chin. They take billions and billions of these blows to the chin. They got lots of cash. So who cares back here in the USA? HSBC? Please. Just expressing the other view and the joys of derivatives and global diversification. There will only be small and isolated problems."
  • The problem we have with this "cynical" view is, one, who says it's mostly Asian buyers who have exposure here?, and two, globalization isn't a one way street where risk gets "diversified" away as if by magic.
  • As well, we find it interesting that so many are so willing to toss aside subprime problems as "minor and isolated" in an economy levered so highly to consumption.
  • Minyanville Professor John Succo has written extensively on how consumption levels in the U.S seem to be increasingly reliant on upper end spenders, as opposed to a broad spectrum of consumption across all levels of income and (to put it bluntly) borrowing.

3. Speaking of an Economy Levered to Consumption...

Check out the latest wrinkle in real estate financing - the REX Agreement.

  • What is a REX Agreement? Simple, in exchange for tapping the existing equity in your home, you agree to give REX & Co. the right to a portion of the future value of your home.
  • But wait, that's not all. "REX & Co. can provide up to 15% of the purchase price of your next home," the company says.
  • How does that work?
  • Easy, says REX. "[I]f you plan to buy a $500,000 home and obtain a $335,000 mortgage REX & Co. can provide $65,000 of your down payment at the time of purchase or immediately afterwards. Your payments are reduced because your mortgage is $65,000 lower."
  • On the front page of the REX Inc. site is a testimonial:
    "Instead of taking money out of our 401k to use for an investment opportunity, we chose to take advantage of the equity in our house," writes D&N Barber of CA.
  • Right. So Instead of taking money out of your investment account for an, uh, investment opportunity, you took it out of the one supposedly non-speculative asset you partially own to risk it on something else.
  • Hmmm, that concept sounds familiar. What do they call that when you take money out of something that is supposedly not for speculation, but whose value could fall, and you risk it on something else whose value could fall? Oh yeah. IT'S CALLED LEVERAGE!

4. Five Things Mailbag

We frequently get interesting emails from readers. The one below raises some interesting questions about the yen/dollar relationship (note Congress now getting in on the action there, too) and, by extension, the carry trade.

Professor Depew,

I have a few speculations regarding an issue that has been the topic of a lot of commentary on Minyanville and elsewhere. I decided to roll this grounder to you, as your range seems pretty good.

We've got a case where all-out, blatant shorting of the Yen for pure fun and profit enjoyment is the order of the day. The Bank of Japan makes it clear that it plans on doing nothing to strengthen the Yen. "It's because of the weak data from Japan," says economist A, "they aren't consuming enough and prices are stagnant."

Ok, says my nut-sized brain, that's right. Lower interest rates lead to higher growth and greater consumption. But then I remember the liquidity trap that Japan fell into in the 90's (are still in?). Another Best Buy banner ad pops up and I'm reminded of one of the principal factors allowing Americans to continue consuming like the pi... errr, good consumers we are: cheap Asian goods.

Let's see - if most Asian currencies are more or less pegged to the USD, and the BOJ has a de-facto weak Yen policy, that means... yes, that Japanese aren't benefiting from the ultra cheap Chinese labor. In fact, a weak Yen is a way of protecting the Japanese manufacturing economy from Detroit-disease. And I wonder, that chart of Toyota Motors (TM) seems quite correlated to USD/JPY - are US sales of Toyotas rising because they are more efficient vehicles or because they are cheaper? (Or is it because most assets have been correlated for last few years?)

It follows that, although seemingly paradoxical, higher Yen rates and a stronger Yen would lead to greater consumption and wage inflation in Japan. Then we could start to buy lots of Chinese cars! I can't wait!

Have I spoken any sense here?

Excuse me, the USD/JPY is hitting new highs, I gotta get my short yen order in quickly....

Minyan Brad

5. FOX Business "Friendly" TV

Rupert Murdoch yesterday announced News Corp. will launch a Fox business channel in the fourth quarter, the Financial Times reported.

  • Fox said it intends to take a more "business-friendly" approach than rival CNBC.
  • Mr. Murdoch, speaking at a conference here in New York, said CNBC has an atmosphere that "is a little bit negative," according to the FT.
  • Meanwhile, Roger Ailes, head of Fox Television, went a step further according to the newspaper, saying CNBC reporters only get excited about profits "the day they negotiate their own contracts."
  • In a separate interview in the New York Times, Mr. Ailes said, "many times I've seen things on CNBC where they are not as friendly to corporations and profits as they should be."
  • Impossibly, Minyanville has obtained a copy of the Fox Business TV "Business-Friendly" game plan.
  • Below are a few ways the Fox Business TV channel plans to differentiate itself from CNBC:

1. Bearish analysts referred to as communists.

2. CEO's served complimentary caviar and champagne in green room.

3. Declining dollar? Burn the George Soros effigy doll!

4. Anchors will conclude each positive trading day by lighting up a giant "victory" cigar on air with a hundred dollar bill.

5. Fair and balanced air time given to both bulls AND superbulls.

6. And joining us now is the real Fed Chairman, Dick Cheney!

7. The phrase "white collar crime" replaced with the phrase "CEO shenanigans."

8. Once a quarter, before market opens, Roger Ailes will appear live on camera and eat a poor person.

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