MoneyNews
Tuesday, Aug. 16, 2005

1.  CPI Rate Still Unbelievable

If you can believe the latest government statistics, the housing market may be showing some cracks – and inflation is still very low despite a huge run-up in oil prices.

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According to data released Tuesday morning, the annual rate of inflation rose to 3.2% in the twelve months to July, following a 2.5% gain in the year to June.
 
Credit this to rising energy costs. But the "core" annualized rate – which excludes energy – rose from 2 to 2.1% in July.
 
With oil costs up more than 100% in the past 15 months, we still find it difficult to believe that both CPI and the core rate show such little impact from this.
 
In MoneyNews' Financial Intelligence Report "The Inflation Lie", editor Jarret Wollstein details why he believes the core rate is much higher – likely 5 to 6%. [For more info on this report, Go Here Now]
 
FIR argues that the government manipulates the CPI rate, making it artificially low. In doing so, the government keeps many costs in check, including its own incremental budget increases and entitlement spending.
 
But the flipside is that the value of the dollar is eviscerated by the real inflation rate. The telltale signs of the inflation manipulation are the devaluation of the dollar (which is down by 50% over the past five years) and the rise in commodity prices – most of which have skyrocketed in recent years – oil being just one example.
 
According to a separate report, housing starts in July ran at a 2.042 million pace, down slightly from June's 2.045 million starts.
 
Is it an indicator that the housing boom is over?
 
Though we see a bust on the horizon, we believe long-term rates still rule they day. They remain low and the boom continues.
 
But the slight decline in housing starts may be a sign that the Fed's increase in short-term rates is finally affecting the "froth" in the housing market.
 
Only time will tell.

Editor's Notes: 

• Get Your Copy of the FIR "The Inflation Lie" – Go Here Now
• Sir John Templeton Warns of Housing Bust – Go Here Now

2. More Signs of Cooling in Housing Market?

What happens when you combine the lowest mortgage interest rates in 40 years with a shortage in the housing supply?
 
That's right. You get a five-year, 50% increase in the average value of the housing stock across America.
 
Apparently there are signs of some cooling in activity. And if they continue, we will undoubtedly see home price appreciation stall in the coming months  -- and that could even lead to price declines in the hottest regions.
 
In California's San Diego County, where the median home price has more than doubled during the last five years, the number of homes listed for sale on July 8 was more than twice the number listed exactly one year before.
 
And in northern Virginia, where demand for suburban Washington housing has skyrocketed, inventories are up by 26%. This led one real-estate agent to comment that not only have sales leveled off, but also investor demand has disappeared as well. The inability to bank on quick returns seems to have deterred investors in the area as they are left unable to unload properties.
 
Realtors note an increase in Massachusetts, Chicago, Las Vegas and Orlando.
 
Since August is a traditionally slack month, we are set to find out whether this latest reading is merely seasonal or if the slack will disappear over the next quarter. Economists note that we will have to wait until October to determine that.
 
With homebuilders continuing to report strong sales and order backlogs and an index of June's pending sales rising 3.6%, we are left looking for further signs of cooling.
 
Perhaps that will stem from the torrent of media reports about the red flags popping up all across the real estate market.
 
With Fed Chairman Alan Greenspan making reference to "froth" in the housing market, perhaps some people are starting to realize that the low-hanging fruit has long since been picked.
 
In June the National Association of Realtors reported that the number of "existing" or previously owned homes for sale had jumped from 2.4 to 2.7 million. Any slowdown in sales would certainly cause a swell in this monthly backlog. And that would set off an inventory bulge and an inevitable leveling of prices – if not a decline.
 
The rising interest rate environment is also likely to continue to weigh on homebuyers' decisions – and following the tenth straight increase by the Fed recently, there is no end in sight.
 
The 30-year fixed rate has jumped from 5.53% in late June to 5.89% recently, according to government mortgage-finance company Freddie Mac.
 
In both California and Florida, median prices have long surpassed affordability, and that has prompted banking regulators to question mortgage-lending standards. Some observe that these standards could be tightened, which would lead to a house price cooling when it would be least welcome.
 
Once the boom ends, we should see some modest cooling in several cities, according to CSFB analyst Ivy Zelman. She notes that the housing boom in the late 1980s led to falling prices in both California and New England a few years later.
 
Editor's Note:

• Sir John Templeton First Warned Housing Prices Could Crash 50%. Find Out What He Said and Learn How to Protect Yourself and Even Profit from the Coming Storm - Go Here Now 
   

3. Dollar Out of Its Doldrums

NewsMax was ahead of the dollar curve a few weeks ago when the company's senior analyst and trader Andrew Wilkinson predicted that the dollar would rise against international currencies – particularly the euro – over the short term.
 
And that's good news for both the U.S. currency and American investors – for now, anyway.
 
Bloomberg has now reported on a Treasury Department report that showed how international investors increased their holdings of U.S. financial assets by the highest levels since February.
 
The run-up has boosted the dollar over the euro for the past three weeks. Against the euro, the dollar advanced 0.7% to $1.2359 from $1.2441 just days earlier, according to electronic foreign-exchange dealing system EBS.
 
Fueling the dollar's rise was a record $52.2 billion in purchases of corporate bonds. Rising U.S. interest rates added to the appeal of debt denominated in the U.S. currency. The Federal Reserve has increased its benchmark rate five times this year.
 
All told, overseas investors bought a net $71.2 billion of Treasury notes, corporate bonds and other securities in June, compared with $55.8 billion a month earlier. The Treasury report reinforced speculation that the United States is attracting enough overseas capital to offset its trade deficit.
 
"This is a large enough number to be a positive surprise," Michael Woolfolk, senior currency strategist in New York at Bank of New York, told Bloomberg. "We're not only adequately financing our trade deficit, but even a bit more than that. It certainly helps us better understand why the dollar continued on firm footing in June."
 
And other dollar-watchers concur.
 
"This is going to be a positive for the U.S. dollar," said Naomi Fink, a currency strategist at BNP Paribas SA in New York.
 
"The corporate bond picture is supportive. The data will really serve to lessen concern over the U.S. double deficits," she said, referring to the U.S. trade and federal budget shortfalls.
 
While many currency speculators were saying that foreign markets like China and India would be big sellers of the dollar, that hasn't been the case of late.
 
In fact, Bloomberg reports that demand from international investors – who hold almost half of all U.S. government debt – climbed during a recent sale of 10-year U.S. Treasury notes. The auction showed that foreign central banks and investors (who bid through so-called primary dealers) bought 46.9% of the $13 billion in 10-year notes sold – the most since June 2003.
 
But not all the news on the dollar is bullish. The U.S. Congressional Budget Office estimates that the dollar will resume its decline "during the next year and a half" as the U.S. trade deficit expands. 
 
The CBO notes that the dollar has rallied this year after falling for three straight years, due in part to concerns that America won't be able to attract enough foreign capital to finance its widening trade shortfall.
    
Even so, the CBO says that the deficit in the U.S. current account – the broadest measure of trade – will surpass $800 billion this year and exceed $850 billion in 2006. The gap widened to a record $195.1 billion in the first quarter. A bigger trade deficit means more dollars need to be converted into other currencies to pay for imports.
    
"CBO expects that over the near-term, the dollar will decline at a moderate pace rather than fall sharply," according to the report posted on the CBO Web site.
 
The pace of the dollar's drop will be tempered as "investments in the United States are expected to be more attractive than those available in other industrialized countries, primarily because the outlook for U.S. economic growth is brighter."
 
Editor's Note:

• Tap Into the Oracle of Omaha's Inside Picks. They're all Detailed in our Brand-new Special Report "Warren Buffett's 8 Best Investment Plays for 2005." This Briefing is Being Made Available Exclusively to MoneyNews Subscribers. Get Your Free Copy Online in the Next Five Minutes. Go Here Now. 
   

4. Bush Tax Cuts Slash Deficit

From an economic vantage point, it must be tough being a liberal these days.
 
The GOP controls both houses of Congress, the unemployment rate is way down, the GDP is way up and now, thanks to President Bush's tax cuts, the deficit is slimming down at an amazing pace.  
 
The latest good news on the economic front is that the U.S. budget deficit (which the Congressional Budget Office estimates will clock in at $331 billion in 2005) is down from $412 billion in 2004. Early projections for 2006, the CBO says, see the deficit sliding down even more to the $314 billion range.
 
As Bloomberg has pointed out, a narrowing deficit would be the first improvement in the annual shortfall since President George W. Bush took office. And it would move the White House closer to its promise of halving the deficit by 2009. The CBO in January projected a 2005 deficit of $368 billion and last month predicted the deficit would fall to $325 billion or lower. The fiscal year ends Sept. 30.
 
It's also vindication that the Bush tax strategy is flat out working.
 
"It's basically a strong economy generating more tax revenues," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. "We have seen some degree of fiscal discipline on the spending side."
 
But the latter point remains to be seen.
 
Given the heft of the new transportation bill passed earlier in August and the expected rising cost of the new Medicare prescription drug bill, the Bush administration will have its work cut out as it attempts to keep the deficit on a strict diet.
 
As the CBO says, gains in tax revenue will continue into 2006, though costs for the Medicare prescription drug benefit – which begin in January – will slow improvement, said Stanley. He forecasts a 2005 deficit of $320 billion and a 2006 deficit of $300 billion.    
 
The CBO report takes into account only spending and tax cuts already approved by Congress, including about $100 billion in costs for the wars in Iraq and Afghanistan in 2005. It also assumes those figures will remain static.
    
"The CBO report confirms the dramatic improvement in the 2005 deficit picture that the Administration reported last month," said Scott Milburn a spokesman for the White House budget office. "A strong economy fueled by tax relief is generating stronger-than-projected revenues."
 
But not all Democrats remained silent regarding the deficit picture.
 
"While this year's deficit will be lower than last year's record shortfall, the improvement is likely to be short-lived. Declarations of victory over budget deficits only distract from the disturbing long-term budget outlook," said Kent Conrad of North Dakota, top Democrat on the Senate Budget Committee.
 
Editor's Note:

• Think It's Too Late to Invest in the Energy Sector? Think Again. Learn Why Warren Buffett is Planning to Invest an Additional $10 to $15 Billion in the Energy Sector – and Discover the Top 2 Companies That Are Getting the Lion's Share of it.  Go Here Now.
  

Editor's Notes:

• Get the Most Recent List of the Top 30 Holdings in Buffett's Berkshire Hathaway Portfolio. Go Here Now
• Get Your Copy of the FIR "The Inflation Lie" – Go Here Now
• Sir John Templeton First Warned Housing Prices Could Crash 50%. Find Out What He Said and Learn How to Protect Yourself and Even Profit from the Coming Storm - Go Here Now
• Tap Into the Oracle of Omaha's Inside Picks. They're all Detailed in our Brand-new Special Report Warren Buffett's 8 Best Investment Plays for 2005. This Briefing is Being Made Available Exclusively to MoneyNews Subscribers. Get Your Free Copy Online in the Next Five Minutes. Go Here Now.
• Think It's Too Late to Invest in the Energy Sector? Think Again. Learn Why Warren Buffett is Planning to Invest an Additional $10 to $15 Billion in the Energy Sector – and Discover the Top 2 Companies That Are Getting the Lion's Share of it.  Go Here Now.
• Forget Annual Health Check-Ups – These Special Medical Exams Are What You Really Need to Stay Healthy – Learn More