The week's economic reports

Following is a summary of last week's economic reports. More indications of an ailing housing market were only partially offset by regional strength in manufacturing and an improvement in the leading economic indicators. Stocks and bonds ended the week with the S&P 500 Index down 2.0 percent to 1,503, now up 5.9 percent on the year, and the yield of the 10-year U.S. Treasury Note down 4 basis points to 5.14 percent.


Housing Market Index: The National Association of Home Builders' (NAHB) monthly Housing Market Index (HMI) fell from a reading of 30 in May to 28 in June. This was the lowest level since 1991 and an all-time low since they began charting the index back in 1995. All three components declined - present sales fell from 31 to 29, six month sales went from 41 to 39, and buyer traffic slid from 23 to 22.

Concerns over subprime lending continue to weigh on both the mortgage market and the housing market, tighter lending standards for the least credit-worthy borrowers now being felt nationwide. The outlook from NAHB Chief Economist David Seiders was bleak, "Home sales most likely will erode somewhat further in the months ahead and improvements in housing starts probably will not be recorded until early next year. As a result, we expect housing to exert a drag on economic growth during the balance of 2007".


Housing Starts: After gaining ground over the last two months, housing starts declined once again in May, falling 2.1 percent from April, while the number of permits issued for new construction rose 3.0 percent in May after a 7.1 percent drop in April. Particular weakness was seen in the West where housing starts declined 19.7 percent while there was strength in both the Northeast and Midwest where starts rose 15.7 percent and 15.5 percent, respectively.

The good news on permit issuance was tempered by the fact that all of the increase came from multi-family units which rose 16.5 percent for the month - permits for new single-family units fell 1.8 percent. While this may be a good sign for construction companies and related employment, it is a decidedly bad indication regarding the health of the housing market in general as homeowners are increasingly becoming renters again, fueling the demand for rental housing.


Leading Economic Indicators: The Conference Board's Index of Leading Economic Indicators rose 0.3 percent in May after an upwardly revised decline of 0.3 percent in April. So far in 2007, the index has posted two gains and three declines. Positive components were initial jobless claims, higher building permits, and higher equity markets.

Philadelphia Fed Survey: The Philadelphia Fed's survey of manufacturing activity rose from 4.2 in May to 18.0 in June, a continuing sign of either a recovery in the manufacturing sector or a bounce from recent lows - in a few more months it should be clear which one it really is. Strength was seen in new orders while shipments declined, largely a result of weakness in new orders earlier this year. Prices paid were still elevated but came down from a May level of 32.3 to 29.7 in June.

This uptick should not distract attention from the fact that this index has been in decline for three years now along with other similar indicators. Like the gain in the New York Empire Index last week and the much broader national ISM Manufacturing Index, there has been an unmistakable pickup in activity over the last month or two, but this comes after multi-year lows on all three of these measures late in 2006 and early in 2007.

Summary: The housing reports, coming at a time when mortgage lending seems to be transitioning into a full-fledged crisis, should nix any serious thought of a short-term rebound in residential real estate. Like last year at about this time, more and more analysts are now "writing off" housing for 2007, pinning their hopes on a recovery in 2008. Now well into the prime summer selling season, next week's reports on new and existing home sales should provide additional detail on the state of the nation's real estate market.

The Week Ahead: Economic reports in the week ahead will be highlighted by existing home sales on Monday, new home sales on Tuesday, and the final reading on first quarter GDP on Thursday. Also scheduled for release are consumer confidence on Tuesday, durable goods on Wednesday, and four reports on Friday - personal income/spending, the Chicago purchasing managers' index, construction spending, and consumer sentiment.

The FOMC policy meeting will be held on Tuesday and Wednesday where no change to short-term interest rates is expected. The policy statement, however, may offer additional insight into how the Federal Reserve views the current state of the economy given a faltering housing market and escalating problems in mortgage lending.

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Only one week left ...

This is just a quick update on the "Guess the Mid-Year Price of Oil and Gold" contest that comes to what just might be a very unexciting conclusion next Friday.

[Someone please remind me to allow more than six or seven weeks for this to run when it is repeated at the end of the year - with prices for both oil and gold stuck in a fairly tight range, it might be more entertaining to watch paint dry.]


Interestingly, the movement of the last week has turned this into a bit of a horse race as MT is still in the lead, but is now followed closely by WT, MT, dtmwp, Chuck Ponzi, Blue Event Horizon, and RC.

The contest concludes one week from today with the winner receiving a free one-year subscription to Iacono Research where, this week, the model portfolio declined only modestly and remains up 9.1 percent for the year.

The model portfolio is now two or three percentage points clear of all major U.S. equity indexes with the Dow now up +7.2 percent, the S&P500 up 5.9 percent, and the Nasdaq having gained 7.2 percent.

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Involuntarily Disconnected

The mood surrounding last night's untimely failure of an old splice in the cable down by the street and its subsequent repair by the cable company a short time ago are another reminder of the degree to which many of us have grown dependent on technology and instant access to information.

At first, there was a feeling of panic, as if somehow something had been stolen. At times, life is unfair, and initially, this felt like one of those times.

"Does this happen often?" was the question posed to the friendly cable company representative during a late-night phone call, "We've only been here a month."

"It happens often enough", came the reply. "We'll have to schedule a service call.

Let's see ... tomorrow .... from 1 to 5?"

The news that connectivity should be restored within 24 hours came as a tremendous relief and an eerie feeling of calm swept over me.

Is that normal?

Should emotions be so easily swayed by the thought that a "disconnected" state would soon be remedied and that maybe a 15-hour internet-free interlude might be an interesting experience?

Septuagenarians, including my parents, often talk about how people are addicted to their cell phones or their email. Clearly, blogs do nothing but add to the addiction that modern technology has become.

Earlier today, the TV still worked, so it was turned on and tuned in to CNBC where they were talking about the Blackstone IPO - it looked like everyone was on speed. Does everybody have to talk that fast? Is the Blackston IPO that exciting?

Apparently it is.

Fortunately a round of golf was planned for this morning and while the "Mid-year review of the year-end predictions" (very impressive, so far) was all set to go this morning, it has now been rescheduled for next week.

Playing golf with three seventy-year-olds really puts things into perspective (one of them beat me by eight strokes!) and upon returning a short time ago, the cable truck parked in the driveway was almost an unwelcome sight.

Anyway, as should be clear with the tardy first offering you are now reading, things are about back to normal.

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The lonely vigil

You've got to hand it to David M. Walker, the Comptroller General of the United States, on his lonely mission to warn the rest of the country (and the world) about the government's >long-term obligations and the nation's worsening finances.

Listening to the White House and the Treasury Department talk, you'd think we were on track to close the budget deficit in just another year or two and that we're headed for surpluses again in the next decade.

The Washington Post reports on Mr. Walker's continuing efforts:

Walker is the tour's rock star, profiled on "60 Minutes" and interviewed by faux-pundit Stephen Colbert. A former Arthur Andersen accountant, Walker heads the Government Accountability Office, a legislative agency that aims to improve government performance through audits and investigations.

With six years to go on a 15-year term, Walker has the stature and independence to say what he wants. For the past five years, since Congress ignored his advice and created a hugely expensive prescription-drug program for Medicare beneficiaries, Walker has put the looming fiscal crisis at the top of his agenda.

"People are on the beach having a beach party while you can see a tsunami of spending on the horizon. And you've got people saying, 'party on,' " Walker said in an interview. "We're headed for very, very rough seas, like we've never seen before in this country."

With his Southern-fried accent and flair for apocalyptic turns of phrase, Walker's job on the tour is to breathe life into the dry details of the federal budget. By his reckoning, the heart of the problem is this: The annual budget deficit, which is the difference between revenue and spending, was $248 billion in fiscal 2006, down from a high of $413 billion in 2004. It is expected to decrease further in the fiscal year that ends in October, and both the White House and Congress are projecting a balanced budget by 2012.

But the numbers hide massive cracks in the budget's structure. First, they rely on borrowing from the Social Security trust fund, which today collects more in taxes than it needs to pay benefits. As the baby boomers retire, demands on the trust fund will grow, and the yearly surplus will likely disappear by 2017. Without that surplus, last year's deficit would have been $434 billion. Eventually, the money the government has borrowed from Social Security will be needed to pay retiree benefits, and it will have to come out of general revenues.

Which gets to the larger problem: More than half the federal budget is on autopilot, eaten up by interest payments and entitlement programs that provide benefits to anyone who qualifies. The biggest entitlements are Social Security, Medicare and Medicaid, which together account for about 40 percent of federal spending. Interest on the national debt accounts for another 9 percent and is the fastest-growing budget category at $227 billion, or nearly twice what was spent last year on the war in Iraq.

Congress created the big entitlement programs, and it can change or limit them at any time. But the programs are so popular that in practice, Congress rarely tinkers. Unlike such other government functions as education and transportation, known as discretionary programs, entitlement spending grows more or less automatically. That makes it easy to project spending, and the outlook is sobering.

Being in low tax bracket for the foreseeable future has its advantages - my sympathy is with those of you now looking at decades of (higher) payroll taxes ahead of you.

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The PowerShares Commodity ETFs

Back on January 5th of this year, PowerShares and partner Deutsche Bank launched seven new commodity ETFs as shown in the table below. After almost six months, now seems to be a good time to check in on them to see how they have fared.


Like most of other ETFs where commodities are the underlying investment, all of these funds purchase futures contracts and, before they expire, existing contracts are sold and new ones are purchased to replace them (a futures contract is an obligation to buy or sell "a certain underlying instrument at a certain date in the future, at a specified price").

This is referred to as "rolling" the contracts and, with each contract "roll", comes the potential for gains or losses based on the difference in price between the contract being sold and the contract being purchased. This difference results in what is called the "rolling yield" and benefits investors when the purchase price of a new contract is less than the sale price of the expiring contract, a condition known as "backwardation". The opposite condition, "contango", works against investors.

Unlike some other products, the PowerShares funds implement a method of rolling contracts aimed at potentially maximizing the roll benefits in backwardated markets and minimizing the losses in contangoed markets. Rather than selecting the next contract month as a replacement, these funds choose one of the next thirteen months based on which one generates the best possible "implied roll yield" (see the funds' prospectus for more details).

Since futures contracts cost only a fraction of the price of the underlying commodity, excess funds are invested in debt instruments, typically treasuries, to offset expenses and management fees. Dividends are paid to shareholders on a regular schedule based on these excess earnings.

Energy

First looking at the two energy funds - PowerShares DB Energy (AMEX:DBE) and Oil (AMEX:DBO) - it is clear that they've outperformed the two existing futures-based crude oil ETFs - United States Oil (AMEX:USO) and iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE:OIL).

While the better performance of the broader energy fund (DBE) can be easily explained by the heftier year-to-date price increases for gasoline, heating oil, and natural gas (up between 20 and 40 percent while crude oil has gained about 13 percent) the reason for the difference between DBO and the existing crude oil ETFs is less clear.


The "optimum yield roll" strategy employed by Deutsche Bank may explain the better performance - about a three percentage point difference based on the chart above - though there appears to be some confusion over the exact difference in performance (see here and here).

The funds clearly diverged in May at a time of the month when contracts are sold and repurchased - whatever happened at that time leaves the PowerShares oil fund well clear of the other two and offers a strong (but still preliminary) case for these funds becoming more popular over time, particularly for long-term, buy-and-hold retail investors.

Note that with an average volume of about 50,000 shares per day, the PowerShares energy funds trade at but a tiny fraction of the USO fund daily volume that sees over three million shares change hands (a strong argument for being first to market). The volume for the iShares fund averages about 150,000.

Two other oil funds exist - Claymore MACROshares Oil Up Tradeable Trust (AMEX:UCR) and Oil Down Tadeable Trust (AMEX:DCR) - and the Oil Up fund has outperformed all of the funds above. This, however, is an entirely different type of product that makes no investment in crude oil, but rather, works in conjunction with the Oil Down fund moving money from one fund to another based on the price of crude oil. An interesting product to be sure and perhaps a subject for another day.

Precious Metals

The three precious metals ETFs - PowerShares DB Precious Metals (AMEX:DBP), Gold (AMEX:DGL), and Silver (AMEX:DBS) - seem to be tracking the existing gold and silver ETFs fairly well so far.

It is important to note that the existing precious metal funds - StreetTRACKS Gold Shares (AMEX:GLD), iShares Comex Gold Trust (AMEX:IAU), and the iShares Silver Trust (AMEX:SLV) - all hold physical bullion rather than futures contracts. The value of the fund, therefore, is subject to storage and handling fees related to the physical commodity in addition to normal fund management fees and expenses.


A closer look at the performance of the funds above shows that, so far, there is little difference between the two approaches to precious metals ETFs - any difference in performance remains obscured by the normal volatility in determining the daily closing value, the performance of one fund relative to another being dependent on the specific time period of the comparison.

Once again, the first product to market gets the lion's share of the trading volume as demonstrated by the wildly popular StreetTRACKS GLD gold fund with an average daily volume of over 4 million shares. Similarly, the first-of-its-kind silver bullion ETF from iShares sees almost a half million shares traded every day.

The volume for the iShares IAU gold fund is only about 150,000 shares and, as might be expected, trading for the new PowerShares precious metals ETFs trail all the existing products by a wide margin at between 10,000 and 20,000 shares per day.

It's not clear what minimum level of share volume is necessary to keep a fund operating - with stiff competition from entrenched products and offering no clear advantage so far, the longevity of these funds may be questionable.

Agriculture, Base Metals, and the Original DB Fund

Two of the most interesting recent offerings in the world of commodity investments have been the combination funds for agriculture and base metals - PowerShares DB Agriculture (AMEX:DBA) and Base Metals (AMEX:DBB).

Also shown below is the original Deutsche Bank Commodity Index Tracking Fund (AMEX:DBC) which is now almost a year and a half old - it is heavily weighted toward energy (55 percent) along with about equal parts of corn, wheat, aluminum and gold.


All three of these funds show double-digit gains or better since their inception - the original DBC fund is now up 13 percent since its launch last year after factoring in dividends paid. When comparing funds such as these, it is important to include the dividend payments which are not normally reflected in most charting tools (no dividends have been paid for any of the funds shown in any of the charts above).

Trading volume for both the original DBC fund and the new agriculture fund are both almost 300,000 shares per day while the base metals fund sees only about one-fifth that amount. The agriculture fund has been popular due to steadily rising corn and wheat prices while many investors appear to be overly-cautious about wading into base metal investments after a spectacular rise last year and talk of a bursting commodity bubble led by copper prices.

As shown in the charts above, there has been no "bursting" in any commodity markets this year and, with crude oil looking like it is about to retake the $70 level, much higher prices may be ahead.

Overall, this is a very good family of funds from PowerShares/Deutsche Bank. With these products, retail investors can now confidently participate in the long-term commodity bull market, diversifying their portfolio away from equities to whatever extent they are comfortable.

Historical studies have shown that commodities typically outperform equities as economic growth slows and recessions near, something that may be in store later this year or early next year as the slumping housing market continues to weigh on the U.S. economy.

Full Disclosure: Long DBE, SLV, DBA, and DBC at time of writing.

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When the savings and liquidity gluts end

Buried within an otherwise fascinating tour of the last few decades of financial history, Martin Wolf of the Financial Times raises a particularly insightful question that was surely lost on all but a few of his readers.

In The new capitalism, come these gems:

Two further long-term developments help explain what has happened. The first is the revolution in financial economics, notably the discovery of options pricing by Myron Scholes and Fischer Black in the early 1970s, which provided the technical underpinning of today's vast options markets. The second is the success of central banks in creating a stable monetary background for the world economy and so also for the global financial system. "Fiat" (or government-created) money has now worked well for a quarter of a century, providing the monetary stability on which complex financial systems have always depended.

Yet there is also a shorter-term explanation for the explosive recent growth in finance: today's global savings and liquidity gluts. Low interest rates and the accumulation of liquid assets, not least by central banks around the world, has fueled financial engineering and leverage. How much of the recent growth of the financial system is due to these relatively short-term developments and how much to longer-term structural features will be known only when the easy conditions end, as they will.

Left unstated here is the obvious relationship between "fiat" money and the two "gluts" that are integral parts of today's financial world - the "savings glut" and the "liquidity glut".

You don't normally get too many "gluts" (or the resulting asset bubbles) when the creation of money and credit are subject to some kind of restraint. That is, the kind of restraint that you see when money and credit are not simply created by government "fiat" or Wall Street "fiat" (e.g., securitized debt, etc.) and are then subject to some reasonable bank reserve requirement.

It is more than interesting that Mr. Wolf can be so sure of the fate of the gluts - "when the easy conditions end, as they will" - yet apparently unaware or uninterested in their causes.

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This would never happen at the Fed

The minutes of the Bank of England's June 6th-7th monetary policy meeting were released earlier today and it was revealed that Governor Mervyn King was outvoted 5-to-4 in his bid to raise interest rates another quarter point.

This comes amid rising inflation in the U.K. and increasing discussion in the mainstream media about how the government's statistics understate the rising cost of living for various groups, particularly pensioners (retirees).

Bloomberg reports:

Five of the Monetary Policy Committee's nine members overruled King with an unexpectedly slim majority, marking the second time in four years he has been outvoted as governor. King argued an increase was needed because of ``upside'' inflation risks, minutes of the June 6-7 meeting showed today.

The pound rose and investors raised bets on another rate increase after the publication of the vote, which wasn't predicted by any of the 26 economists in a Bloomberg News survey. King said last week that the bank ``may need to take further action,'' on inflation, which has exceeded the Bank of England's 2 percent target for the past 13 months.

Two percent. Ha!

How does London become the world's second most expensive city when inflation is running at just over the two percent target?

Only an economist could rationalize something like this.

Dissent in the Ranks

When it comes to casting votes on monetary policy decisions, it is interesting to note the contrast in voting patterns on either side of the Atlantic.

While this was the second time in four years that the central bank chief was outvoted, it may come as a surprise to learn that here in the U.S. there have been a total of only five dissenting votes since the Federal Reserve began releasing the roll call of votes back in 2002.

Monetary policy decisions have been unanimous for all but five meetings since 2002 and four of those split decisions were a result of Virginia Fed Governor Jeffrey Lacker voting for another quarter-point rate hike in the second half of last year.

As can be easily verified at the Fed's website, there was only one dissenting vote in the last four years of Alan Greenspan's term as Fed chief. This came in September of 2005 when Mark Olsen voted for "no-change" about mid-way through the 2004-2006 "baby-step" campaign to normalize interest rates.

In his later years, the former Fed chief was known to squash discussion at FOMC meetings, purportedly knowing before the meeting began that the vote would be unanimous (except for that one time).

What is it they say when everyone thinks alike?

No one is thinking that much?

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Wow, this must be embarrassing

Like the privately held Bay area lender who shall hereafter remain nameless (don't ask), DataQuick President Marshall Prentice must not be liking what he sees when he Googles himself.

At first, a typographical error was suspected but, as it turns out, the spelling is correct. A search on "Marshall Prentice" returns a late-2005, not-so-flattering post from this blog in the number one spot.

Regarding Southern California, DataQuick President Marshall Prentice seems particularly intent on shaping public opinion about what the future holds:

"The big question is still whether or not the real estate market will end this cycle with a crash, or with a soft landing. Right now the latter scenario is still the most likely. Home values have doubled in the past four years and almost all, if not all, of those gains are here to stay," said Marshall Prentice, DataQuick president.

So, that second sentence is passable as sound analysis of the current situation - no evidence of anything crashing yet. But that third sentence is really very prescient, no? Divine omniscience? Didn't know that you had that in you Marshall - how else to explain stating as fact that an early 1990s style pull back in price levels is out of the question?

This post goes on at great length about a series of DataQuick articles, calculating "typical" mortgage payments, and a few other topics.

It's hard to believe that this is from 20 months ago and it still comes up as number one - it looks like Marshall needs a stronger "web presence" to knock stuff like this off of the first page.

That's one bad thing (or good thing, depending on how you look at it) about blogs and especially those hosted by a company such as Google where disk space is essentially unlimited - this stuff hangs around forever.

Admittedly, using DataQuick's median home price figures, Marshall's "almost all, if not all of those gains are here to stay" prediction is far from being wrong - SoCal median home prices are still rising, though you'd have a hard time convincing sellers of this.

The problem is that the housing slowdown is going on much, much longer than any of the optimists ever envisioned and the chances of that guarantee holding up fade a little more with each monthly report from DataQuick.

Ironically, in the most recent report on May sales, Marshall himself wonders why prices haven't fallen further.

"Sales have been dropping now for the last 20 months. The first part of that was just coming off the frenzy of 2004 and 2005 and didn't put that much downward pressure on prices. The sales declines of the last half year, though, will have more of an effect on prices. It's remarkable they haven't come down more than they have," said Marshall Prentice, DataQuick president.

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Less regulation, more calculators

Now that the horse has long since left the barn and Ben Bernanke and the crew at the Federal Reserve have come under increasing scrutiny for a mortgage lending industry that was healthy as a horse a couple years ago but now appears more sickly everyday, the Fed comes out with ... online mortgage calculators.

Surely, this will be the cure for the mess of bad loan products and incomprehensible disclosure statements that permeate the home loan business - potential home buyers will be able to compare monthly payments for different kinds of loans and make informed decisions including all-important options for "building equity" by ... paying down the principle?

That sounds sooo last century - doesn't home equity just "build up" by holding onto a property and making the minimum possible monthly payment?


This is so confusing.

It was much simpler when the lender just provided the answer that the home buyer wanted to hear - that the half million dollar home they sooo desired could be theirs for only $1,600 a month with no money down.

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The Oil Drum takes on BP ... again

The folks over at The Oil Drum are a persistent bunch. As the years go by and it continues to look as though Steve Forbes' post-Katrina prediction of $35 oil will forever fail to materialize, the forecasts by the crew at TOD appear increasingly likely to prove more accurate than predictions from most Wall Street types and nearly every big oil company and energy agency.

The Oil Drum (and other sites like it) in 2007 may turn out to be kind of like the housing bubble blogs back in 2005 when they screamed to the rest of the world that there was a problem but no one wanted to listen. The screaming at TOD is markedly less shrill than many housing bubble blogs, but not heeding their warnings will likely be even more disastrous than ignoring the housing naysayers a couple years ago.

A case in point came early yesterday after Euan Mearns had a good look at the latest from BP - their Statistical Review of World Energy. Judging just by the sound of the title of his retort - Lies, damned lies and BP Statistics - he obviously didn't like what he read.

If you are unfamiliar with the Middle East OPEC reserves reporting scandal and the culpability of BP and OECD institutions in perpetuating myths about global oil reserves then this is explained below using Saudi Arabia as an example.

In its purest form, oil reserves accounting follows a simple convention:

Reserves at start of period
Less production
Plus new discoveries
Plus or minus revisions
Equals reserves at end of period

Oil reserves therefore, are a dynamic variable, relentlessly pulled down by production when the rate of new discoveries declines, as it inevitably does in every oil region.

Revisions are a wild card that allows companies or countries to correct for past mistakes or to take account of new technologies that may boost recovery or changes in oil price that may make recovery more or less economic.

Saudi Arabia is the second largest oil producer in the world (after Russia) and is the largest exporter with 2006 exports of roughly 8.9 million barrels of oil per day. This represents 20% of global oil exports and it is therefore vitally important for the World to know for how much longer Saudi Arabia can continue to produce oil at 10 million barrels per day - that equates to roughly 4 billon barrels of oil per year.

The chart shows two lines that provide very different pictures of Saudi oil reserves. Both lines are anchored on 1980 – the year that the Saudi government took 100% control of Aramco – the state run Saudi oil company.

The blue line shows the official Saudi reserves as reported by BP whilst the red line shows how Saudi reserves would have declined since 1980 as a result of the 77 billion barrels of oil that have been produced since then.

In a very well written piece, worth reading in its entirety along with the comments, Euan goes on to lodge two complaints with the "official" reserve estimates - huge upward adjustments were made in the 1980s without justification and ongoing annual production is not properly accounted for in the updated reserve estimates.

Ultimately the problem lies in major energy companies and energy agencies perpetuating the worldwide belief that peak oil is many decades away.

For so long as BP, the IEA and EIA go on reporting ME (Middle East) OPEC reserves without question then the leaders of the major OECD economies will continue to ignore the energy peril that they are confronted with.

Keep up the good work!

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The end of sanguinity (or sanguineness)

Take your pick - sanguinity or sanguineness (the pronunciation and spelling of the former is much easier than the latter and, therefore, is preferred here) - when it comes to the state of homebuilding in the U.S., no one seems to have much of the stuff anymore.

Even the economists are down on housing now, though credit must be given to the economists where credit is due...

Housing data from the Commerce Department was released earlier today and, according to a Wall Street Journal report($), a survey of 25 economists had produced a median estimate of 1.474 million housing starts in May.

The report from the Census Bureau showed exactly 1.474 million!

Very good!

Predicting the future course of homebuilding one-month out appears to be much less error prone than seeing the longer term picture. The dismal set has been woefully inept at longer term forecasting for more than a year now though they do seem to have ratcheted their expectations down lately.

A contrary indicator? No, in this case, probably not.

Housing starts decreased 2.1 percent to a seasonally adjusted annualized rate of 1.474 million in May after a downwardly revised (surprise!) total of 1.506 in April. On a year-over-year basis, housing starts are now down 24 percent.

Housing permits, an advance indication of future homebuilding activity, rebounded 3.0 percent in May to an annual rate of 1.501 million after an upwardly revised total of 1.457 million in April. Unfortunately, permits for single-family homes just hit a ten-year low.


Today's construction data comes after yesterday's dismal report on homebuilder confidence that just reached a 16-year low.

Just how bad is the mood right now? Let's ask the economists.

David Seiders, chief economist at the National Association of Homebuilders:

Home sales most likely will erode somewhat further in the months ahead, and improvements in housing starts probably will not be recorded until early next year

An unidentified researcher at Goldman Sachs:

Housing's woes seem far from over

From a Bloomberg report, Joshua Shapiro, chief economist at Maria Fiorini Ramirez:

There is way too much supply. If you're a homebuilder with inventory, the market is skewed against you.

And Mr. Seiders again:

Builders are really worried now, not only by the credit tightening in the mortgage market, but now all of a sudden by an increase in the fundamental mortgages as well.

From a MarketWatch report, Richard Moody, chief economist for Mission Residential:

The data seem eerily calm. Simply put, there is too much inventory lingering in the market, and the most recent data suggesting rapid growth in the number of foreclosures mean the inventory overhang will become more severe, particularly with higher mortgage rates taking a bigger bite out of demand.

Some sanguinity prevailed, however, in one Ken Mayland, chief economist for ClearView Economics:

We are making progress toward the point where housing can be said to be 'stabilizing'.

But, not much.

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Plumbing new lows on the HMI

The National Association of Home Builders released their monthly Housing Market Index (HMI) a short time ago. The overall reading fell to 28, the lowest level since 1991, and an all-time low since they began charting the index back in 1995.

The outlook remains grim:

Ongoing concerns about subprime-related problems in the mortgage market and newfound concerns about rising prime mortgage rates caused builder confidence to decline two more points in June, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), released today. With a reading of 28, the HMI now is at the lowest level in its current cycle and has reached the lowest point since February 1991.

“Builders continue to report serious impacts of tighter lending standards on current home sales as well as cancellations, and they continue to trim prices and offer a variety of nonprice incentives to work down sizeable inventory positions,” said NAHB President Brian Catalde, a home builder from El Segundo, California.

“It’s clear that the crisis in the subprime sector has prompted tighter lending standards in much of the mortgage market, and interest rates on prime-quality home mortgages have moved up considerably during the past month along with long-term Treasury rates,” added NAHB Chief Economist David Seiders. “Home sales most likely will erode somewhat further in the months ahead and improvements in housing starts probably will not be recorded until early next year. As a result, we expect housing to exert a drag on economic growth during the balance of 2007.”
...
All three component indexes declined in June. The index gauging current single-family sales slipped two points to 29, the index gauging sales expectations for the next six months fell two points to 39, and the index gauging traffic of prospective buyers fell one point to 21.

They should probably hire some economists who are more optimistic - rosier predictions just might turn this thing around.

Housing starts for the month of May will be released tomorrow morning.

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What's their long-term plan?

Last week, the Bank of Switzerland announced that they plan to sell 250 tonnes of gold bullion into the market over the next two years. This comes shortly after news that the Bank of Spain had dumped more than 100 tonnes of the metal and word of additional sales by Belgium.

With the words "global inflation" on the lips of billions of people around the world and a rising price of gold sure confirmation of such, you have to wonder what the long-term plan is for Western central banks and their gold.

Do they plan to just keep selling the stuff until they have none left?

Why do they hold gold at all if it is simply a relic of some former, barbarous time - a metal that long ago lost its relevance in a world of advancing economic theory and practice?

So far this year, with each new press release detailing additional supply being pushed into the market, the gold price has taken another nose-dive only to trudge back up toward $700 an ounce, the level at which a line appears to have been drawn.

Like Gandalf to Balrog in the Mines of Moria, central bankers appear to be warning, "You shall not pass!"

Of course in the first Lord of the Rings movie, both Gandalf and Balrog took a perilous fall, Gandalf eventually gathering himself and averting disaster.

Will Western central bankers hold off their nemesis for a while longer and, if so, is it their intention to just stand there on the bridge indefinitely hoping that Balrog will get tired and walk away?

Balrog seems full of energy - not the type to tire easily.

Or, in the world of central banks and their gold, does Gandalf lose?

Surely their long-term plan can't be to continue to sell gold into the market indefinitely, keeping the price of the metal artificially low, until all their vaults are empty.

What will they do then when the price of gold continues to rise?

Raise interest rates to 20 percent?

With the amount of debt and leverage that has become commonplace in the world today?

Reality Check

As more and more of the world's citizens doubt their government's reporting of a "low inflation" world - as they see prices rising quickly around them, watch asset bubbles inflate, and hear of double-digit money supply growth - more and more of the world's citizens buy gold.

Like other commodities, the supply of gold is limited.

Unlike the paper and its electronic equivalent that spews from the global financial system at a dizzying rate, the supply of gold can not be increased with the push of a button on a computer keyboard.

That is why its value goes up.

The more the world's citizens buy gold, the higher the price goes, and the more that Western Central Banks are likely to sell - up to the point that they either decide to stop selling or they run out of gold.

Which will it be? When will it be?

Does anyone really think that this same discussion will be taking place ten years from now or fifty years from now?

Surely Western central bankers have some sort of a plan to keep the price of gold from making them look bad.

Don't they?

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Gargoyles

Just a few pictures from a hike we took last week - Gargoyles. If not for the U.S. Open, there might be something more to offer this afternoon - it seems that there is a nearly endless supply of bad news about housing, but you've probably heard it all already.


That little thingy in the foreground is how this area got its name - they're sticking up like this all along the perimeter.


A view of the Stanislaus Mountains (I think - we're still new around here).


One big rock between two smaller ones.

ooo

This week's cartoon from The Economist:

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