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Five Things You Need to Know: Housing Starts Decline "Actually a Positive"; NAHB Index "Stabilizes"; ECB Crosses the Rubicon; Moody's Warns Corporate Defaults to Increase; We Might Be Able to Put a Little Something On It


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


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Housing Starts Decline "Actually a Positive"

Housing starts dropped in November and permits for future construction fell to a 14-year low, according to the Commerce Department.

  • Privately-owned housing starts in November declined 3.7% for the month, not quite as bad as forecast, but still 24.2% below November 2006.
  • Building permits in November were 1.5% lower and 24.6% lower year-over-year, hitting a 14-year low.
  • But why the better-than-expected decline in privately-owned housing starts?
  • Because of a small rise in multi-family building, probably to "take advantage" of increased demand for apartment dwellings thanks to the housing collapse.
  • The key single family number fell 5.4%, however, to its lowest since 1991.
  • On the bright side, at least one economist said the drop in homebuilding is "actually a positive" because it helps the market "come back into balance."
  • Seriously.
  • So, we got that going for us, which is nice.

2. NAHB Index "Stabilizes"

In addition to the decline in housing starts, which we are told is actually a positive, also going for us is the good news that home builder sentiment stabilized in December.

  • The bad news is that it stabilized at a record low.
  • The National Association of Home Builders said yesterday its NAHB/Wells Fargo Housing Market Index was unchanged at 19 in December, the lowest level since the index began in 1985.
  • On the bright side, the index of sales expected in the next six months rose to 26 from 24, but that's down from 49 a year earlier and from 53 in February.
  • Readings below 50 indicate more builders view market conditions as poor than favorable.
  • Meanwhile, the prospective-buyer traffic measure fell to 14 from 17, below 23 a year ago and the 2007 high of 29 set in February.
  • "Today's report shows that builders' views of housing market conditions haven't changed in the past several months, and there clearly are signs of stabilization in the HMI," NAHB Chief Economist David Seiders said.

3. ECB Crosses the Rubicon

Last night the European Central Bank injected an unprecedented $500 billion into the banking system as part of a global effort to ease gridlock in the credit market, according to Bloomberg. How significant is this and what does it mean?

  • The (UK) Times put it this way: "Europe's central bank crossed the Rubicon of monetary policy."
  • Why the Rubicon?
  • Because the ECB, frustrated that previous liquidity injections, offered the loans at below market interest rates.
  • The ECB offered "unlimited funds" on a two-week basis at an interest rate of 4.21% – significantly below the market rate before the statement, about 75 basis points lower to be exact.
  • So is this good news? Bad news? Does it even matter anymore?
  • To put it in perspective, as Minyan Peter noted on the Buzz and Banter this morning, $500 billion is an enormous amount.
  • How enormous? It's about 5% of the total U.S. banking system assets.
  • Moreover, the $500 billion loan is through the year-end.
  • What does all this mean? Doesn't liquidity help the problems banks are facing?
  • It would if this were a liquidity issue, but it is not. It's a debt issue.

4. Moody's Warns Corporate Defaults to Increase

U.S. corporate defaults probably will quadruple next year as the number of companies that have lost their investment-grade credit ratings has increased at the fastest pace since 2003, according to Moody's (MCO).

  • Moody's Investors Service predicts companies will default on 4.7% of their bonds in 2008, up from 1% this year.
  • Moody's reduced ratings on 389 corporate issues this quarter, compared with 150
    upgrades, according to data compiled by Bloomberg.
  • Now, keep in mind that while 4.7% is a big increase, it's inline with the historic average of 5% default rates.
  • According to Bloomberg, corporate bonds returned 3.08% in 2007, less than the
    rate of inflation as subprime-related losses forced buyers into government debt as a safe haven.
  • This year is the worst for company debt compared with government securities since 2000, according to Merrill Lynch (MER).

5. We Might Be Able to Put a Little Something On It

Looks like U.S. states might be a little short on pension and benefit payments according to research from the Pew Charitable Trusts (no relation). How short? Oh $731 billion.

  • States have promised at least $2.73 trillion in pension, health care and other retirement benefits for public employees over the next three decades, but have set aside only $2 trillion for pension payments, and only $11 billion is
    available for benefits, the Pew Center on States report released today said.
  • See, look at the pie chart:
  • States still need to come up with about $731 billion to meet their promises.
  • The Pew Center says that's a conservative figure that does not include all costs for teachers and local government employees.
  • The number of people 65 and older is projected to increase by 80% between 2010 and 2030, the report said.
  • Of course, by 2030 about 71 million, or one out of every five people, will be over 65, so any funding shortfall can be easily managed by simply confiscating huge portions of the earnings of anyone under 35.
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