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Five Things You Need to Know: It's Fed Day; Ongoing Subprime-Contained Housing "Adjustment" Now Contained to Luxury Builder Toll Brothers; And Rich New York City Suburbs; The Return of Public Works Projects; Gordon Gekko to Return as Hedge Fund Manager


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


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

1. It's Fed Day

It's Fed Day and while no one expects any change in formal policy, it's the statement that may get some adjustment... and cause some confusion.

  • Here's where we stand heading into today's meeting:
  • Sub-3% (annualized) and slowing Real GDP growth over the past year.
  • Slowing productivity measured year-on-year.
  • A consumer making ends meet by taking down revolving (mostly credit card) debt in March by the most in four months.
  • Price paid component of ISM spiking to an eight-month high, yet still no commodities reported in short supply.
  • Meanwhile Core PCE came in flat for March.
  • And Personal Spending rose less than expected.
  • Even as Core CPI was flat in the face of record high gasoline prices and rising food prices.
  • In March the the Fed adopted what we described as a "Timid & Indecisive" bias.
  • In less than 60 days the FOMC moved from "signs of stabilization have appeared in the housing market," to "the adjustment in the housing sector is ongoing."
  • The Fed noted that economic indicators were "mixed" and that future policy adjustments will "depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
  • So what happens today?
  • The cross-currents are many, inflation is moderating in the most recent month-on-month data, though still above the Fed's 2% "comfort zone," but so too is economic growth.
  • So we view the probabilities that the Fed statement will provide anything other than more confusion today as minimal at best.
  • Bottom line: inflation moderating, growth moderating, housing adjustment ongoing, data dependent.

2. Ongoing Subprime-Contained Housing "Adjustment" Now Contained to Luxury Builder Toll Brothers

Speaking of the "ongoing housing adjustment," yet more news of spreading housing containment hitting the tape this morning from a variety of sources.

  • First off, luxury home builder Toll Brothers (TOL) - in contrast to those subprime home builders where the housing adjustment is, you know, reputedly contained, yet ongoing - this morning said it is withdrawing its formerly weak FY07 outlook due to worse than expected market conditions.
  • The builder reported a 19% decline in revenues for its second quarter.
  • And just to quash any optimism, the company said it saw a 25% drop in net-signed contracts during the quarter.
  • The cancellation rate for the quarter was 19%, compared to 9% a year earlier.
  • "Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets," chairman and CEO Robert Toll said.
  • Toll said the company's traffic in the second quarter, on average, was flat on a gross basis, and down approximately 20% on a same store basis from last year.
  • Yet, "there are some bright spots", Toll said, including New York City and related suburbs.

3. And Rich New York City Suburbs

In still more signs that the ongoing subprime-contained housing "adjustment" is well contained, the U.S. housing slump adjustment has hit New York City's richest suburbs, according to Bloomberg.

  • The wealthy suburbs just outside of New York City in New Jersey, Connecticut and New York's Westchester County, previously thought immune from the spread of the ongoing subprime-contained housing adjustment are now experiencing an adjustment of their own, according to Bloomberg.
  • Prices fell as much as 18.8% this year in 15 of the 24 areas in which data was collected.
  • Bloomberg blames, among other things, the tightening of credit in response to rising subprime defaults.
  • Interestingly, Ara Hovnanian, CEO of Hovnanian, New Jersey's largest homebuilder, blames psychology.
  • "In these markets, there aren't going to be buyers concerned about subprime mortgages, but psychologically it's one more bit of news that's negative and it causes hesitation on the part of buyers,'' Hovnanian said.
  • Ah yes, psychology... inflation's mortal enemy.
  • David Smith just sold his 11,000-square-foot Westport home on two acres for $5.9 million - about $600,000 less than originally listed, Bloomberg reported.
  • He said he took a loss. "It's a buyer's market now,'' Smith, an investor
    based in London, told Bloomberg.
  • "There's so much to choose from, you don't get them to focus. Their attitude is, the longer I wait, the less I have to pay.''
  • Deflation (de-fla-tion) [di-fley-shuh n] - noun
    1. a fall in the general price level or a contraction of credit and available money.
    2. psychologically, a determination to delay purchases due to belief the longer one delays, the more prices will fall.

4. The Return of Public Works Projects

Finally, some good news! A report to be released today by the Urban Land Institute and Ernst & Young LLP says U.S. airports, roads, rail, bridges and other transit infrastructure are deteriorating across the U.S. because of insufficient investment.

  • The report, entitled "Infrastructure 2007: A Global Perspective," says the failure to address the deterioration in basic infrastructure could lead to disasters on par with Hurricane Katrina, the Wall Street Journal reported.
  • "Wait, we thought you said "Good" news. How could that possibly be good?"
  • Easy. During economic depressions caused by mal-investment and magnified by intervention and perversion of the normal business cycle, widespread layoffs can create vast societal upheaval and even riots as displaced workers and former homeowners turn desperate in order to feed their families and get by.
  • Fortunately, all this deteriorating infrastructure is perfect for expensive, government-paid public works projects!
  • Remember the Public Works Administration (PWA)?
  • The PWA of 1933 was a part of the first New Deal agency that contracted with private firms for construction of public works, i.e. building and repair of infrastructure projects.
  • The PWA was created by the National Industrial Recovery Act in June 1933 in the midst of the Great Depression.
  • More than $3.3 billion dollars was allotted in 1933 to be spent on infrastructure projects as a means of providing employment, stabilizing purchasing power and improving public welfare.
  • Between July 1933 and March 1939 the PWA funded and administered the construction of more than 34,000 projects including airports, large electricity-generating dams, Navy warships, bridges, nearly three-quarters of all new schools and one-third of all new hospitals.
  • Streets and highways were the most common PWA projects.
  • Fast forward 75 years.
  • The U.S. faces a $1.6 trillion deficit in needed infrastructure spending through 2010 for repairs and maintenance, the Journal says.
  • You know that pothole your car service driver hit on the way into work today that caused you to spill coffee on your Zegna suit?
  • Cheer up! With any luck, you'll be shoveling asphalt into that gaping hole yourself in a few years.

5. Gordon Gekko to Return as Hedge Fund Manager

You'd like to think we just totally made that headline up, wouldn't you? Sorry, it's real.

  • According to the New York Times, Gordon Gekko is indeed returning to the silver screen... this time as a hedge fund manager.
  • Fox movie executives quietly sealed a deal to revive Gordon Gekko for a sequel to the 1987 (yes, that 1987) film Wall Street.
  • The title of the movie will reportedly be "Money Never Sleeps," one of Gekko's words of "wisdom" from the original film.
  • Oliver Stone will not direct the sequel, the Times said, although the producers and the movie's writer reportedly sought his services.
  • Michael Douglas will, however, reprise his role as Gekko.
  • "Speaking by telephone from Bermuda, Mr. Douglas said he wouldn't mind if he never had "one more drunken Wall Street broker come up to me and say, 'You're the man!'," the Times said.

    Money Never Sleeps

    "Buddy boy, those BHP CDS spreads widen by one more basis point... I promise I will shoot you in the head!!!!"
No positions in stocks mentioned.

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