Hey, It Worked For Auto Companies, Right?!?
August 24, 2005: Today's Events:
The auto companies have done just so well with a simple formula: cut prices, cut prices, cut prices, and keep unit sales high. Really, how can you argue with the success that GM and Ford have had...sure, their debt is junk (GM and Ford were both downgraded to junk today by Moody's) but what great sales! How they're supporting the economy!
Now the housing market is taking a page from that book. Today, New Home Sales for July shot to an all-time high of 1.41mm units. But the median sales price declined, so that the year-on-year change in prices is -4%. That's the worst price performance since 1992, during the credit crunch, but such a statement doesn't do justice to the reality. The chart below really is worth a thousand words:
The series is not seasonally adjusted, but the seasonals (as you can see from the lack of a clear periodicity from the chart) are not huge anyway.
Predictably, the huge rise in sales was taken as a positive by the market chatterboxes; when they commented about the price change at all they typically said something like "fewer sales of higher-priced homes pushed the sales prices lower." But that's not right. The mean sales price fell 1.5% year-onyear (and actually rose for the month). If the decline in price was happening because of fewer sales in the upper tail, the mean price would fall more than the median price. The fact that the median price is falling faster than the mean price is a sign that the sales prices of midprice homes are falling faster than higher-priced homes. I'd argue that's a shot across the bow of the housing market.
And it makes sense: speculation isn't happening in the McMansion market; it's happening in the condo, townhouse, and single-family-home construction market. If the housing markets are softening, the first place I would expect to see softness is in the middle of the price distribution.
So of course unit sales are high! It's exactly what auto companies have done: highly levered (like homeowners and especially spec buyers), they need to keep the cash flow going even if they have to cut prices. The difference is that the auto companies are not building cars on spec (at least, not much), so the overhang can clear with a month or two of sales. The overhang in housing looks to be much worse.
The intellectual pliability of bullish economists is increasing again: the Durable Goods figure this morning (which actually came out well before New Home Sales, but the latter was a more-fascinating release) showed a fall of -4.9%, and a hefty -3.2% fall ex-transportation. What we were told by blasé economists today was that a big fall in the first month of a quarter after a big rise in the last month of a quarter is the "usual" pattern. Er, yeah...it's called "channel stuffing," and it is a pretty normal occurrence. But if it's so normal, why wasn't it in your forecast yesterday?
But despite weak durables and two housing numbers with disturbing subtexts, equities started the day by rallying off the overnight lows and bonds sagged. Rising oil prices finally started to get the market's attention once the front contract went to another alltime high (Crude closed +$1.61 at $67.32), and gasoline prices spiked 6.660 cents to $1.8603.
As an aside, apparently the State of Hawaii is trying to get their citizens into good aerobic condition: the Public Utilities Commission in Hawaii is going to implement caps on wholesale gasoline prices beginning September 1st. Of course, anyone who has spent more than ten minutes in an economics class is aware that caps have no effect if set above the market-clearing price, and cause shortages if set below the marketclearing price. The result will either be nothing, or a bunch of walkin' Hawaiians.
In addition to the continued rally in energy prices (which helped press TIPS breakevens 5bps wider at the front of the curve and 2-4bps wider for the rest of the curve), news that the New York Fed has "invited" fourteen leading dealers in credit derivatives to participate in a "discussion" about the backlog of unconfirmed trades in that market sent chills up the backs of investors who were not aware that a sloppy trade confirmation process is not at all unusual on Wall Street today (which doesn't make it acceptable, of course).
The 10y note rallied back to end with modest gains at 4.176%; the S&P dropped -0.64% to a new month-and-ahalf low.
I suspect Thursday will be a bit calmer than today, although this may be a preview of the sort of volatility we'll see in September. The main economic data includes Initial Claims (Consensus: 315K), but this will not move a market that was reluctant to rally on a sharp decline in non-defense capital goods exaircraft.
Be aware that Chicago Fed President Moskow is speaking tonight on the topic of the economy, and if recent Fed whispers are any indication he may well be somewhat hawkish. But with the backdrop of an economy that's weakening and data that are beginning to show it, if the bond market weakens on his remarks I suspect it will create a good entry point. As we get closer to September, I get more aggressive about buying dips since the seasonal pattern of interest rates is so unambiguously bullish from September through October. The bond market is still in the middle of the range, but I expect it to continue to inch higher for now.
Question of the Day: What modern convenience is Don Wetzel credited with inventing in 1968?
Answer to Prior Question: The question was, "Another question about a journalist: what do former reporter Michael Finkel of the New York Times Magazine and Christian Longo have 'in common,' sort of?" Well, Christian Longo was a murderer who killed his wife and three children in Oregon and fled to Mexico, where he hid out for three and a half weeks under the assumed identity of...Michael Finkel, who had been fired by the Times in 2002 for fabricating facts in a story about child laborers on chocolate plantations. Finkel found out and later wrote a book about Longo and his own deceit.