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February 10, 2005

There’s No Place Like Housing

Alan Greenspan is creating bubbles these days like a slap-happy kid with a pouch of Big League Chew. The renewed stock market bubble has been deflating since the turn of the year. It’s demise was heralded by successive interest rate hikes in conjunction with the Presidential cycle. Lest we be too confident, let’s allow a couple more months before we lay claim to all this foresight. The market, and the Fed, have both surprised us with extremities of irrational exuberance. However, our bets are currently placed on further declines.

The other two bubbles, as discussed in our money supply and inflation article, are the housing bubble and the consumer debt bubble. What will herald the demise of these bubbles? Consumer debt, we believe, is supported by housing. Therefore, the deflation of housing will lead to trouble in the debt arena. Which brings us back to pondering what will herald the end of the housing bubble.

If you believe a fantastic spike in housing stock prices will precede the gloom, as we do, then the gig may be up. If you believe trouble with the GSEs will foretell the gloom, as we do, then the gig may be up. If you believe tales of rampant individual speculation in new home purchases will mark the top, as we do, then the gig may be up.

Indeed, housing stocks have been spectacular since their July lows. Falling mortgage rates fueled another round of speculation, sending housing sales up and stock prices rocketing. Centex has gained over 50% while Toll Brothers more than doubled. Toll Brothers, in fact, is selling at nearly double its 200-day moving average. That’s phenomenal.

The GSEs have been falling sharply. This matters because they buy all the packaged loans generated by speculation and long-term purchases alike. The GSEs will be the first to feel the pain since they get caught holding the proverbial bag. Any sudden change in environment could greatly upset their already shaky hedging efforts, as well. It will be fun to see how all this plays out!

In other news, metals soared today on news of the $56 billion trade deficit for December. It amazes me how all the headlines read “trade deficit improves” just because the number was slightly less catastrophic than November. Such futile efforts to spin the story positively are farcical. The number is still the second worst number in history… by far… and the metals markets let us know it. Silver gained over 5.5% while gold tacked on over 1 percent. The miners did just as well, with PAAS gaining nearly 6% and Newmont tacking on 2 percent. Whether these gains are the start of a new run or the release of some buying pressure remains to be seen, but either way, we believe the longer term direction is solidly upwards.

A final note on the trade number. It is bad news for housing. Why? It has been mentioned by many smart minds that those supporting our roaring deficit (read: Asian governments) by purchasing US bonds may realize soon enough that it’s not in their best interest to do so any more. With a deficit of buyers, bond prices go down, meaning rates go up, including mortgage rates.

Author’s Disclosure: Short CTX, Long PAAS


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