Today's Tidbits

S&P Case Shiller Index Shows House Price Declines in First Quarter
From MarketWatch: “U.S. home prices dropped 1.4% in the first quarter compared with a year earlier, the first year-over-year decline in national home prices since 1991, according to the S&P/Case-Shiller index released Tuesday. A year ago, home prices were rising at an 11.5% pace. Prices have been falling for the past three quarters.
The Case-Shiller indexes cover three geographical areas. The national index is released quarterly, while the 10-city and 20-city indexes are released each month. The 10-city Case-Shiller price index fell 1.9% year-on-year through March, while the 20-city index dropped 1.4%. The 10-city index has fallen nine months in a row, while the 20-city index has fallen for eight straight months.”

From JP Morgan: “The moderation in home prices continues to be particularly dramatic among expensive cities along the coasts and in the southwest—regions that saw rapid price appreciation during the boom and, in many cases, are experiencing price
declines at this time. The Case-Shiller house price indexes, like the OFHEO, track price changes for constant-quality homes and also control for regional shifts in the mix of homes sold. However, unlike the OFHEO, the Case-Shiller indexes include non-conforming mortgages—mortgages over $417,000 in 2006 and 2007—thereby
capturing the upper-end of the housing market and coastal markets where the median home price is high. This difference, in part, explains greater appreciation in the national Case-Shiller index during the boom but also more rapid deceleration subsequently. In addition, subprime activity is underrepresented in the OFHEO, but likely not in the Case-Shiller national sample.”

From HSBC: “Unsurprisingly, a drop in Q1 national house prices according to the Case-Shiller index, falling 2.9% annualized in Q1 (and -1.4% Y/Y), or about -7% annualized in real terms. This suggests that the OFHEO index will soon be showing declines too, although it could still take a couple of quarters to show through. There are still pockets of strength, including areas such as Portland (7% yy), Charlotte (7.4% yy) and Seattle (10%), while anecdotal evidence suggests the Manhattan condo market also remains strong, partly thanks to a cheap dollar attracting foreign buyers. Overall, though, there is little doubt that national prices in aggregate are exerting a negative wealth effect on consumption, offset to a lesser or greater extent by the rally in stock prices. Areas of weakness include Washington DC (-4.8% yy), Phoenix (-3% yy), Tampa (-3% yy), Detroit (-8.4% yy) and San Diego (-6% yy). Real national house prices are likely to keep falling for the next few years as valuations remain too rich in about half of the housing market…”

From LEHC: “In the first quarter, 11 of the 20 metro areas experienced annualized home price declines in excess of 5%... It’s also worth noting that the recent home price indexes reflect transactions from January through March, and as such would only have been slightly impacted by the subprime mortgage market debacle, and the recent tightening in mortgage credit by most lenders – and not just in the “subprime” market. This tightening has depressed the “effective” demand for housing, while at the same time inventories of unsold homes have soared. These developments strongly suggest that home prices will be under even more downward pressure over the next several quarters, and there is virtually no doubt that home prices will show a record yearly decline in 2007. Our own forecast – which we have not revised, as the recent data came in “as expected” – calls for a decline in the S&P/Case-Shiller national home price index of 7% from Q4/06 to Q4/07.”

From Lehman: “The 10-city composite is heavily weighted by “bubble” regions and is therefore more volatile than the other aggregates. As such, it showed bigger price increases during the boom and is likely to continue to show bigger price declines during the correction. On a regional level, home prices in 13 out of the 20 cities fell on a y-o-y basis, with Detroit and San Diego witnessing the biggest declines of 8.4% and 6.0% respectively …We continue to look for OFHEO home prices, which are to be released on Thursday, to increase 0.5% q-o-q or 4% y-o-y in Q1. OFHEO uses the same weighted repeat sales methodology as Case-Shiller but has a broader sample with a loan conforming limit, making the series less volatile and more likely to report higher prices during the downturn.”

From Goldman Sachs: “This more timely data indicates that house prices do not appear to have bottomed with, if anything, the pace of the decline increasing slightly. We remain comfortable with our forecast of house prices falling by 5% over 2007.”

Government Statistics Subject to Revisions and Assumptions/ Use With Caution
From Gartman: “…we shall go on record noting that when we have our own ‘guess-timate’ prepared for our clients we shall strongly urge them not to pay anything other than academic interest in those figures, or in the figures of others, and certainly we shall not recommend predicating any trading decisions upon them, for these figures have proven worthless over time given the enormity of the revisions made to them from one month to the next…and of their revisions made a year later!”

From LEHC: “…“demographic” data available in terms of household formations, headship rates, and homeownership rates are of highly dubious quality. There are numerous and often conflicting data available from Census on household growth over time, and researchers have had a devil of a time dealing with such conflicting data.
Another reason is that projections of population by “age cohort” are heavily dependent on assumptions about immigration, and it’s pretty clear that any such assumptions in the current environment are at best just “guesses”.”

MISC

From Dow Jones: “Treasury prices continued to trade modestly lower…The dollar staged a modest recovery against its European rivals…Stocks struggled [to close slightly higher]…”

From AP: “Oil prices plunged by more than $2 a barrel Tuesday on hopes that the inauguration of a new president in OPEC member Nigeria would contribute to a stable supply from the Niger Delta region. A formal meeting over the weekend between U.S. and Iran officials also soothed traders' concerns about a potential conflict between the two… gasoline futures fell 6.46 cents to $2.3391 a gallon after several refineries restarted on Tuesday.”

From Gartman: “2006 was the first time ever that exports of oil from Africa to the US surpassed shipments of oil from the Middle East. The trend continues this year for thus far, Nigeria, Angola, and Algeria account for just over 25% of the US’ oil imports, while Saudi Arabia, Iraq and Kuwait account for only 23%!”

From Lehman: “After China and the United States, few countries will have a greater effect on future oil demand than India. We expect Indian demand to grow 140k b/d (5.2%) in 2007, representing 8% of global demand growth of 1.7m b/d.”

From Bloomberg: “Short sellers are betting against U.S. stocks like never before as the Standard & Poor's 500 Index approaches an all-time high… The amount of shorting -- where traders sell borrowed stocks expecting to buy them back after prices fall -- jumped to 3.1 percent of the total shares listed on the New York Stock Exchange this month. That's the highest since at least 1931… The S&P 500 has climbed 6.9 percent this year, extending four years of gains that pushed it up 95 percent.”

From Bank of America: “Open-end mutual funds focused on US equities continue to suffer net outflows, though the pace of selling has slowed to nearly zero in the latest week. Investors continue to prefer funds investing in international stocks, which collected an additional +$1.5B in the latest week, bringing the average weekly take over the past month to +$1.9B/week. This pace is a good deal slower than the +$4B/week rate of inflows that prevailed before the global market swoon in February, but it is still a lot better than the -$500 million/week net redemptions that domestic funds are seeing.”

From RBSGC: “Cheapest OAS numbers in a year are attracting new investors to MBS, including crossover corporate bond buyers worried about credit risk. Agency debenture curve OAS at 18 bp is close to the wide of 20 bp seen last July and could prompt the GSEs to buy MBS in size versus issuing debt. They could also buy swaptions to hedge.”

From Dow Jones: “The riskiest portion of the benchmark credit derivative index based on subprime mortgages came under pressure Tuesday after closely-watched loan data showed borrowers continuing to buckle under the weight of their home loans in May.”

From AP: “China’s former top drug regulator was sentenced to death Tuesday for taking bribes to approve untested medicines, as the country’s main quality control agency announced its first recall system targeting unsafe food products. The developments are among the most dramatic steps Beijing has publicly taken to address domestic and international alarm over shoddy and unsafe Chinese goods — from pet-food ingredients and toothpaste mixed with industrial chemicals to tainted antibiotics.”

From MarketNews: “Chinese companies appear to be reining in their expectations for future growth and business conditions as rising input costs and government measures to slow the economy take hold, suggest the results of the May Xinhua Finance/MNI China Business Sentiment Survey.”

From Lehman: “Chinese investors still have 95% of financial assets in cash…”

From The Washington Post: “China has embarked on a nuclear-plant construction binge…Under plans already announced, China intends to spend $50 billion to build 32 nuclear plants by 2020…China’s plans have already been felt in world markets. Chinese Premier Wen Jiabao has been traveling the work to secure contracts for the uranium needed to power nuclear reactors…Higher worldwide demand and fear of future shortages have driven the price of processed uranium ore from $10 a pound in 2003 to $120 this month.”

From The Financial Times: “A disease killing millions of pigs in China… Pork prices have risen as much as 30 per cent in Chinese cities over the last week. According to the agriculture ministry, wholesale prices for pigs have gone up even more, rising 71.3 per cent since April. China's 500m-odd pigs are the country's most important source of affordable meat, and any sustained interruption in supply would be a big political problem for the government… The government has a "strategic pork reserve", established in the late 1990s, including both frozen stocks and access to pig farms, which could provide a buffer.”

From Merrill Lynch: “…producer prices for farm products have not risen this rapidly since 1974.”

From Dow Jones: “Brazil’s leading beef processor and exporter has purchased Swift Foods Co., the third largest U.S. processor of beef and port, for $1.4 billion.”

From Bloomberg: “A tax-cut war is spreading across Europe as leaders of the continent’s biggest economies give up criticizing smaller neighbors for slashing business rates and decide to join them instead…The EU’s average corporate tax rate at the end of 2006 was a record-low 26 percent and is falling even more.”
From The Financial Times: “Recruiting at business schools reached its peak in 1999, but after the technology boom subsided, recruiting and hiring was lacklustre for several years. It has recently started to pick up, and this spring, it is "the healthiest in years"… While big banks and consultancies conduct most recruiting at business schools, boutique investment management groups and real estate companies have recently become a strong presence. In addition, … consumer packaged goods companies such as Pepsi, as well as information technology companies such as Google and Microsoft, had also ratcheted up management recruiting…an MBA recruiter for Goldman Sachs, described this year's recruiting season as "extremely competitive" with "more students getting multiple offers".”
From Dow Jones: “Texas-area manufacturing activity continued to grow at a solid clip in May… Manufacturing activity in the Midwestern U.S. expanded in April, registering its third straight monthly increase in the heavy industrialized region, the Federal Reserve Bank of Chicago reported.”