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Five Things You Need to Know: Consumer Confidence Drops Anchor


The Fed is concerned that inflation expectations might become less firmly anchored. That concern is now a reality.


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

1. Consumer Confidence Drops Anchor

This morning the Reuters/University of Michigan Surveys of Consumers showed consumer confidence this month fell to its lowest level since 1980.

More important than the consumer confidence index itself, however, is the survey's tracking of one-year inflation expectations. The Federal Reserve is very concerned about inflation expectations, their theory being that expectations of higher prices leads to... higher prices.

The survey's one-year inflation expectations gauge jumped to 5.2% from 4.8% in April. That's the highest level since February 1982.

In the minutes of the March 18 Federal Reserve Open Market Committee meeting, the most recent meeting for which minutes are available, we learned that FOMC "participants expressed some concern that inflation expectations might become less firmly anchored." That concern is now a reality.

2. Fannie Mae Lowers the Ante, Increases the Risk

Fannie Mae (FNM) this morning announced it will stop requiring bigger down payments in regions where home prices are dropping. The policy of requiring higher down payments was adopted in December to reduce risks associated with declining home prices.

Under the new policy, borrowers approved by Fannie Mae's automated underwriting program will be able to borrow up to 97% of the value of their homes, the company said.

Minyanville Professor Scott Reamer notes that at the current pace of decline in housing prices (basis the Case/Shiller Composite) it would take just four months to be underwater on your mortgage with a 3% down payment and six months with a 5% down payment loan.

3. Inside Housing Starts

Speaking of housing, while everyone is busy congratulating themselves on the better-than-expected housing starts, we'll look at the actual data in the release instead of the headlines and note the following:

  • While the total housing starts came in at an annualized rate of 1,032,000, 8.2% above March's revised 954,000 figure, this was 30.6% below the April 2007 rate.
  • Well, one might object, all bottoms have to begin somewhere.
  • Yes, and for housing it will begin with increases in single-family units, the most important datapoint in the release.
  • But looking at this data, single-family housing unit starts in April were actually LOWER than March, 692,000 units versus 704,000.
  • So how did the headline show strength?
  • Multi-family units came in at 340,000 versus 250,000 in March.

There is nothing about this report that can be construed as positive for real estate and housing.

4. Now, It's a Depression!

The CEOs of 50 large U.S. companies saw their compensation fall sharply last year, with direct compensation down 15.8% from the previous year, a study by Mercer Consulting, a unit of Marsh & McLennan found.

That takes the CEO's median direct compensation down to $9.4 million. How will they survive?

5. What Can Big Brown Do for You?

What can Big Brown do for you? If you are United Parcel Service (UPS) he can win the second leg of the Triple Crown tomorrow, keeping hope alive that he'll become the first horse to sweep all three legs of the Triple Crown since Affirmed in 1978.

UPS signed up to become a marketing partner of Big Brown in an agreement with
jockey Kent Desormeaux and IEAH Stables, the group that owns the horse. Exposure for UPS during the Derby, including the 56 seconds in which television viewers were able to see the company's logo on Desormeaux's pants, was estimated at $1.4 million by Joyce
Julius & Associates, according to Bloomberg.

After the death of the filly Eight Belles immediately following the Kentucky Derby, the sport is certainly hoping for some good news. Yum! Brands (YUM), the sponsor of the Kentucky Derby, found itself embroiled in a public relations nightmare.

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