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Five Things You Need to Know: Non-Existing Home Sales; Picture This; China Issues Unvarnished Warning to Paulson, Congress; Assume the Position; Dad Was Right


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. Non-Existing Home Sales

While yesterday's on-the-surface 16.2% (plus or minus 13%) month-over-month increase in New Home Sales provided the backdrop for housing's anti-doom-sayers to take to the airwaves, this morning's Existing Home Sales provided a more sober assessment of the state of housing.

  • Existing-home sales in April dropped to the lowest pace in nearly four years, according to the National Association of Realtors.
  • Home resales fell to a 5.99 million annual rate, a 2.6% decrease from March's revised 6.15 million annual pace.
  • Inventories rose 10.4% at the end of April to 4.20 million, which represents an 8.4-month supply at the current sales pace.
  • The median price for a home previously owned was $220,900 in April, down 0.8% from $222,600 in April 2006.
  • Sales dropped in all regions, down 0.7% in the Midwest, 8.8% in the Northeast, 1.7% in the West, and 1.2% in the South.
  • Minyanville Professor Scott Reamer noted that, "Existing home sales, prices, and inventories data continue to suggest that the housing bust is still developing (common sense and history also say same)."
  • "The hit to median prices has not actually manifested suggesting the consumer balance sheet impact (most important for the credit cycle on the consumer side) has not really even registered yet," he added.

2. Picture This

It's easier to "see" the unfolding of real estate in the following Bloomberg charts:

First is the Existing Home Sales Total chart showing the continuing decline... no signs of stability here...

While, unlike yesterday's New Home Sales price plunge, prices for Existing Homes as shown in this chart have not quite "adjusted" to the decline in total Existing Home Sales...

A situation that the continuing rise in Existing Home inventories suggests won't last much longer, after all this remains an economic issue tied to the simple laws of supply and demand.

3. China Issues Unvarnished Warning to Paulson, Congress

We're surprised this isn't making more waves today. Chinese Vice Premier Wu Yi said the yuan isn't the cause of the U.S. trade deficit and a large appreciation in the currency would hurt China's economy.

  • "China will continue to reform its exchange rate on its own initiative, gradually,'' Wu said at a dinner in Washington.
  • In other words, U.S.Treasury Secretary Henry Paulson can encourage a faster revaluation of the yuan all day, but China isn't listening.
  • With respect to trade, about 85% of China's trade surplus is generated by foreign companies exporting products from China that are no longer made in the U.S., such as textiles, shoes and furniture, Wu said, according to Bloomberg.
  • Wu added that "Imposing protectionist measures would only harm both nations," and said China would continue to "guard against currency risks."
  • Why is that important?
  • Consider what took place on Wednesday.
  • In a letter given to Wu when she visited Capitol Hill following two days of talks with Bush administration officials, the House of Representatives Ways and Means Committee wrote, "The committee has serious concerns about China's massive and constant interventions in the currency markets. Those interventions keep the value of the Chinese currency, the renminbi, artificially low -- making exports from China relatively cheap and imports into China relatively expensive."
  • Ways and Means Committee Chairman Charles Rangel, (D-NY) told reporters after meeting with Wu and senior Chinese officials that he planned to move legislation aimed at China's currency practices.
  • Wu's comments emphatically show that China 1) has no intention of heeding Paulson's admonition to revalue the yuan at a faster pace, and 2) will continue to intervene in currency markets as it sees fit. Naturally Congress, understanding little about the ramifications of protectionist measures, will push ahead with legislation that President Bush may be forced to try and veto.
  • "There is a bipartisan sentiment in Congress that we're not being tough enough," said Rep. Tim Ryan (D-OH), co-author of a bill that would allow the United States to levy duties against China's exchange-rate "subsidy."
  • Chen Xingdong, chief China economist at BNP Paribas SA in Beijing, summed up the reality of the situation in comments to Bloomberg, "The U.S. government also doesn't want a trade war with China. If that really happens, the losses for the Americans might not be lower than those for the Chinese.''
  • As difficult a reality as this may be for many to grasp, the United States simply isn't calling the shots on this one.

4. Assume the Position

U.S. airlines including AMR Corp.'s American Airlines and Continental Airlines would be able to cut their employee pension contributions by $2 billion under a provision written into an Iraq war spending measure, according to Bloomberg.

  • How, one might ask, can these companies, which have been in and out of bankruptcy, manage to cut their pension obligations?
  • Simple, the bill approved by the House of Representatives would permit the airlines to assume an 8.25% annual discount rate in calculating the value of their pension.
  • They currently assume an annual discount rate of 6%.
  • What does that mean?
  • It means they're going to be allowed assume an increase in the assumptions they are making about returns to their pension funds.
  • If they are allowed to assume higher rates of expected returns, then their pension payments will be lower.
  • American and Continental lobbied for the change after rivals Delta and Northwest won permission to use a higher rate, 8.85%, in a 2006 law, Bloomberg said.
  • Ironically, the reason the airlines pension costs have grown in the first place is because of stock market declines, interest rate declines and an increase in retirees.
  • In other words, they assumed too high a rate of return in the first place.
  • Similarly, the lesson here for individual investors is if your retirement plan funding obligations grow due to stock market declines, then you just need to raise your assumptions for expected future returns!

5. Dad Was Right

Men in their 30s today are worse off than their fathers' generation, according to a new study by John Morton of the Pew Charitable Trusts.

  • In 2004, the median income for a man in his 30s, considered a good predictor of his lifetime earnings, was $35,010, 12% less than for men in their 30s in 1974 when adjusted for inflation, the Wall Street Journal noted.
  • The significance of the study is that it shows that a decade ago, the median income for men in their 30s was 5% higher than 30 years earlier.
  • In other words, while your father was doing considerably better than his father in the pay department when he was your your age, you're doing worse than your father, which means that your father was absolutely right when he warned you back in 1982 that you had better cut that ridiculous mop of long hair, get rid of that stupid Army jacket and those hiking boots, turn off that music and do some homework for once, mow the yard, stop hanging out with those no-good slacker friends of yours drinking beer, smoking the pot and staying out all night at those AC/DC concerts, or you're going to wind up making 12% less than I make when you're my age.
  • Dang. He was right!
No positions in stocks mentioned.

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