June 2010 - Money Morning - Only the News You Can Profit From
Housing Market Wobbling without Tax Credit Crutch
The housing market has struggled to rebuild since its 2007 collapse, and its recovery is on even shakier ground now that a tax credit for first-time homebuyers has expired.
Nearly one-third of all U.S. home sales in the first quarter involved properties that were in some stage of mortgage distress, according to RealtyTrac Inc.. And homes on the market that were in the process of foreclosure sold at an average discount of 27% in the first quarter, which does not bode well for new inventory coming onto the market.
"We're clearly creating more properties that will be sold at distressed prices than the market is absorbing," Rick Sharga, RealtyTrac's senior vice president for marketing, told Bloomberg News in an interview. "The discount will probably stay between 25% and 30% as lenders carefully manage the number of new foreclosure actions in order to avoid flooding the market."
Question of the Week: Readers Respond to Money Morning's Question on China's Currency
After months of intense political pressure, China last week announced that it would allow its currency to gradually appreciate against the U.S. dollar. China's currency – the yuan – has been pegged to the American greenback since 2008.
"This is going to lead to a transition from export-lead, investment-lead to more of a consumption-lead economy going forward," Jing Ulrich, chair of China equities and commodities at JPMorgan Chase & Co. (NYSE: JPM), told CNBC. "I think the ramifications are profound not just for the next few months but actually for the coming years."
Not surprisingly, U.S. exporters embraced the news as an opportunity to compete against Chinese companies and to reduce the U.S. trade deficit. Foreign nations, including the United States, have accused China of undervaluing its currency to give its exporters an advantage in global trade.
Chinese domestic consumption stands to benefit the most, as consumers will have more purchasing power on top of China's recent wave of multi-industry wage increases. Western companies that reach out to Mainland China can access a consumer base with more money and an increased desire to spend, which should give Western investors a chance to cash in on climbing profits.
However, not everyone will see immediate benefits from the new currency policy. In fact, the combination of big double-digit wage increases in China and an increase in the yuan will reanimate inflation.
It's Time to Invest in Chile and Colombia – Latin America's Reigning 'Good Guys'
For decades, investors with an interest in Latin America were essentially limited to two choices: Invest in countries that were moderately badly run; or invest in countries that were truly dreadfully run.
Most recently, it's been the "dreadfully run" group that seems to be attracting new members: Bolivia, Ecuador and Nicaragua have subscribed to the economic and political doctrines of Hugo Chavez's Venezuela.
However, two elections this year have created a new category of Latin American country – the "truly well run" class – and installed the first two members: Chile and Colombia. As investors, we should rejoice, make them part of our portfolio, and keep an eagle eye out for other countries that may join this promising new category – the "good guys."
Commodities Are Key as China Continues to Call the Shots
China ended up being the big story this month, as investors looked past Europe to the Far East for clues about what shape the global recovery – if you can even call it that – is taking.
Markets around the globe tanked yesterday (Tuesday) after the Conference Board revised its leading economic index for China to show the smallest gain in five months in April. The index rose just 0.3% in April, which was a significant reduction from the 1.7% gain the Board reported on June 19.
The news of the error contributed to the biggest sell-off in Chinese stocks in more than a month, and sent U.S. indices into a dizzying downward spiral. The Dow Jones Industrial Average plunged 268.22 points, or 2.65%, to close at 9,870.30 and the Standard & Poor's 500 Index tumbled 33.33 points, or 3.10%, to close at 1,041.24.
We Want to Hear From You: How Do You As A Consumer Feel About the Financial Reform Bill?
With U.S. consumers still feeling the sting of the global financial crisis, consumer advocacy groups are claiming that they snagged a win with the financial reform measure approved last week by a joint House-Senate congressional committee.
The bill goes next to President Barack Obama, who is expected to sign the measure into law.
"It's historic legislation," Michael Calhoun, president of the Center for Responsible Lending, told ABC News. "It's a big win for consumers."
EU Widens Scope of Bank Stress Tests to Include More Banks, Government Debt
Under pressure from investors to provide more transparency, European Union (EU) officials are widening the scope of banking stress tests to include more national and regional banks and to assess sovereign-debt risks when calculating how lenders would perform against shocks to the banking system.
The moves come as investors have been increasing pressure on the EU to provide complete transparency while conducting stress tests on the banks.
EU leaders have already agreed to publish stress test results for 26 banks next month – mainly big, cross-border institutions – to address concerns about the Eurozone's exposure to sovereign debt.
"Experts" Grow Bullish on Japan …But We See Reasons For Caution
KYOTO, Japan – Japan's Nikkei 225 is half the relative price of the U.S. Standard & Poor's 500 and is the cheapest that it's been in nearly three decades. This has led many Western analysts to conclude once again that it's "time to invest" in Japan.
I don't "buy" it – and you shouldn't, either.
Dollar Bulls Retreating From Bets Against Euro
The biggest surge in the value of the U.S. dollar since 2005 appears to be waning, as traders retreat from bets against the euro and other currencies.
The number of contracts hedge funds and other large speculators hold betting on a rise in the dollar versus other currencies declined by 70% to 49,335 in the week ended June 22 from a June 8 peak of 163,085, according to an analysis of Commodity Futures Trading Commission data conducted by Bloomberg News.
With concern that Europe's fiscal crisis will cause a nation to default easing, the Dollar Index – which measures the currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona – is down 3.5% since June 7.
Money Morning Chief Financial Strategist Keith Fitz-Gerald thinks there may be an opportunity to cash in on the dollar's recent weakness in view of the increasing flows of capital into Asian markets.
G20 Summit Bogged Down by a Shaky Global Recovery
The Group of 20 (G20) countries concluded their weekend summit with an outline for reducing budget deficits and a delay in global banking reform, but failed to create a unified policy as nations find themselves in different phases of economic recovery.
Leaders pushed decisions on global banking regulations to the agenda of the November session in Seoul, South Korea. The meeting's concluding statement expressed unity in countries' desires to reduce debt, but did little to alter austerity plans and stimulus measures countries have already created.
"With the common efforts of G20 members and the international community, the world economy is gradually recovering, but the foundations of the recovery are still not solid, the process is not balanced and there are still many uncertainties," said Chinese President Hu Jintao. "All this shows that the deeper impacts of the financial crisis have still not been surmounted, and systemic and structural risks to the world economy remain very grave."
The G20 communique underscored the countries' focus on achieving "growth friendly" fiscal policies while acknowledging that leaders must reduce the budget deficits, although policies and budget cuts should be tailored to suit each individual nation.
"The path of adjustment must be carefully calibrated to sustain the recovery in private demand," the G20 nations wrote. "There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery. There is also a risk that the failure to implement consolidation where necessary would undermine confidence and hamper growth."
Analysts said the divergent views on how to sustain economic recovery marked the lack of effectiveness of the G20 forum.