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Five Things You Need to Know: China's Trade Surplus; Even Order Cancellations for Fake Houses Surging!; Speaking of "Sharp Declines"; Full Disclosure; Like "Entourage" But for Hedge Funds


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. China's Trade Surplus

China foreign trade surplus jumped to 22.45 billion USD in May, well above the 16.88 billion USD surplus in April, and by more than enough to further stoke the political fires of those barreling ahead toward protectionism in Washington.

  • The surplus, up 73% from last May, was the third-highest monthly level on record the Chinese customs agency said on its Web site.
  • Exports rose 28.7% 94.07 bln USD while imports were up 19.1% at 71.6 bln USD.
  • According to XFN-Asia, China's year-to-date surplus stood at 85.73 bln USD at the end of last month, and based on government data is up about 85% over the same period last year.
  • The unexpected jump in the foreign trade surplus will almost certainly raise further the ire of politicians in Washington who are insistent that the yuan's 7.5% rise since July 2005 when China implemented currency reforms is not enough.
  • Some in Washington say the yuan may be undervalued by as much as 40% and are threatening trade sanctions.
  • Meanwhile, tomorrow China and European Union trade representatives are set to meet to discuss similar tensions.
  • The EU so far this year has been China's largest trading partner.
  • European Central Bank President Jean-Claude Trichet said last week that China should make its currency more flexible, according to Bloomberg.
  • The call for increased currency flexibility was also joined today by Japan's Finance Minister Koji Omi.

2. Even Order Cancellations for Fake Houses Surging!

In a sign of yet more deterioration in housing, KB Home (KBH) is reportedly even seeing a spike in order cancellations for fake houses.

  • The Department story Macy's (M) has reportedly canceled plans to build 3,000-square foot fake homes inside stores in such cities as New York, Chicago and San Francisco, according to the Wall Street Journal.
  • The fake houses were part of an ambitious plan to display a large new line of home goods produced by Martha Stewart (MSO) the newspaper said.
  • The department store is canceling the plans due to a sharp decline in the housing market.
  • You know, that "sharp decline" in housing that is not spilling over into other areas of the economy... except retailers, automakers and other businesses that make money by selling things to people.
  • Home builder KB Home (KBH) had been in talks with Macy's to build the fake homes as part of a "daredevil discussion" between former KB Chief Executive Bruce Karatz and Macy's Chief Executive Terry Lundgren, KB Home spokeswoman Caroline Shaw told the Journal.
  • But building a fake house inside a department store "takes an immense amount of logistics and resources that both sides were not ready to allocate at that time," Shaw said.
  • Indeed.
  • This cautionary tale just serves to illustrate that even the fake house construction market is weakening more than expected due to fallout from the real estate mania.

3. Speaking of "Sharp Declines"

Speaking of "sharp declines" in housing that are not spilling over into other areas of the economy... except retailers, automakers and business that make money by selling things to people, according to a weekend article in the Wall Street Journal some economists are giving up on the idea that the U.S. housing slump will be quick and relatively painless.

  • Federal Reserve Chairman Ben Bernanke acknowledged in a speech last week that the housing market remains weak and that the slowdown in residential construction "now appears likely to remain a drag on economic growth for somewhat longer than previously expected."
  • However, he remains insistent that "we have not seen major spillovers from housing onto other sectors of the economy."
  • Perhaps "major" is in the eye of the beholder; sort of like that old saw about a "recession" occurring when your neighbor loses her job, a "depression" when you lose yours.
  • Be that as it may, the drag from housing is most certainly showing up in other areas of the economy, "major" or not.
  • At the peak of the housing boom in the third quarter of 2005, people were taking cash out of their homes at an annual rate of $709 billion, according to Michael Feroli, an economist at J.P. Morgan Chase & Co in New York, the Journal said.
  • As of the first quarter, that number has fallen to $178 billion.
  • Sure enough, retailers of building and gardening supplies saw sales drop by 6% year-over-year in April, the Commerce Department.
  • Last week Macy's Chief Executive Terry Lundgren noted last week that a number of retailers, including J.C. Penney, Wal-Mart and Sears, have recently complained of weak sales of home-related goods.
  • As well, we ran across an article in Saturday's New York Times "Caution: Lower Truck Sales Ahead," that blamed declining truck sales - down 5% so far this year - on... you guessed it: real estate woes.
  • Meanwhile, we should note that we have seen some subtle language changes from Fed officials over the past six months; notably, there's been a shift from seeing "no spillover" in March to "no serious broader spillover" in May to, finally, "no major spillover" last week.

4. Full Disclosure

Although it didn't garner much attention last week due to a roiling bond market and stumbling stock market, there were some interesting nuggets in Fed Governor Frederic Mishkin's testimony on credit card disclosures before U.S. House of Representatives Committee on Financial Services last week.

  • Mishkin was speaking before a House subcommittee about a Fed proposal to revise the card disclosures currently required by current Truth in Lending Act.
  • Among the changes the Fed is proposing are clearer disclosures of eventual higher rates in advertisements of introductory rates, a requirement that advertisements for "fixed" rates actually be fixed (imagine that!), and a requirement that consumers be notified 45 days before a penalty rate is imposed.
  • These regulations were last reviewed comprehensively in 1981. Yes, 1981!
  • In 1983 just 43% of American families had at least one "general purpose" credit card.
  • Now, nearly three-quarters (71%) have at least one credit card.
  • Not surprisingly, the sharpest increase was among lower-income families.
  • From 1983 to 2004, the share of families in the lowest income quintile that hold a credit card jumped from 11% to 37%, Mishkin said.
  • And not only are more Americans holding credit cards, total charges on credit cards increased by about four times between 1991 and 2004 alone.

5. Like "Entourage" But for Hedge Funds

Man, with all the Soprano's final episode hype we had already forgotten about the new upcoming HBO series about hedge funds by Doug Ellin of HBO's "Entourage" notoriety... until we stumbled across an interview with him in this weekend's New York Times magazine.

  • In the interview Deborah Solomon asked Ellin, " Why do you find the subject of money so interesting?"
  • "Sadly, right now, that's the world people are aspiring to," Ellin noted. "You have Harvard-educated medical doctors who would rather work at an investment bank than try to cure cancer, and that's the wish-fulfillment lifestyle that I play into."
  • A television show about Wall Street? It all sounds so familiar.
  • Flashback: November 2000, The $treet - "Darren Star, creator of Sex and the City , Melrose Place and Beverly Hills, 90210 , steps out of the bedroom and onto Wall Street. A new generation of upstarts rules the roost at Balmont Stevens, Inc. However, this boys' club shares space with some corporate types and together they must survive the world of high finance...and high-stakes living."
  • Will the debut of the "'Entourage' for Wall Street," like the ill-fated 'The $treet' usher in a similar market top?
  • We have no idea, but Minyanville has obtained a preliminary character summary for the new show.

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