Tuesday, April 15, 2008

Inflation Hot Hot Hot/Housing Poll

Good late afternoon!

What a choppy day in the markets. The data was mixed. On the positive side J&J had a nice quarter and Intel hit earnings after hours tonight. We are very lucky that we have strong global growth heading into this downturn.

Who knows where we would be right now without Chindia and their exploding middle classes consuming everything in sight along with many countries building huge infrastructures. Global companies like the two above should be able to hold things together as the US economy slows to a trickle FOR NOW. GE showed on Friday that this global growth story may be showing signs of slowing. Lets see how long this global growth lasts as the US consumer continues to run out of breath.

On the downside today we had ugly an ugly inflation report when the PPI number came out. From Bloomberg:

"U.S. producer prices rose almost twice as much as forecast. Food and energy stoked the 1.1 percent gain in wholesale prices in March, the Labor Department reported today in Washington.U.S.

Excluding fuel and food, the producer-price index increased 0.2 percent, as forecast. From a year before, producer prices climbed 6.9 percent, compared with a 6.4 percent gain in February. Excluding food and energy, the increase was 2.7 percent from a year earlier, the biggest since July 2005.

So far this year, wholesale costs are up 10.2 percent at an annual pace compared with 8.4 percent at the same time last year. The core rate has increased at a 5 percent annual pace compared with 2 percent in the first three months of 2007.

Traders pared their estimate of the odds of a half- point Fed rate cut this month to 24 percent from 42 percent, futures prices showed. ``the Fed is clearly confronting some unpleasant inflation numbers,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland."

My Take:

This was a big number. Inflation basically rose on goods twice as fast as what was forecasted. This is what happens when the Fed drops rates and throws our currency to the wolves. Our pricing power is dropping at a rapid pace. What was interesting to me was how the bond market reacted. The traders in the bond market reduced the chances of a .50 point cut from the Fed this month from 42% before the PPI number to only a 24% chance after the PPI.

Some advice. Never bet against the bond market. They almost always get it right. So according to them the Fed may soon change its tune. The rate cutting is about over folks and the Fed will be forced to address the inflation issue. The bond market is starting to price this in.


Because inflation could kill the consumer. Americans are losing jobs due to the bad economy and their annual wage increases are not keeping up with the rise in the price of goods(see yesterdays wage chart). As a result, we are getting poorer every month because we have less money to spend after paying our bills that continue to rise month after month.

This will have many repercussions including higher mortgage rates because money will be more expensive to borrow. This will hurt financials as the banks spread on rates shrinks which then hurts profits . This will not be good for housing.

By the way, don't you love how the government takes out food and fuel when they come up with these inflation numbers? This is so ridiculous. That's like asking me to rate a dinner at a restaurant minus the appetizer and the main course. If I gave it a 4 Star rating it wouldn't mean much would it. Yet the talking heads on CNBC cheer when the number comes out in line with expectations like it did today.

The USA Today/AP Housing Poll:

I wanted to briefly discuss a poll of 1000 Americans and their thoughts on the housing woes that was in the USA Today. Some of the results of the poll:

"The Associated Press-AOL Money & Finance poll found that more than a quarter of homeowners worry their home will lose value over the next two years. One in seven mortgage holders fear they won't be able to make their monthly payments on time over the next six months.

Sixty percent said they definitely won't buy a home in the next two years, up from 53% who said so in an AP-AOL poll in September 2006. At the same time, just 11% are certain or very likely to buy soon, down from 15% in 2006.

The biggest worriers are those expecting to buy soon. Of that group 43% frets that their home's value will drop in the next two years, compared with 25% of those not expecting to buy shortly.

Gus Faucher, director of macroeconomics for Moody's Economy.com, a consulting firm, estimated that 9 million homeowners owe more on their home than it's worth. "

My Take:

Well I am glad I am not selling a house!! We have a long ways to go with the housing downturn when 89% of Americans don't plan on buying a house soon. The other number that caught my eye was 1 in 7 homeowners are worried they won't be able to make a payment within the next 6 months. That's almost 15%! Yikes!! Imagine a 15% default rate on all mortgages?

Any bottom callers just need to look at these stats to realize we are still in the early innings of the housing time bomb. With mortgage rates potentially rising due to a potential rate rising Fed reacting to inflation, these stats could get worse IMO.

Another big inflation number is out tomorrow when the CPI comes out. Stay tuned!

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