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Five Things You Need to Know: Housing Off to a Good Start... on Planet Denial; Some Light Wednesday Reading; Large and In Charge; IMF Selling Gold Based on Mr. T Gold Indicator... We're Guessing; Kill Debt Now


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. Housing Off to a Good Start... on Planet Denial

Came across a headline on Housing Starts on the World Wide Interwebanet thing a bit ago that happily concluded the following: "Housing Starts Are Off to a Good Start."

  • Housing starts began the second quarter above the average of the first quarter, the article noted, clearly suggesting that housing will be a much smaller drag on GDP during the coming quarters, it then asserted.
  • Clearly suggesting? Really? Clearly?
  • We must be seeing different reports, because all that has happened is that housing starts increased 2.5% over the prior month's disastrous pace!
  • The Commerce Department reported that housing starts hit a seasonally adjusted annual pace of 1.528 million units, above estimates for a 1.490 million pace.
  • Oh, and March was revised down from 1.518 million to 1.491 million.
  • Also, Building Permits, an indication of future building plans, dropped 8.9%, the slowest pace since 1997.
  • The contortions required to pen the "Housing Starts Are Off to a Good Start" piece are apparent if one considers that Housing Starts are still down a whopping 16% year-over--year, and if one simply looks at the long-term chart below for some perspective.
  • Total Housing Starts, Monthly from 1959 to Present, Not Seasonally Adjusted and Seasonally Adjusted, courtesy of Ron Griess'

2. Some Light Wednesday Reading

When you get some time, take a look at the just released FOMC transcripts from 2001. The Fed releases transcripts of FOMC meetings and conference calls on a five-year lag, and the 2001 transcripts were released yesterday afternoon.

  • Few Americans really understand what the FOMC does when it meets, what the committee discusses, the economic indicators that are considered.
  • These transcripts, therefore, particularly from the meetings during 2001 are pretty eye-opening.
  • To whet your appetite for what you might find, here are a few nuggets from the August 21, 2001 FOMC meeting:
    MR. MCTEER: Based only on the state of the economy and its near-term prospects, a large policy action is called for today. But it's a closer call when we consider the lags and the degree of stimulus already in the pipeline. As for the directive and the bias statement, I don't know whether it's better to speak softly and carry a big stick or to be more diplomatic and say "nice doggy" while looking for an even bigger stick. If the bias statement and the press release weren't already written, I'd say it's going to be difficult to write them this time. [Laughter]
  • After each of the Fed Presidents, the Vice Chair and the Fed Governors have discussed in turn what they are seeing in the economy, Chairman Greenspan discusses his assessment.
  • Also from the August 2001 meeting:
    CHAIRMAN GREENSPAN: Questions for Don? If not, let me get started. I think it's fairly evident, certainly in retrospect, that we are seeing an absorption of very large capital losses throughout the economic system. I don't know whether one would call this a structural adjustment, but it certainly is not what we have embodied in our standard post-World War II econometric models. It's a different sort of phenomenon and it's clearly being engendered by a set of forces that are largely without historical precedent in the post-World War II period.
  • Later in that same section Greenspan notes the Fed's (or at least his) keen awareness of the role of psychology in the markets:
    CHAIRMAN GREENSPAN: What has happened is simply a fundamental shift in the general degree of confidence. In the same sense that expectations were very clearly overdone on the upside, they are being underdone, if I may put it that way, on the downside; and that will continue to be so until the normal cycle, not of the business environment but of human psychology, runs its course.
  • Even more fascinating is how closely the Fed monitors the markets and, in fact, often relies on the markets to carry through their decisions.
  • Take this discussion between Fed President Jack Guynn and Chairman Greenspan on the ramifications of the August easing and possible shift in the policy statement:
    MR. GUYNN: I don't know whether the answer is a phrase in the statement or what. But if we continue to ease and continue to have the balance of risks statement the way it has been, I'm not sure how we will get off that treadmill as quickly as I suspect we're going to want to.
    CHAIRMAN GREENSPAN: I think the market is going to take us off the treadmill.
    MR. GUYNN: I hope that's the way it's done.
    CHAIRMAN GREENSPAN: In fact, if we could actually arrange it, that would be the ideal way. In other words, the ideal way would be that we don't shock the market but that suddenly we get the federal funds futures rates flattening out because the data are beginning to look better. And at the moment I see nothing to prevent us from doing that.

3. Large and In Charge

Who's in charge of the market now? Relative strength charts are pointing to Large Cap stocks and the S&P 500 over the Russell 2000.

  • Going back to January 2000, the performance of the Russell 2000 has dwarfed that of the S&P 500.
  • The Rusell 2000 has returned a hefty 61.3% since 2000.
  • However, if you happen to be a perpetually-bullish stock investor with a penchant for indexing to the S&P 500, you are probably quite disappointed.
  • Since 2000 the S&P 500 has returned a meager 2.2%, far underperforming cash and T-Bills.
  • If you were fortunate enough to catch that Russell 2000 small cap over large cap train it's tempting to become a little too comfortable sticking along for the ride, even as a growing number of signs point to a shift well underway.
  • Year-to-date the S&P 500 is up 5.8% compared to the Russell 2000's 3.4%.
  • And year-over-year the S&P 500 is up 16.2% compared to the Russell's 10.4% return.
  • But how does one know which group to overweight?
  • Here is a chart showing the relative strength of the S&P 500 versus the Russell 2000 on a point and figure basis.
  • The chart recently broke a triple top and that tells us the relationship is now definitively in favor of the S&P 500 performance over Russell 2000 performance.
  • Still other views of this changing relationship comes to us from Richard Rhodes, Editor/Publisher of The Rhodes Report.
  • Yesterday afternoon he forwarded us three charts with some interesting perspectives:
    The first is the SPY and the IWM daily chart
    The second is the chart of the IWM
    The third is the Russell 2000 ratio chart

4. IMF Selling Gold Based on Mr. T Gold Indicator... We're Guessing

IMF director, Rodrigo Rato, announced that the institution will sell 400 tons of its gold reserves in coming days to help defray a drop in income, according to Prensa Latina, one of the few news sources bothering to cover the sale.

  • The sale of gold was one of the measures recommended by an independent panel that included former president of the US Federal Reserve, Alan Greenspan.
  • The 400 tons of gold the IMF will sell represents one-eighth of the 3,217 tons of gold the institution holds in its reserves.
  • The IMF reserves are valued at around 68.4 billion dollars at current prices.
  • Below is the current chart of gold with Minyanville's proprietary (this means YOU, Barron's!) Mr. T Gold Indicator overalaid.
  • Although not stated overtly, the IMF is probably concerned over the debut of Mr. T's Snickers bars commercials advising folks to "Get some nuts!"

    Minyanville's proprietary Mr. T Gold Indicator:

    1).jpg" width="395" />

5. Kill Debt Now

The cover story of BusinessWeek this week picks up the demonization of easy access to credit
meme we mentioned in yesterday's Five Things.

  • These articles pretty much write themselves... and we can expect to see more and more of them repeated over and over again as social preferences shift toward a repudiation of credit and debt.
  • What we find more interesting than the articles themselves, however, are the Online comments by readers.
  • Here we can see the battle of competing attitudes play out in real time.
  • For example, some readers like "Rogelio" are already well on their way toward adopting anti-credit attitudes:
    "I just said NO! No,to the new bauble that I really did not need. No, to the new car when my old one is doing just fine. I discovered that stuff did not make me happier but paying for the stuff sure as hell made me unhappy."
  • "Tomcat" notes, "If everyone lived within their means, the economy would implode. Remember when you were a kid 50 years ago and being thrifty was a virtue?"
  • Indeed. Tomcat's view might be interpreted as one where social action over the past 50 years has driven the change in social mood.
  • Put another way, over the past 50 years has the embrace of credit and debt been the result of a structural shift in finance? Or has social mood made possible the structural shift in finance?
  • The question is an important one. Socionomics takes the side that social mood motivates changes in social action, not the other way around.
  • It's grounded in the belief that human's have an unconscious herding impulse which leads to the emergence of social trends.
  • These trends help shape both the tone and character of social action.
  • Reader "smendler" asks: "Will the system decide to rein itself in BEFORE it engenders a violent response from the poor - or AFTER? Human beings, after all, have their limits."
  • The question itself is rooted in shifting social mood.
  • The tone and character of it speak volumes about where we are currently with respect to social mood, and where we are probably headed.
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