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Five Things You Need to Know: Existing Home Sales; Who Cares? Part I; Who Cares? Part II; Conspiracy of Excess Liquidity Mongers; What a Difference a Day Makes


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. Existing Home Sales

Sales of Existing Homes fell 0.3% in May to an annualized rate of 5.99 million, the National Association of Realtors said.

  • Sales of previously owned homes fell 0.3% in May to the lowest in almost four years, the NAR reported.
  • Sales last month were down 10.3% year-over-year.
  • Meanwhile, the supply of unsold homes jumped to the highest in almost 15 years.
  • The national median existing-home price for all housing types was $223,700 in May, a 2.1% decline year-over-year, marking the 10th consecutive month of year-over-year declines.
  • NAR senior economist Lawrence Yun said the market softness is understandable, and that apart from the fundamental factors of too much housing supply, unsustainable pricing structure and tightened lending standards in the wake of the subprime mortgage meltdown, psychological factors are currently the biggest drag on housing. Seriously, he said that.
  • "I think psychological factors are currently the biggest drag on the housing market," in addition to all that other stuff, he added.
  • Yun also note that "Household formation has slowed dramatically since late 2006, implying that many people are doubling-up – they're adding roommates or moving in with parents." You know, the typical stuff people do... during an economic depression.

2. Who Cares? Part I

Question: Why is it stocks don't really seem to care about anything - subprime mortgage woes, potential derivatives dislocations, Bear Stearns?

Answer: Because stocks do best when things seem the worst.

  • Jon Markman on the Minyanville Buzz and Banter this morning pointed out a Gallup Poll showing that the general public is more pessimistic about the future today than at any time in the last 15 years.
  • In a poll last week asking, "In general, are you satisfied or dissatisfied with the way things are going in the U.S. at this time?" a whopping 74% reported dissatisfaction, while only 24% reported satisfaction.
    Click to enlarge:
  • By comparison, Markman noted that in January 2000 69% of Americans reported they were "satisfied" compared with 28% who reported feeling "dissatisfied."

3. Who Cares? Part II

Question: Why is it lenders don't really seem to care about anything - subprime mortgage woes, potential derivatives dislocations, Bear Stearns?

Answer: Because of a seemingly endless supply of cheap money.

  • This is generally what is meant when someone says "excess liquidity."
  • What does such availability of money look like? How does it influence asset prices?
  • Consider the following from a recent Wall Street Journal Op-Ed piece written by Steven Rattner, managing principal of the private investment firm Quadrangle Group LLC: In 2006, a record 20.9% of new high-yield lending went to weak borrowers with at least one rating starting with a "C." So far this year, that figure is at 33%.
  • In recent months, lower credit bonds have traded at a smaller risk premium (as compared to U.S. Treasuries) than ever before in history, Rattner wrote.
    Click to enlarge:
  • America's general mood aside, it helps that "money" today is available in quantities, and at prices, never before seen in the modern-day history of financial markets.
  • Of course, as Rattner pointed out, a mere 0.8% of high-yield bonds defaulted last year, the lowest in modern times.
  • And so far this year there has been only three defaults.
  • By comparison, high-yield default rates have averaged 3.4% since 1970.
  • The result is a familiar cocktail: increased competition among lenders for business resulting in cheaper loans and increasingly relaxed lending standards.
  • Hmmm. Where have we tasted that combination before?

4. Conspiracy of Excess Liquidity Mongers

Yeah, yeah, yeah. Excess liquidity and blah blah asset bubbles blah blah blah.

  • We know what you're thinking: This is just the kind of doomsterism we've come to expect from perma bears, conspiracy theorists and... the Bank for International Settlements?
  • It's true.
  • Conspiracy of Excess Liquidity mongers at the BIS, in its annual report released today, are saying the credibility of central banks around the world may hinge on their response to surging money and credit growth, which is helping fuel asset bubbles, Bloomberg reported.

    "In this environment, there was a moderate tightening of monetary policies in many countries, although overall monetary and financial conditions remained highly accommodative. In part this was due to real policy rates remaining rather low, with associated effects on long-term interest rates. But it was also due to an increased willingness of lenders to advance credit to high-risk borrowers with less onerous conditionality than in the past. While the credit cycle has peaked in the subprime mortgage market in the United States, the expansion has continued in most other areas. As a result, global asset prices either continued to rise or were maintained at unusually high levels."
  • Just last week in Five Things "Defending M3" we noted European Central Bank Jean-Claude Trichet's admonition to fellow central bankers not to ignore movements in money growth.
  • But look, that's just the president of the ECB and the BIS talking.

5. What a Difference a Day Makes

Yesterday we ran across a positively glowing portrait of U.S. Federal Reserve Chairman Ben Bernanke in the New York Times. What a difference a day makes.

  • Today Bloomberg is reporting some in Congress are threatening to take away some of the Fed's power to write consumer-protection rules - a move being characterized as "a blow to Bernanke's prestige."
  • While yesterday the New York Times was busy praising Bernanke for "making them believe" - it's true, as the Times noted, financial markets now accept the Fed's view of the economy and are no longer betting against it - politicians were busy figuring out how to parcel out blame for the "ongoing" housing and subprime mortgage mess.
  • House Financial Services Committee Chairman Barney Frank and Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, are pressing the Fed to make sure lenders treat consumers fairly - a responsibility
    they say it and other banking regulators largely shirked during the housing boom, Bloomberg reported.
  • Fed officials have so far this year been summoned to Capitol Hill six times to answer questions about consumer lending, twice as many as during all of 2006.
  • In a speech last month Bernanke said that while the Fed is "authorized'' to write rules against abuses in lending, "regulators must walk a fine line'' in doing so.
  • Bloomberg notes that Bernanke's description of the Fed's approach brought a rebuke from Dodd.
  • "The chairman misspoke," Dodd said. "The law requires the Federal Reserve to write rules to protect home borrowers.''

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