Open exchange --- Suzy (fast)
hello, everybody, from world headquarters in new york. i’m suzy assaad. you’re watching “open exchange.” thank you for being with us today. top stories at this hour, the new data that shows u.s. inflation staying in check. producer prices crept up just about .10% for core prices, and it suggests that the fed may pause in june. also, housing construction slowed for a third straight month. the pace of starts slipped to the lowest annual rate in a year-and-a-half. in earnings news, wal-mart and home depot topping analyst estimates last quarter. wal-mart benefited from the sharpest sales growth in two years. the company said high gas prices could hurt results for this quarter. home depot increased their share of the appliance market and expanded into the business of supply and contractors, and that helped them in the last quarter. you can see, home depot shares are down on the expectations and the concerns that the consumer and housing will slow down in the next several quarters while wal-mart is up almost 2%. let’s get a quick comment from our featured guest this morning, doug cliggott, on these markets . we start off talking about housing starts that came out this morning. much lower than expected, and then another month of lower than expected numbers. what do you think of that?
>> i think, suzy, we had a disconnect at the end of last year and the beginning of this year where we saw demand for housing slow down. new home sales have slowed, mortgage originations are down very sharply, and at first, builders just kept accelerating their rate of building through the winter, and now i think we’re getting a pretty big unwanted inventory out there, and so we’re seeing, i think you would call it a violent adjustment now as they try to slow the pace of building, more in line with the rate of demand they’re seeing.
>> this is where everyone starts to get concerned that you will have an actual decrease in prices, right? how substantial do you think it’s going to be?
>> i don’t think anyone knows, suzy. it would be great to know, but we have never seen the kind of run in housing that has occurred in the past three or four years. it hit really, an unprecedented share of the total economy. you have to go back to the 1950’s after the second world war when we created the suburbs in america to come anywhere close to the boom in housing we have had. what happens on the other side of this―i think truly it’s impossible to tell.
>> you did say that you thought it was a violent correction. these numbers―give us an idea of why that―i mean, that’s a very strong word to use associated with this market .
>> well, i think the idea being you have seen a build in housing a build in starts continuing to climb even as demand softened. now, so we’re going to see a strong decline in starts, and the uncertainty really is not will starts come down to the pace of sales. of course, they will. the real uncertainty is what happens to demand, what happens to sales over the next six, nine 12 months, and that’s where i think no one really could give you an accurate answer.
>> you’re shorting the homebuilding stocks?
>> we are, yes.
>> we’re going to talk about that a lot more over the next hour, but let’s just get a check on the markets today. they are really lackluster at this point with the dow jones industrial average up only 12 points, the s&p and nasdaq are a little changed. the treasury mar markets are seeing a little more buying because of the data that came out today indicating that the fed may be closer to pausing in their june meeting. yield is at 5.12% in the ten-year and the two-year note is yielding at 4.95%. the dollar is declining because of the data and again because of the expectations that the fed may halt. the dollar/yen is down to 110. euro is 1.28 and british pound at 1.88.5. oil markets , prices are lower for two days in a row. we’re below $70 a barrel. we are seeing a decline of .4% in the stock market at this hour. for little more on today’s rally in the bonds, we have john brady at the chicago merchantile exchange. john, we’re seeing certainly a bid coming into the market . tell us how strong it is and who is buying?
>> i think it’s important, suzy, to remember that there is a tremendous overhang of speculative short positions compared to the speculative long positions in the treasury market as registered by the commissioners of traders data. that having been said, we see the markets have a good short base. we have seen short covering here this morning. we probably have further to go. there are shorts that want to maintain the positions ahead of tomorrow’s c.p.i. data. of course, there are fed speakers in the next few days and we will be watching those speeches carefully. i will suggest it appears that the real time demand data, whether it’s housing starts or retail sales from last week, and the market continues to soften and the idea is eventually going to be what will the fed do? will the fed stop and perhaps skip more than one meeting in order to keep demand from falling off a cliff, or will they continue to tighten with the idea of fighting inflation? there’s an interesting argument that seems to be sort of becoming more intense and swelling as we enter summertime trading.
>> john, it’s doug cliggott. a question, with the fed fund’s rate at 5% now, doesn’t that really put a floor under how far down ten-year yields can move?
>> it does, doug. actually, what it does it puts a floor down in terms of what the entire term structure can do. you see he excellent institutional buying of two-year treasury notes against 5%. with funding at 5%, you see the notes trading closer to 4.95, 4.94% this morning. to reiterate what i may have seed earlier, that seems to be a tremendous short base in the market with ten-year treasury notes at 5.12% and 5.12125 and we compare this to the data in the next two days to the massive numbers and i think the path of the least resistance may be higher prices and lower yields.
>> john, thank you very much for being with us today.
>> thank you.
>> john brady at the chicago merchantile exchange. he is talking about not pausing for just one meeting. he is is talking about pausing possibly for two meetings?
>> right. i―there’s such a mixed set of data now, suzy. i mean, clearly, if all of the • if all there were were the housing data, the fed may not have raised rates last time, but there’s a lot of conflicting information with what’s going on in the commodity markets like everyone is speaking about, and i think another real frustration has to be for our policymakers the fact that so much of existing treasury stock is ownedded by people outside the u.s.. i don’t think the direction of interest rates in the united states is completely in our own hands right now.
>> nonetheless, though, i mean, you bring up the commodity markets and the sales, isn’t that something that the fed is actually happy to see, that the prices are finally starting to pull back. isn’t that going in the direction they intend to go in terms of rates?
>> well, i think it depends on your time perspective, suzy. they came down last week, but you know, let’s draw a chart for a year or two years or three years. you can hardly see that little downtick.
>> it’s just a blip at 100% and 200% returns. in terms of equities, though, do you think that part of the reason we have seen an equities gaining over this quarter was -- has been earnings. earnings have done very well. we have seen very good levels of earnings. is the earnings growth at these levels sustainable for the equity markets ?
>> we don’t think so. to us, that’s a hugely different picture than, say, three years ago when we were starting this very powerful bull market . may, 2003, expectations for earnings for the rest of 2003 and for 2004 were pretty modest, even i guess you could call them dismal. we had the fed moving aggressively during may to lower rates for 1%, then we got enormous tax cuts just before the memorial day weekend. that made those low earnings expectations just vaporize. you really had conditions for a very, very strong move as earnings beat expectations.
>> none of these conditions exist anymore?
>> not anymore. now you have the fed raising rates trying to slow us down. when we look ahead through 2007, the consensus is for combined 25% earnings growth this year, and next year. that’s an incredibly high bogey. we just don’t see those numbers being hit.
>> does that mean equities have to retreat? we have seen the dow going up almost 8% just a couple of weeks ago, will the dow have to come back from that?
>> not necessarily. it can work out at least a couple of different ways. we might be absolutely right on earnings that they’re going to miss by a lot. what that might mean is the market stays stable orrell tiffly stable for a very long period of time. alternatively, we―you could get a fairly meaningful price correction. could the market go down 10% or 15%, sure it could, but there’s -- i think you need some kind of combination of negative surprises for that. our guess is that the best bet is literally no increase, maybe a modest decline. maybe this year is virtually flat.
>> from these levels?
>> from these levels, yes.
>> okay. let’s take a break, everybody. when we come back, we’ll have more on agilent. the shares are moving lower today, after the company came out and said that the forecast disappointed some investors and analysts out there. their c.e.o., bill sullivan, will join us after this break. shares of agilent down 7% this morning.
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Listen Focus: Market briefing & NYMEX
>> the dow, the s&p this morning are seeing modest gain and the nasdaq is really unchange at this point. here is a look at what’s going on in the treasury market . they are seeing a bid that the economic data showed weaker than anticipated numbers with the expect thation that the fed may pause at the next meeting. it’s coming down to 5.12% on the 10 and the two is at 4.95% if dollar is also taking a little bit of a hit because of the weaker data, so dollar yen, the euro, and the british pound are all down about .4%. the dollar is down against those current sis. as for the price of gold, it is gaining this morning as the dollar goes down. trading right now in the futured market is down about .8% for gold. crude is turning lower continuing a two-day decline. the latest trade we’ve got on the price of crude, if we can bring that up and show you, it is down to $69.15. we have su keenan at the new york mercantile exchange to give us a little more on the session.
>> well, suzy, it is steepening up to a real battle between the bulls and the bears after yesterday’s steep sell off. we did have the rebound this morning, but now appear to be sliding downward. one analyst said yesterday, simply put, not a good day for the bull. how bad was it? take a look at the way crude has traded for the past month. while the trend has been higher, yesterday’s more than $2.50% drop the biggest drop of the year so far. take a look at gasoline. another upward trend. if you look at the 30-day chart, and yesterday’s almost 6% drop, you have to go back to october to find a single one-day
