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Nicholas Colas (Chief Market Strategist): 212 448 6095 or [email protected] Clark: 212 448 6085 or [email protected]
Beth Reed: 212 448 6096 or [email protected]
Replace OER with Case-Shiller, and the truth about inflation comes through loud and clear. Inflation was actually over 6% for much of 2004 2006. It also grewmuch more quickly earlier in the decade, doubling from 2% to +5% in 2002-early 2004. It is pretty clear that the Fed should have been raising rates much moreaggressively in the decade. Had it done so, house prices would not perhaps have gotten to the stage where their trajectory resembled a boulder rolling down a cliff.
If somethings not right, its wrong.But enough of the finger waving What does this mean for the ongoing inflation/disinflation/deflation debate?If you accept that house price inflation is better measured by Case-Shiller than OER and we hope we have proven this point then a quick examination ofwhere Case-Shiller is right now is in order. Thats the last chart in our stack.The index has flatted out from its free fall, at least partly due to the first time home buyer tax credit from the Federal government. That program ran fromJanuary 2009 to April 2010. Case-Shiller bottomed in May 2009. The data we will get on the residential housing market this week should help determine if the index willbegin to decline once again, or continue to stabilize.
My thought is that the odds are tilted to deflation. Unemployment is still high, confidence is still low, and savings rates are still moving up. Thats not a recipe forhousing market strength.
And while we may poke fun at the Fed, in reality they must know all this. Their recent announcement about holding the size of their balance sheet constant is awarning flare on a host of issues, but the housing market has to be at the head of the list. It is the fulcrum issue for the economy, and not just because there are so manyhouses still for sale. It is, in fact, ground zero for deflationary pressures and the Fed must keep moving its policy in an ever more aggressive manner to try to catch thatboulder before it rolls further down the hill.
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Nicholas Colas (Chief Market Strategist): 212 448 6095 or [email protected] Clark: 212 448 6085 or [email protected]
Beth Reed: 212 448 6096 or [email protected]
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150.0
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Owners ' Equivalent Rent vs Case-Shi l ler HPI (Index = 100 in 1987)
OER Case-Shiller
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Owners ' Equivalent Rent vs Case-S hi l ler HPI (Index = 100 in 2000)
OER Case-Shiller
-6%
-4%
-2%
0%
2%
4%
6%
8%
Year-Over-Y ear % Changes in Select Measur es of Inflation
Headline CPI CPI Excluding OER Case-Shil ler Replacing OER in CPI
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110
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190
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Case-Shiller HPI
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Nicholas Colas (Chief Market Strategist): 212 448 6095 or [email protected] Clark: 212 448 6085 or [email protected]
Beth Reed: 212 448 6096 or [email protected]
U.S. EQUITIES
PAR surged 44.6% after HPQ (-2.0%) said it offered to purchase data storage firm 3PAR for $24 a share in cash, or $1.6 billion, representing a 33%premium to the price offered by DELL (-1.1%). In other M&A news, POT (+0.4%) announced that its board voted unanimously to reject BHP Billitons (BHP:-0.5%) takeover offer and has commenced talks with other companies on alternatives. Shares of MMM rose 0.5% following news the company intendsto spend about $2 billion on acquisitions in 2010, double its previous estimate. Finally, GILD shares added 0.6% as team researchers said they found apossible cure for cocaine addiction.
Important Conferences/Corporate Meetings Today:EnerCom Incorporated Oil & Gas Conference Denver, CO
Important Earnings Today (with Estimates) From
Source: Thomson ONE
Three Day (High 1080.25; Low 1061.75):Prior Day SPX (High 1081.58; Low 1067.08; Close 1067.36):
S&P Futures
One Day (High 1080.25; Low 1065.50):
BKS: $-0.80 BIG: $0.47 BKC: $0.34 MDT: $0.82 PAY: $0.26Source: Bloomberg
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Nicholas Colas (Chief Market Strategist): 212 448 6095 or [email protected] Clark: 212 448 6085 or [email protected]
Beth Reed: 212 448 6096 or [email protected]
FIXED INCOME
Source: Bloomberg
Todays Important Economic Indicators/Events (with Consensus): Existing Home Sales (10:00am EST): 4.650M SAAR
Source: Bloomberg
Treasuries advanced Monday, with 2-year note yields falling to within 4 basis points of a record low on concern the recovery is stalling. Tuesday thegovernment will auction $37 billion of the debt. Mondays $8 billion sales of 30-year TIPS drew a yield of 1.768 percent, which was the lowest ever forsales of the debt dating back to 1998. The bid-to-cover ratio was a record high 2.78. Indirect bidders bought 39 percent of the securities versus 42percent at the last offering in February.
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