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Hedge Your House MoneyNews
(Headlines - scroll down for full stories)
The headlines will say that durable goods climbed in February, but if you look closely, you'll see a mixed bag. Overall, durable goods rose 2.6% in February. That's the biggest rise in three months for goods expected to last more than three years. But look closer and you'll see that only one category was largely responsible for the improvement, while most others lost orders. Orders for commercial aircraft rose a whopping 52.5% in February after cratering 70.1% in January. According to Bloomberg News, carriers from Asia and the Middle East are strong aircraft buyers, even though many domestic U.S. airlines are suffering financially.
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Outside of the transportation sector, durable-goods orders fell 1.3% in February. That's the weakest they've been since July. According to Economy.com, new orders fell for machinery, primary metals, fabricated metals, electrical equipment and motor vehicles. That doesn't bode well for the manufacturing sector in general. As we told you in yesterday's MoneyNews, the manufacturing sector is more bearish on its outlook than other industries, according to a survey. That's not surprising, considering the woeful state of American car manufacturers. Both General Motors and Ford have announced that they will cut production. Orders for motor vehicles fell 3.3% as sales for cars and light trucks dropped by one million during the month. One bright spot in the durable-goods report: shipments of semiconductors. Our sister publication SectorTrade has said that the biggest growth in the technology sector will come from wireless networks. Computer orders rose, inventories dropped and shipments of semiconductors were robust in February. If you're a SectorTrade member, that's good news for your technology sector investments! Editor's Note:
2. New Home Sales 21% Below Peak In contrast to yesterday's positive sales for existing homes, newly constructed home sales plunged 10.5% in February - down 13% year over year. In addition, January's home sales were revised downward by 2.1%. Home sales peaked in July 2005. Since then, sales have fallen 21%. This month's sales numbers are the lowest since March 2003 and median home prices are down 3% from a year ago. Inventories for new homes balooned. The amount of time it takes to sell a new home: a whopping 6.3 months! However, builders keep on building. The number of homes available for sale reached 548,000 in January - a new record, according to Economy.com. The top-line result may have been different, but the pattern of sales is similar to the existing home sales. The big losers: The West and South. The not-so-big losers: The Northeast and Midwest. Sales there gained 13% and 5%, respectively. Milder-than-normal weather was a factor in the improvement. In the South, sales fell 6%. In the West, sales cratered by 29%. The precipitous fall in home sales could spell disaster for homebuilders and mortgage companies. If you're still holding on to these stocks, dump them or be prepared for a rocky ride. But if you're ready to hedge the investment in your house, take a look at our next item. Editor's Note:
3. Hedge Your House Standard & Poor's will soon introduce the S&P CME Housing Futures and Options, a derivatives service that will enable investors to "take a position on the direction of home prices either for the nation as a whole or for 10 major cities to start, including New York, Los Angeles and Chicago," according to CNNMoney. MoneyNews has recently reported on the steadily growing derivatives market, which is currently valued at an estimated $12.4 trillion. Derivatives are instruments used to transfer credit risk from one party to another. The party transferring risk away has to pay a fee to the party that will take the risk. Meanwhile, Federal Reserve data shows that at the end of 2005, the U.S. housing market was valued at $21.6 trillion - more than the total market cap of the U.S. stock market. That's why the S&P saw the value in creating a set of housing indices that will lead the way for a futures/options service allowing investors to bet on the housing market. The company sees it as a necessity to help buyers get a better grasp on property values and the housing market overall. "For the vast majority of Americans, their home is their largest and most valuable asset, and in a period of rising housing prices and increased concerns about a possible housing bubble, reliable information on their biggest asset is extremely important," S&P index committee chairman David Blitzer told MarketWatch. The new service will be based on information gleaned from an index created by famed Yale economist and author Robert Shiller and his partner Karl Case.
The two "started developing the Case Shiller Home Price Indexes about 20 years ago. The pair claims it is now considered the most accurate measure of the residential real estate markets. The S&P CME Housing Futures and Options will be based on the data accumulated in these indexes, so accuracy is crucial for building trust among potential investors," says CNN. While the service is primarily intended for larger institutional investors, such as home-building companies, its creators contend that there is a great deal of interest from retail consumers. Shiller says there are two ways individuals can make use of this new investment vehicle. "Investors could buy futures in housing prices and profit if home prices continue to increase (if the investor goes long) or if they fall (if the investor goes short)," the article says. Or "homeowners intending to sell within a year or two can go short in home price futures. If the price of their house drops, that can recapture the loss on the investment." Another economist even envisions home-equity insurance (just like fire or storm insurance) in the near future - to protect against losses incurred from falling home prices.
The announcement of the S&P index "comes amid widespread debate over whether there is a housing bubble as interest rates move up and signs point to slowing sales activity. "Homeowners have lacked convenient tools for hedging the risks of movements in real-estate prices, but that appears to be changing," says MarketWatch. Editor's Note:
4. Google Added to S&P 500 Type in "Google and S&P 500" on your favorite search engine this morning and you'll see that the former will be added to the latter's group of the top 500 American companies. Google will replace Burlington Resources on the S&P 500 Index on March 31. The Internet behemoth won't be tracked on the index until April 1, 2006. The news drove the search engine giant's stock up, trading to $369.15 at press time. Google has traded as high as $475 per share in early 2006. In February, Google announced that revenue growth would be curtailed - news that knocked the company's stock down in the last month or so. Still, if you got in at the IPO price of $84 in 2005, Google has provided a big boost to your portfolio. But the impact of the S&P 500 news goes beyond pumping up Google stock. According to Reuters, index fund managers will be required to add Google shares to their portfolio. "Funds are going to have to come in and take positions if they don't have it," Peter Cardillo, chief market analyst and chief strategist with SW Bach and Co., tells Reuters.
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