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Five Things You Need to Know: Corporate Risk Aversion, Return of the Rolax Watch, Negative Equity: The Future of Real Estate, England, The Future Is Now


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


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

1. Companies to Consumers: Do as we say, not as we do.

According to the latest data from Thomson Financial, the cash on the balance sheets of the world's largest 100 companies has now reached $1,100 bln, the Financial Times notes.

  • First, 1,100 billion is the same as 1.1 TRILLION.
  • Corporate cash holdings have been rising since 1999, first breaking the Trillion mark in 2004, the FT said.
  • Last week Merrill Lynch said that a net 33 per cent of asset allocators were overweight in cash – an all-time high.
  • "You have to go back to the Iraq invasion of March 2003 to see levels of risk appetite this low," David Bowers, an independent consultant to Merrill Lynch told the FT.
  • Rising commodities have played some role, sure. According to Thomson, the percentage of cash held by oil and gas companies has jumped from 5.5 per cent of the total in 2004 to 10.2 per cent now.
  • But, and this is important, the surge in cash holdings (basic risk aversion) began in 1999, well before the commodities prices boom, which began (basis CRB Index) from a low of 182.83 in October 2001. The CRB Index is now at 333.
  • The corporate message to consumers. Do as we say, not as we do... please. Please, do as we say.

2. The Return of the "Rolax" Watch

The Wall Street Journal this morning reports that after a decade of widening consumer tastes for upscale products, the price of gasoline is beginning to take its toll on middle class shoppers.

  • So, as corporations continue their cash hording, the consumers, always late to the party it seems, are considering joining the balance sheet preservation/risk aversion game.
  • The WSJ this morning asks if the (relatively) high price of gasoline is finally denting consumer spending.
  • At current prices gas is up .71 cents from six months ago, the paper notes.
  • However, Wendy Liebmann, president of consulting firm WSL Strategic Retail, finds evidence in a recent survey of 1,500 consumers of a broader shift in consumer behavior after almost a decade in which most were "trading up" for high-end items.
  • "Many are now cutting back, she says, with low-income households becoming more likely to stick to dollar stores and supercenters and middle-income families visiting more mass merchants and grocery stores than specialty outlets," the WSJ quotes Liebmann as saying.
  • She adds that she was surprised to find evidence that households earning as much as $75,000 a year are changing their habits.
  • Minyanville Professor John Succo has noted this trend as well based on incoming earnings reports from companies highly leveraged to consumer behavior, most recently Abercrombie & Fitch (ANF) and Lowe's (LOW).
  • Moreover, he noted last week on Minyanville's Buzz and Banter, the real dilemma for the Fed in the credit-driven consumption boom is that credit is not only becoming more difficult to obtain, but it's apparently becoming more difficult to force upon increasingly cash-strapped consumers, judging by recent reports from Capital One (COF), Countrywide (CFC) and Accredited Home Lenders (LEND), among others.
  • Bottom Line: The Return of the "Rolax" Watch

The highly coveted back-alley Rolax Watch

3. We Have Seen the Future, and It Is: Negative Equity

In Australia, plummeting property prices have meant many are confronting negative equity, where they owe more on the property than it is worth, according to the Sydney Morning Herald.

  • Over the weekend The Herald checked 16 properties in south-western and western Sydney suburbs and found 60 percent had prices or had attracted offers at a discount to their last sale price.
  • Even the inner-suburban areas are showing signs of depressed prices, the newspaper reports.
  • An unrenovated four-bedroom house on 607 square meters last sold at $1,355,000 in 2003, the height of the boom.
  • It attracted a $1,179,000 top bid after its recent renovation by its owner-builder.
  • Increasing petrol prices appear to be compounding the impact of repeated interest rate rises on properties in Sydney's outlying suburbs by driving prices down, the newspaper says.

4. Also, England.

But wait, that's not all. The monthly UK Rightmove survey shows average asking prices for UK property fell 1.6% in August, the biggest fall since November 2004.

  • The UK, the monthly Rightmove survey shows average asking prices for homes fell by 1,6%, their largest decline since November 2004.
  • The decline follows a jump in July when average asking prices surged 2.9%, their largest monthly rise in nearly five years.
  • With the real estate boom front and center for UK central bankers, the question is whether the incoming data will allow for their own version of a pause.
  • Most economists expect the next hike in UK rates to occur in November.
  • The Bank of England next meets on 6-7 September.

5. Wait, Perhaps the Future of Real Estate Is Now

  • Plunge? That's a grim headline. Is it too grim?
  • The Los Angeles Business Journal has confirmed that in the last 60 days at least six residential brokerage branch offices have closed or are in the process of doing so, most on the Westside or in the San Fernando Valley.
  • In July, the number of home sales in Los Angeles County plunged 34 percent to 6,146 compared to last year, according to HomeData Corp.
  • July's drop follows six consecutive months of lower home sale volumes compared to last year's historic high levels, the LABJ reported.
  • Of course, home prices are still rising; 7% annually (though down from the scorching 20%+ jumps in recent years).
  • As a result of the prior boom, in the last five years the number of licensed Realtors in California has roughly doubled to 504,000, according to the California Association of Realtors.
  • Meanwhile, Merrill's David Rosenberg this morning notes the worrisome NAHB Housing Market Index. (See the chart here, courtesy NAHB).
  • Apparently, according to Rosenberg, the NAHB HMI leads the S&P 500 by 12 months, with a near-80% correlation.
  • One word: yikes.
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