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Five Things You Need to Know: Kiwi Surprise; Oh, THOSE Rising Interest Rates; Runaway Bull Market?; NAR Warns Now May Not Be Such a Great Time to Buy a Home After All; President Bush Appoints Czar Czar to Oversee Growing Number of American Czars


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. Kiwi Surprise

In the high-flying world of global central bankers, only one plays the game the way it was intended when James Naismith nailed a peach basket to the wall of a Springfield, MA gymnasium in 1891. It's the Reserve Bank of New Zealand's world. We're just living in it.

  • The Reserve Bank of New Zealand offered a bit of a surprise this morning, raising the official cash rate to a record high 8% while warning of upside risks to inflation.
  • New Zealand's dollar is the best-performing of the 16 most- traded currencies tracked by Bloomberg over the past 12 months, gaining 20% against the U.S. dollar and 28% against the yen, the news service reported.
  • New Zealand's currency has been a favorite target of the carry trade, where investors can borrow in a cheaper currency, such as the yen, and invest in a country like New Zealand where they can receive a higher yield.
  • Ok, but what's so special about New Zealand's Reserve Bank?
  • Unlike the United States Federal Reserve, the Reserve Bank of New Zealand does not have elements of private ownership.
  • The Reserve Bank does not have shareholders and is not a government department.
  • It is 100% owned by the New Zealand Government, with any extra revenue that the Reserve Bank makes going back into the Crown accounts.

2. Oh, THOSE Rising Interest Rates

This morning with the yield on the benchmark 10-year Treasury jumping well above 5%, the Financial Times helpfully pointed out that in the U.S. bond yields were rising because of "growing evidence of the resilience of the U.S. economy."

  • True, rising bond yields may to an extent reflect the re-pricing of interest rate expectations given the rate hike in New Zealand and the European Central Bank's hike on Wednesday, but there is also another not-so-small matter to consider.
  • We are conditioned to expect rates to move higher as the economy grows, a natural response to an increased demand for credit.
  • But what if interest rates were to actually increase as the economy slows?
  • Could that happen?
  • What if the predominant owners of U.S. debt - Asian Central Banks - were to find themselves with less money as a result of a slowing U.S. economy and consequently a consumer cutting back and purchasing fewer cheap (or not cheap, see yesterday's Five Things on Chinese labor) Chinese goods?
  • Absent a new buyer of U.S. debt, the net result would be a slowing economy with rising rates, would it not?

3. Runaway Bull Market?

The Time for Honoring Yourself Will Soon Be at an End

The difficulty in equities since 2003 has been having the discipline to remain involved. The point and figure bullish percent indicators have been helpful to some extent, but even those indicators for the S&P 500, NYSE, Nasdaq and Russell 2000 have occasionally reversed to negative (even if only briefly) and the challenge has been transitioning back into a more aggressive equities posture when they have reversed back to positive.

For example, the S&P 500 bullish percent since reversing to positive in March 2003 has reversed to negative eight times. It's currently at 78%. Moreover, of the 50 months that have transpired since March 2003, this bullish percent has spent at least 28 of those months above the elevated risk level of 70%. And it's never once fallen below 48%.

One of the common themes I hear is that "this market continually makes me feel foolish." Indeed. I can relate. But why? Why is it that this market makes so many feel so foolish? I have at least a partial answer.

Take a look at this chart. It's a percentage-based (I used a scale of 3%) point and figure chart of the S&P 500 going back to 1999.

There are a couple of things to take away from this chart.
1) There have been no pullbacks (using the 3% scale) for this chart since January into March of 2003. None. Zero. Nada.
2) This move off the 2003 lows has been unprecedented.

Click to Enlarge

The "why?" of this chart is certainly something interesting to consider, but is knowing, for example, that this "unprecedented run" is concurrent with an "unprecedented run" in M3 any consolation? I doubt it. The time for this market honoring itself will one day be at an end. It is inevitable. The question is the timing of the inevitability. For now, there are few signs that time is anywhere in the immediate future. The reality is that demand remains firmly in control of this market.

4. NAR Warns Now May Not Be Such a Great Time to Buy a Home After All

The National Association of Realtors woke up this week and discovered that something may be amiss in the U.S. housing market.

  • The NAR said yesterday the trade group now expects sales of existing homes to drop 4.6% this year, more than double the percentage decline they predicted just two months ago.
  • New home sales are expected top decline 18.2%, compared to expectations of a 14.2% decline just two months ago.
  • And prices? The group said it now fears the median price of existing homes, which comprises 85% of the market, to fall this year for the first time since the 1960s when the group first began tracking it.
  • The group expects the median price for existing homes to drop 1.3% this year, to compared to April forecast of a 0.7% decline.
  • Lawrence Yun, NAR senior economist, was valiantly unbowed, however.
  • "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year," he said while quickly hitting the Windows key and simultaneously holding down "M" on his keyboard to hide the browser window on his monitor that was searching for new jobs.
  • "It's important to keep in mind that all real estate is local," he added while strategically moving the coffee cup on his desk to cover up the Washington Post Help Wanted ad pages with the Financial Analyst/Economist Wanted ad circled.
  • "Many markets are expected to have higher sales and strengthening prices during the second half of this year," he noted while pretending to accidentally knock a stack of his newly-printed resumes off his desk.

5. President Bush Appoints Czar Czar to Oversee Growing Number of American Czars

President George W. Bush on Thursday appointed a "Czar Czar" to oversee the growing number of American Czars.

  • The appointment of Czar Czar, if approved by the Appointment Czar, would create a position to oversee the many policy czars now involved in a wide range of public administration.
  • in May the White House announced the creation of a new War Czar to oversee the war in Iraq.
  • The new War Czar, however, will report to the Czar Czar if the position is approved, which makes the position possibly redundant, according to the Government Waste Czar.
  • Also reporting to the Czar Czar would be the Drug Czar, Trade Czar, Education Czar, Energy Czar, Food and Safety Czar, Transportation Czar, Terrorism Czar, Homeland Security Czar, Intelligence Czar, Treasury Czar, Privacy Czar, Health Care Czar, AIDS Czar and Subprime Mortgage Czar.

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