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Five Things You Need to Know for Wednesday


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


Five things you need to know to stay ahead of the pack on Wall Street.

1. Data in the Hizzouse, Part Three

Don't even start with the "hizzouse" thing. We know. Just be glad that this is the final chapter in our three-part data series.

  • Monday, January sales of new homes fell 5 percent, to an annual pace of 1.23 million, the lowest level in a year.
  • Yesterday, existing-home sales fell 2.8% in January, the fifth straight month of declines.
  • The number of unsold homes rose 2.4% to 2.9 million, the highest level in nearly eight years.
  • Existing-home sales make up 85% of all transactions and therefore that data is considered more significant and more stable than new-home sales.
  • Today the Office of Federal Housing Enterprise Oversight reports the House Price Index at 10 a.m. EST.
  • What is it? Glad you asked. The HPI is a broad measure of the movement of single-family house prices. "The HPI includes house price figures for the nine Census Bureau divisions. In addition, the Index contains separate house price indexes for the 50 states and the District of Columbia. A weighted average index figure for the United States as a whole is also included," the OFHEO says.
  • Economists really don't try to forecast the number because, frankly, until recently no one much cared.
  • In the third quarter, OFHEO said U.S. home prices had risen 12% during the past year, down from the record 14% year-over-year gain in the second quarter.

2. President Bush, India, Pakistan, and the Stock Market of Fire

President Bush today will visit India, a significant symbolic visit since it is only the second visit to that country by a U.S. president in more than two decades. He will also make a stop in Pakistan. Why?

  • India is the fourth largest economy in the world in terms of purchasing power parity, which is an estimate of the exchange rate required to equalize the purchasing power of different currencies, and 10th in absolute terms.
  • India's population of more than 1 bln makes it the second most populous contry in the world. Consequently, India is often said to be the "world's largest democracy."
  • But enough about them, what about us? In strategic terms, India's proximity and economic competition with China makes it critical as a partner in establishing a power balance in Asia.
  • India's economic emergence has come with far less foreign investment as has China's.
  • Pakistan carries less economic weight than India, but the country is considered by the Bush administration to be an important ally in the war on terror.
  • Meanwhile, the entire exercise is a lesson in how not to make investment decisions. According to M&C News, President Bush reportedly recently noted that over the past four years the Indian stock exchange had recently soared to a new high, while the Chinese stock market had fallen by about half.

3. Japan No Longer Cheap and Easy?

After nearly a decade of "easy money" with interest rates near zero, Japan's central bank may be poised to raise rates. According to the Wall Street Journal, the shift in interest policy would involve the withdrawal of trillions of yen from the banking system and an eventual increase in interest rates.

  • The Bank of Japan meets on March 7.
  • After years of unsuccessffully battling the first sustained bout of deflation for a major economy since the Great Depression, Japan's Central Bank began using a policy known as "quantitative easing" in 2001.
  • Quantitative easing is distinct from the Fed's policy of "qualitative easing." In qualitative easing, the Fed simply lowers the price of money (overnight interest rates) until people borrow, invest and/or spend again.
  • But what would happen if the people decided they didn't want to spend or borrow no matter how "inexpensive" money became? Japan found out.
  • Therefore, the Central Bank took things a step further by embarking on a "quantiative easing" campaign that involved not just lowering the price of money and printing more yen, but also using freshly printed yen to buy government bonds.
  • The move by Japan has been months in the making and was discussed at least a year ago.
  • If the central bank moves too soon, it could choke off economic recovery. If it moves too slowly, inflation could flare.

Nikkei 225, Monthly, 1999 - Present

4. Hot Commodities. Who Loves You, Baby?

Commodities are still THE place to be, most say...

... but unanimity always scares us. Especially when the unanimity begins to invade the retail space...

A new commodities ETF from Deutsche Bank debuted a couple of weeks ago. Trading under the symbol, DBC, it conveniently invests in light sweet crude oil, heating oil, aluminum, corn, wheat and gold. Less convenient is the fact it debuts after a five-year period in which commodities, as measured by the Reuters-Jefferies CRB Index, have returned 58.7%, compared to a loss of 12.8% for the S&P 500 and a loss of 44% for the Nasdaq Composite.

Meanwhile, the weekly chart of the CRB Index shows a bearish setup according to Tom DeMark's TD-Sequential indicator, a technical indicator used to identify high probability areas of trend exhaustion. In layperson's terms, a 13 on the chart following a sustained advance is bad. A 9-13-9 is considered by some to be even "more bad."

CRB Index, weekly

And so the game continues. As Robert L. Bacon wrote many years ago in the now out-of-print book, Secrets of Professtional Turf Betting, "The public can never catch up to the form – or the game ceases." The public has no right to lose so much.

5. Speaking of "Turf Betting," There's Always a Bull Market Somewhere

In July 1985, a yearling colt sold at auction in Kentucky for $13.1 million, a world record. Yesterday that record was broken, after a mere 20 years. A two-year-old son of Forestry sold at Calder's Fasig-Tipton sale for a new world record, $16 million. Champagne anyone?

  • The colt was bought by Demi O'Byrne for the Irish bloodstock operation Coolmore Stud, outbidding a buyer for Sheik Mohammed bin Rashid al-Maktoum of Dubai. Hey, aren't those guys also buying... never mind.
  • The old world record in 1985 was for a half-brother to Triple Crown winner Seattle Slew, named Seattle Dancer.
  • Seattle Dancer earned only $150,000 winning just two races.
  • Although $16 million exceeds the old record in absolute terms, adjusted for inflation it would take $24 million these days to equal the 1985 mark of $13.1 million.


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