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Five Things You Need to Know: Retail Sales; Import Prices; Jump in Rates Somehow Boosts Mortgage Applications; Tighter Lending Standards Hurting First-Time Mortgage Defaulters; "The Man" Extends Record Streak of Giant Pay Increases!


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. Retail Sales

Retail sales in the U.S. jumped by the most in more than a year last month as Americans flocked to shopping malls, undeterred by record gasoline prices and falling home values, determined to empty their wallets of all traces of dollar-denominated paper and plastic.

  • Retail sales increased 1.4% last month, after falling by a revised 0.1% in April, up from the previously reported decline of 0.2%, the Commerce Department reported.
    Retail Sales (month-over-month)
  • Retail sales are now running at a plus 5 % pace year-over-year.
    Retail Sales (year-over-year)
  • The increase was broad-based with clothing and clothing accessories stores up 7.8% and sales of nonstore retailers up 7.7%, the report said.
  • Even retailers that had previously seen declines related to housing weakness showed increases, with furniture retailers' sales rising 0.3% and building material and garden supplies dealers rising 2.1%.
  • No categories showed decreases in the report.
  • But wait, how can this be happening? Aren't rising prices for gasoline and food combining with declining home prices to conspire against retail sales and consumer spending?
  • Those very questions lead us to today's Number Two...

2. Import Prices

Import prices rose 0.9% in May after the 1.4% jump in April, according to the Labor Department.

  • Expectations were for a more modest increase of 0.2%.
  • Naturally, petroleum was a significant factor, up 2.7% in May, though that increase was far below the 6.6% increase in April.
  • But the report exceeded expectations even ex-petroleum, up 0.5% in May (the largest gain since last November) thanks to a rise in industrial materials such as metals, which increased in price for the sixth month out of seven.
  • Excluding all fuels import prices rose 0.4%, which was the largest increase in nearly a year.
  • Also of note, though undermentioned, capital goods imports were flat, but that follows three consecutive months of declining prices for capital goods imports.
  • Finally, consumer goods-ex automotive prices were again flat in May.
  • The surge in imported inflation should keep everyone on edge ahead of tomorrow's Producer Price Index and Consumer Price Index data.
  • And so we have the "New Conundrum" - consumer spending rising in the face of increasing prices paid for gas and food, and declining prices received for homes and labor.

3. Jump in Rates Somehow Boosts Mortgage Applications

Despite the average rate on 30-year fixed rate mortgages increasing to 6.61% from 6.35% the week before, the number of applications for mortgages jumped by a seasonally adjusted 6.6%, according to the Mortgage Bankers Association.

  • Adjustable-rate mortgages increased to 18.7% of all applications, up from 17.8% the previous week.
  • That's the first increase in three weeks.
  • Worth noting is that rates on one-year adjustable-rate mortgages decreased to 5.48%, the lowest in more than a year.
  • So not surprisingly, the ARM share of activity increased to 18.7% from 17.8% the previous week.
  • The survey from the Mortgage Bankers Association includes only about 50% of all U.S. retail residential mortgage originations, and it doesn't discern multiple mortgage applications, which some suggest have increased dramatically in the face of tighter subprime and Alt-A lending standards.

4. Tighter Lending Standards Hurting First-Time Mortgage Defaulters

Subprime mortgage lenders have tightened credit guidelines so severely they risk squeezing as many 500,000 first-time buyers out of the market, according to the National Association of Home Builders.

  • About 500,000 first-time buyers may be forced out of the market for a new home due to tightened lending standards, according to the National Association of Home
  • The NAHB believes the tighter standards could reduce sales of new homes by 4% and sales of existing homes by 7%.
  • Gopal Ahluwalia, staff vice president for research at the NAHB, told Bloomberg about 2.5 million people are still expected to buy their first homes in this year, but that's down from the 3 million first time buyers in 2005.
  • Toll Brothers (TOL) Chief Executive Officer Robert Toll said the stricter lending standards are affecting affordability at lower price points, according to Bloomberg.
  • "This in turn can and probably does impact the entire housing food chain including some of our potential customers' ability to sell their existing homes.''
  • First-time buyers bought an estimated 26% of newly built homes in 2005, according to an analysis of data from the American Housing Survey, Bloomberg said.
  • In a related story, according to data released yesterday from RealtyTrac foreclosure filings increased 90% year-over-year in May.
  • A jump in foreclosures at a time of year that traditionally is the busiest for home sales means the slide in prices probably isn't over, James Saccacio, chief executive officer of RealtyTrac told Bloomberg.

5. "The Man" Extends Record Streak of Giant Pay Increases!

U.S. chief executive officers are unethical and overpaid, according to most Americans surveyed in a Bloomberg/Los Angeles Times poll.

  • More than 60% of people surveyed say CEOs are "not too ethical'' or "not ethical at all,'' versus 33% who call them "mostly ethical,' the poll revealed.
  • To make matters worse, more than 80% of American surveyed say these villains of industry are grossly overpaid.
  • The median compensation last year for CEOs of S&P 500 companies was $10.8 million, according to Bloomberg.
  • And, the median raise for those CEOs was a whopping 23.8%, according to data compiled by Nell Minow, editor of the Corporate Library, a corporate governance research firm in Portland, Maine.

Five Things Bonus: From the Deparment of "It Can't Happen to Me."

From a Bloomberg/LA Times Survey: more than 80% of Americans say they expect home values in their neighborhood to stay the same or increase over the next six months and only 15 percent are preparing for a decline.

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