December 20, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 42 days before the new Fed Chairman Ben Bernanke takes office and ends the current Fed tightening cycle.

Since June 30, 2004 the Fed Funds Rate (short term) is UP 325 basis points from 1.00% to its current 4.25%. The US Treasury 30 yr. interest rate is DOWN 94 basis points from 5.59% to its current 4.65%.

This morning the long awaited memo from the Comptroller of the Currency was released asking mortgage lenders to be more careful with its lending criteria…..but it also asked the lenders to give comments over the next 60 days. (why??) It is a 42 page document and as usual the government is behind most if not all of the lenders who have already tightened because of a need to show profits and limit loan losses. The only interesting point was made on page 22 where a mention of concentration risk is something that many sub-prime, low doc, no doc, no anything lenders will have to make sure they throw a few “good” loans into the mix to make their overall loan portfolio have at least an appearance of being “healthy”. If Mr. Greenspan had any influence over this memo it would surely have a different look but it appears that with the Fed Chairman only a few weeks from retirement his power has faded and I wonder if he won’t have the same fate as former President Calvin Coolidge who actually walked to the train station after leaving the White House on his last day in office on March 4, 1929. This should put most of you to sleep and if NOT it surely will when the FINAL regulations are released in early March 2006: http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20051220/default.htm

Have you noticed that with the Fed Funds rate at 4.25% and sure to go to 4.50% on January 31, 2006 that we are very, very close to a flat yield curve where all US interest rates are almost the same??? The BIG question continues to be when the new Fed (Bernanke) will begin an easing in monetary policy….one way to make the Fed lower short term rates would be for long rates to drop well below the Fed Funds rate….if the 10 year note goes back to 4.25% it would insure a discussion at the Fed and if we went back to the 4.01% we saw on 8/31/05 it would surely bring much pressure to ease…..I will have my 2006 predictions in the first week of January and I have a few surprises for 2006….

The commercial real estate market continues to sizzle in Seattle as last week another big player announced plans to build a 26 story building without any thought of who will occupy this structure….the story in the Seattle Times had the perfect headline: If they build it, they will come….my answer is…”we’ll see” as the skyscraper won’t be completed until 2008…….. http://seattletimes.nwsource.com/html/businesstechnology/2002686621_equity16.html

For those who play in the stock market over the past 55 years the S&P 500 has been up 0.24% in the last day before Christmas (Friday) and the next three trading days (12/27,12/28, 12/29) versus an average of + 0.035% when analyzing every trading day since 1950.

Not sure where this fits but there was a story in the Greenwich paper last week about the owner of a 31,098 square foot 11 bedroom house and his problems with the local planning and zoning commission. http://www.greenwichtime.com/news/local/scn-gt-home4dec15,0,2344376.story

England has been ahead of the US for a couple of years with interest rate movements and in Sunday’s London Times a member of the Bank of England’s monetary policy committee had a couple of comments regarding future interest rate cuts and voting against the Governor (head)….I wonder if we will see that with our new Fed chief Bernanke..http://business.timesonline.co.uk/article/0,,16849-1937569,00.html

I have often written about the fact that when prices rise supply magically appears and with the price of natural gas soaring around the world it was no surprise to see an article about the Russian gas giant Gazprom preparing to offer gas at cut rate prices to obtain a greater market share. That’s the way companies in the US have gained sales and now we see this happening all over the world. It’s anything but inflationary…… http://business.scotsman.com/index.cfm?id=2427842005

A fascinating article from the San Francisco Chronicle where California farmers are selling their farmland and giving up tax incentives (lower property taxes) to cash in on the super high prices of land. It’s Economics 101 and when prices rise higher than their underlying economic value the owners begin to sell, sell and sell more…….I hope the new buyers have deep pockets and patience because it will be years before these projects are fully developed and ready for end users…..
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/12/12/MNGBNG6N2I1.DTL&hw=more+farmers&sn=003&sc=755

Did you know that 2005 is the worst year for the Japanese yen against the dollar since 1979??? 2006 may be the 2nd worst year and I will have more about that in 2 weeks….

The Santa Cruz Sentinel (yes Santa Cruz has a newspaper, I may be the only subscriber) had an article that said the real estate bubble is only a product of the media’s imagination…..if this turns out to be true…the writer is the only person in the world?? that has this opinion….i’ll pull this article aside for a couple of years……http://www.santacruzsentinel.com/archive/2005/December/17/biz/stories/02biz.htm

General Motors and a possible bankruptcy have been in the news lately as its stock continues to hit multi-year lows. According to a professor at NYU the chances of a BK are only 15% for the next year but 47% within five years…..http://www.bloomberg.com/apps/news?pid=71000001&refer=columnist_levin&sid=ajDXABIp3XQA

Although the US continues to have an out of control trade deficit it really doesn’t seem to matter to foreign investors as the US saw a record monthly inflow on September 2005 and even more incredible is that the last month that we saw an outflow of money was in September 1998. The fear of money leaving the country is nothing more than FALSE EXPECTATIONS ABOUT REALITY (FEAR)…….next year I expect the dollar to remain strong and that will only bring in even more money to our stock and bond markets…..2006 may be the year of the DOLLAR BULL and anyone who stands in its way will surely be gored…….

Finally…..This is one of those nights where I could write all night long….but I won’t for fear of losing readers who like it short and to the point….The Orange County Register had an interesting panel discussion about the housing market and its future direction…..but somehow only published the highlights in the paper…so of course I went online and found the transcript:http://www.ocregister.com/ocregister/money/housing/article_902255.php Remember I read as much as I do NOT to tell me what is going to happen but more importantly to tell me where the players have made their bets….50% of the game is being right on your predictions…but the other 50% is making sure when you are correct that the payoff is BIG enough to offset the predictions that are incorrect…knowing where everyone else stands enables you to calculate a much better risk/reward for your investments…

December 12, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 50 days before the new Fed Chairman Ben Bernanke takes office and ends the current Fed tightening cycle.

Since June 30, 2004 the Fed Funds Rate (short term) is UP 300 basis points from 1.00% to its current 4.00%. The US Treasury 30 yr. interest rate is DOWN 84 basis points from 5.59% to its current 4.75%.

Tomorrow at 11:15am the Federal Reserve (aka Mr. Greenspan) will announce the 13th consecutive increase in the Fed Funds rate to 4.25% and as usual this increase will be accompanied by a statement that the Fed continues to monitor economic conditions and that future changes will be dependent upon inflation, wage growth, etc. The difference this time is that we have only one more increase in Fed Chairman Greenspan’s bag of Fed tricks. (and the bag is almost empty) The only item that is still to be determined is what history will say about Mr.Greenspan’s 18 years as Fed Chairman. If the gold market is used as a barometer of inflationary expectations and Fed policy Mr. Greenspan would receive a failing grade on his final exam. With gold reaching a 24 year high of $541 before backing off to $525 the world is watching and wondering whether we are going to repeat the late 70’s/early 80’s bull market that saw gold reach $850. Demand from China and India have increased and a desire to diversify out of the dollar (why??? it keeps rising) by middle eastern oil producers has made gold the new bull market for 2005-06. Let’s not forget that mutual funds have invested $15 BILLION in commodity funds in just the last five months as they try and ride the wave of higher metals prices and have broken down the door to get in on the action…..my question is: what happens when they try and get out of these positions??? are the markets that liquid that everyone can sell at the same time??? who will be the buyer on the way down??? we may not have to answer that question for a few more months but there was an interesting article in this mornings Indian Express newspaper about a decline in world gold production: http://www.indianexpress.com/print.php?content_id=83787

I always pay attention to articles that are written in a newspaper NOT in the city they are covering and in this mornings Boston Globe there was a lengthy piece about the Las Vegas housing market. This city has the 33rd most expensive housing market in the country but only the 153rd highest in household income. If I was a buyer I would want to buy in a market that had high income and low property values but maybe they just don’t exist anymore…..A great quote comes from the mouth of Mayor Oscar Goodman: ” Right now, I’m giving everybody the candy store….You can’t grow too fast….Growth is wonderful” (This quote is going on my bulletin board)…..My best bet for 2006 is that the price of Las Vegas condos will go down, down, down as supply increases and buyers flee…..this is a disaster that is getting closer and closer…..although I believe the real estate bubble will not pop in the way most are predicting because of a massive amount of cash on the sidelines that is ready to buy the first dip…the Las Vegas condo market is a BIG exception…this article is a must read .. http://www.boston.com/news/nation/articles/2005/12/12/las_vegas_boom_deals_some_a_losing_hand/

Finally there were quite a few articles over the weekend (NY Times, WSJ, etc) concerning the high price of oil and the low price of corn….it seems that corn burning furnaces are in very short supply and the cost of heating a home is less than 40% using corn instead of heating oil…….if you can find a furnace there are a few million tons of corn sitting in silos in the midwest looking for a home……

Wednesday at 12:30pm Mr. Greenspan will be speaking and may have a few words about current interest rates but how much impact can he have on markets when he has only 50 days remaining in office????

December 7, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 55 days before the new Fed Chairman Ben Bernanke takes office and ends the current Fed tightening cycle.

Since June 30, 2004 the Fed Funds Rate (short term) is UP 300 basis points from 1.00% to its current 4.00%. The US Treasury 30 yr. interest rate is DOWN 87 basis points from 5.59% to its current 4.72.

Wouldn’t you like to write Fed Chairman Alan Greenspan a letter and then be lucky enough to receive a personal reply???
If you are New Jersey Congressman Jim Saxton then you are just that lucky and on November 28th Mr. Greenspan responded to a few of his interest rate questions. The information is nothing new but it is interesting to read the Fed Chairman’s views on the yield curve, Fed Funds rate and Fed transparency. For a copy of the letter that was released today: http://www.house.gov/jec/hearings/testimony/109/11-03-05agletter.pdf

The Japanese Expressway Holding and Debt Repayment Agency (owns the Japanese highway system)this week issued the first Japanese 40 year government agency bond at a yield of 2.997%. It appears that everyone in high economic circles is praying and hoping for inflation to reappear in Japan and with it higher long term interest rates. Last night Bank of Japan governor Fukui stated that positive inflation numbers would make a comeback in Japan no later than the spring of 2006. With a Japanese yen sinking to the 121 level (dollar) and monetary policy on full throttle the world investment community is backing a Japanese boom accompanied by a rising stock market and a lower bond market. The government sees the opportunity to raise capital at a very low interest rate and due to coming inflation a devalued currency. This isn’t the first time Japan has tried to pump up the economy but it is the first time in many years it has allowed (and encouraged) a lower yen (versus the dollar). Remember when inflation is high the winner is the borrower and when inflation is low the winner is the lender.

Inflation is the object of Japanese desires but in the US it is the Fed’s arch enemy and on Tuesday December 13th I expect the Fed to raise the Fed Funds rate for a 13th consecutive time to a new high of 4.25%. How high should the Fed go??? When is the funds rate too high?? Looking back at the last 44 years of data (I could go back further but I really need a few extra hours of sleep tonight….I have been up the last few nights wondering what it will take to create a corn shortage) I found that when you measure the Fed Funds rate versus the CORE CPI ( consumer price index less food and energy) you have an average differential of 1.90%. With the funds rate next week at 4.25% and the core CPI at 2.07% (last 12 months change) the difference is now at 2.18% and with another funds rate increase on January 31st to 4.50% this will move the difference to 2.43%. Unless inflation is about to rise from the ashes…and it has been between 1.50-2.00% for the past 18 months this should easily give the Fed reason to STOP tightening and ensure Mr. Bernanke’s first move an easing of the funds rate in the spring/summer of 2006. Long term rates will anticipate this and begin dropping well before the first decline in the Fed Funds rate. Unlike 2005 which saw long term rates stay in a very tight range 2006 should see more volatility with a bias to the downside which should make it another great year for real estate professionals……

December 5, 2005

The clock is ticking on the remaining days in Fed Chairman Greenspan’s term in office. We have exactly 57 days before the new Fed Chairman Ben Bernanke takes office and ends the current Fed tightening cycle.

Since June 30, 2004 the Fed Funds Rate (short term) is UP 300 basis points from 1.00% to its current 4.00%. The US Treasury 30 yr. interest rate is DOWN 83 basis points from 5.59% to its current 4.76%.

This could be a very, very long 57 days as the bond market waits and waits and waits to see if Mr. Bernanke changes the direction of Fed policy. Many, many months ago I wrote that Mr. Greenspan would use every day of his term to raise the Fed Funds rate to the 4.50% level in an effort to put a lid on future inflationary expectations. The interest rate market is now fully aware that Mr. Greenspan’s final two moves will push short term interest rates to the same level as long term rates thus giving us a FLAT yield curve. Although he would like to pierce the “housing bubble” before he leaves office the best he will be able to do is make it expensive for those that are using adjustable rate loans for their home purchases.

But Mr. Greenspan need not fear….the troops are fully prepared to carry on the fight against lenders that want to keep the flame going forever. John Dugan, Comptroller of the Currency had some choice words last week in a speech about negative amortization mortgage loans. Most importantly he stated that new lender guidelines will be issued by the end of this month and they will make it more difficult for borrowers to qualify for payment option ARM’s which have been the hottest “product” of 2005. Mr. Dugan will surely have Chairman Bernanke’s ear in 2006 as the Federal Reserve and Comptroller of the Currency create quite a tag-team that lenders will find a difficult opponent in the lending arena. For the details on Mr. Dugan’s speech: http://www.occ.treas.gov/toolkit/newsrelease.aspx?Doc=I51QIBS3.xml

There was an excellent article in today’s Washington Post that pointed out how much the lending world has changed for Fannie Mae and Freddie Mac. Their share of the mortgage market has fallen from 60% in 2000 to under 40% in 2005 as competition from lenders in Europe and the Far East has slowly taken market share from these mortgage giants. Coupled with regulatory problems that forced them to reduce their portfolios by over $200 billion in 2005 Fannie and Freddie now find themselves in cut throat competition where a basis point can make the difference in buying loans or sitting back and watching the conduit lenders steal the show……The strength of the dollar has had a major impact on foreign buyers of US mortgages so I would advise real estate professionals to pay close attention to the dollar as a signal when mortgage spreads may widen versus US Treasury securities. The good news is that when (not if) the Fed begins to ease in spring/summer 2006 it will give a HUGE push to the long end of the US bond market thus giving everyone one last chance to get out of real estate and/or lock up the lowest long term rates we will see for the next 10++ years. For info on Freddie/Fannie: http://www.washingtonpost.com/wp-dyn/content/article/2005/12/04/AR2005120400728_pf.html

Last Friday’s jobs number was a rarity…the 215,000 jobs created was right in line with expectations and the bond market fell asleep shortly after the number was released. Mr. Greenspan’s two speeches were also non-events and this week we have almost no important economic information. As we end 2005 we still have an inflation rate of less than 2% but the “fear” of future inflation still sends chills to bond traders who remember the late 1970’s/early 1980’s, I have said many times that history does repeat itself….just not when it is expected.

The next FOMC meeting is Tuesday December 13th and it is a virtually certainty that the Fed will increase the Fed Funds rate 25 basis points to 4.25%. This leaves one more increase for Mr. Greenspan’s last day in office on January 31, 2006 and then those in adjustable (not neg am) rate loans can breathe a sigh of relief as this part of the interest rate cycle will end and Mr. Bernanke’s first move will be to LOWER the Funds rate in the Spring/Summer of 2006.

Last week’s edition of the Fed Beige Book (41 pages) had a few interesting tidbits of economic information about different parts of the country. The highlights; 1) A record number of new home listings in the Minneapolis-St. Paul area, 2) From Dallas we see that there are an estimated 200 new oil rigs under construction with another 50 for offshore use but the oil industry is short of skilled labor. 3) From San Francisco the Fed saw that most firms could NOT pass on higher input costs to final prices, 4) From New York 42 percent of bankers reported lower demand for consumer loans and NONE reported higher demand (lowest in 10 years), 5) and finally in Philadelphia bankers reported use of credit lines remained well below historical norms. A Chicago bank reported that excess capacity in mortgage lending continues to squeeze margins. If you can’t get to sleep tonight try reading the entire report: http://www.federalreserve.gov/fomc/beigebook/2005/default.htm

Finally I will end with a note about my most frustrating pick of 2005…..CORN…..for those that are still interested (probably just my dog) …corn has somehow managed to rally the last three days almost 5 cents as the short position by speculators (versus hedgers) is a record 533 MILLION bushels (is there that much corn in the world??) and in the previously mentioned Fed Beige book the Dallas Fed noted that “many corn producers are expected to turn to another crop next year (2006). This could be the biggest short squeeze of all time….but of course I said the same thing 3 months ago……