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June
ANTELOPE VALLEY REPORT
2006
____________________________________________________________________________
jim@jpbroker.com
"Don't wait to buy
land; buy land and wait!"
800-579-0758
____________________________________________________________________________
The following information is the opinion of Jim
Patton, Broker and is based
on his view of the
US economy and the Antelope Valley real estate market since 1980.
The information is delivered to subscribers the weekend after
the first Friday of each month.
The Antelope Valley Report is available by "email only".
Redistribution of this report, without
changes, is encouraged.
=======================================================
Monetary
Policy will Dictate Direction of Economy, Markets
"The FED Writes the Market Letter"
========================================================
June's Hi-Lites:
- CPI (inflation rate) now rising at a 5.2% annualized rate in
2006
- GDP growth now + 5.6%, but where will it be by year's end ?
? ?
- June job creation disappoints badly, giving the financial markets
a bad case of the jitters
- June's stock market finishes poorly as a real concern regarding
the "R" word resurfaces
- AV land sales in June, down 1% from May, but market is still
very active
========================================================
Economic Numbers (listed in order of their
release)
-Retail sales (May) nearly flat at +.1%; sluggish sales, weak
auto sales, gasoline sales strong
-CPI in May up .4%; core rate up .3% for the third month in a
row, FED will keep raising rates
-Durable goods in May, down -.2%, 2nd down month in a row, aircraft
orders weak again
-Q 1 GDP growth, last revision, came in at + 5.6%, the fastest
rate in 3 years
-June Consumer Confidence rises 1 pt to 105.7, stabilizing gasoline
prices helpful
-Factory orders- May, rise +.7%, lead up by non-durable goods
which were up +1.6%
-Jobs / Unemployment rate for June, +121k jobs on payroll survey,
jobless rate holds at 4.6%
-Energy markets- crude oil pushes above $75 for the second time,
but could be headed lower next week
-Stock market- late May's rally fails; SP 500 heads lower over concerns
on economy, market looks weak
========================================================
Summary of Indicators
Retail
sales (May) came in at +.1% with most of the increase
credited to higher gasoline sales (+1.9%).
Overall for the month, retail sales
were considered sluggish. Weak auto sales dragged down the overall
number.
Ex auto sales, retail sales would have been +.5%, which is still
nothing to get excited about.
The report was in line with expectations, so sameday, it had no
effect on the stock and bond markets.
While May sales were sluggish, the report did not confirm any
sharp downturn in the economy.
Over the past year, retail sales were up + 7.6%.
Consumer prices in May, as
measured by the CPI, rose
+.4%, which was in line with expectations.
The core rate, for the third month in a row, rose +.3%. The core
rate, which is the CPI, less food
and energy, over the past 12 months, has risen 2.4%. In 2006,
the core rate is rising at a 3.1%
annual rate- both of which are well above the 1%-2% comfort zone
that FED officials say they prefer.
Over the past 3 months, the core rate has risen at it's fastest
pace since 1995. Leading the report
higher were energy prices (+2.4%) and rents (+ .6%). It was the
third straight month that energy
prices rose 1% or more. The rise in rents was the largest gain
in 16 years. Over the past 12 months,
the CPI has risen 4.2%, but in 2006, it is rising at a 5.2% annual
rate. While some sectors of the
economy are slowing, i.e., housing, consumer spending, and the
stock market, FED officials know
that inflation can accelerate long after the economy has begun
to slow from previous interest rate hikes.
This lag effect is what makes the soft landing so difficult to
accomplish. The FED has a tough call here.
Stop the rate hikes too soon, and inflation could get out of hand;
raise rates too high and too long,
and recession is the risk.
May durable goods orders falls
fractional, down -.2%. Although it was the 2nd monthly decline
in a row, analysts say that business capital investment is growing
at a healthy clip, with underlying
trends remaining solid and that the outlook for capital spending
remaining positive. Year to date,
durable goods orders are up + 9.5%. The volatile aircraft sector
was down (-17.9%), also for the
2nd month in a row. Excluding all transportation orders, durable
goods were up +.7%.
A Morgan Stanley economist says that this report indicates that 2nd
Q GDP will be in the
2.5% to 2.8% range.
June consumer
confidence managed a modest gain, + 1 point to 105.7, as
analysts felt the
stabilization of gas prices gave consumers some solace. Most
economists had expected CC to
decline to 103. Within this index, the expectations index was
also up, which tells us that consumers
are positive about the future. Survey respondents also expect
the business climate to improve,
with the labor market also improving. The survey is based on
a sample of 5,000 households.
Q 1 GDP
report, the last revision, was released on June 29th, and indicated
that Q 1 growth,
at + 5.6%, was the strongest in three years. Over the past year
the economy has grown at a 3.7% rate.
FED officials, and many economists, now expect the economy to
slow to the 2.5%-3% range
the balance of the year. Q1 growth was spurred on by consumer
spending (+5.1%), business
investment in equipment and software (+14.2%), an improving trade
deficit, and federal govt
spending (+10.5%). Spending on durable goods rose 20.3% in Q
1, after falling 16.6% in Q 4.
Investment in housing increased at a 3.3% annual rate. Over the
past two quarters, growth has
average + 3.6%. Also in Q 1, corporate profits were up 28.5%,
the biggest gain in 22 years.
Analysts say that strong corporate profits suggests that higher input costs
can be absorbed by
producers and not be passed along to consumers. We need to see
US growth moderate if the
FED is going to get off the "brake" and stop raising short rates.
Factory Orders,
in May, rose +.7%, surprising analysts and surpassing the expected
gain of
only +.1%. The surprise of the report was in non-durable goods,
which were up +1.6%.
Orders for durable goods actually fell -.2%. Transportation orders
was the weak link in the report;
X transportation orders, factory orders would have been up 1.2%.
Machinery orders were up 2.5%
and orders for primary metals were up +4.6%. April was revised
lower, to - 2%, from - 1.8%.
The June employment report,
(payroll survey) released July 7th, saw the headline number
hold steady, with the unemployment rate at 4.6%. However, job
creation disappointed badly and
reignited fears that the economy was slowing too much. In June,
on the payroll survey, the
economy produced only 121,000 new jobs, versus forecasts of 175,000
to 200,000.
During the week leading up to the report, expectations had been
elevated substantially by ADP,
a payroll processing company, which said they saw current job
strength in their own index at
levels not seen in it's 5 year history. Some analysts actually
expected job growth to approach
300,000. In the Q 1 job creation averaged 176k per month; in
Q 2, job creation averaged 108k
per month. In view of all of this, 121,000 jobs seemed weak,
which had stock and bond investors
back to rethinking the possibility of a recession sometime in
the future. Sameday, stocks were
very weak, as bond yields rose, driving up interest rates. The
report also contained some mild
inflationary news, as over the past year, average hourly wages
were up + 3.9%, the fastest pace
since June of 2001. There is just one thing wrong with the theory
that this report is predicting
recession: the unemployment rate and job creation is a lagging
indicator, not a leading one.
It is one of the last indicators to change as the economy changes.
In the early months of the
recovery in 2003, it seemed it took forever for this indicator
to finally improve and reflect an
improving economy. Yet this month, some investors are using
it as a leading indicator to create a
"recession fear". While we all know that the economy is slowing,
lead by housing, it is unlikely
that the job's report, a lagging indicator, has suddenly become
an accurate leading indicator.
The household employment survey supports this view as it came
up with 387,000 new jobs in
June, which more accurately reflects the strength we have been
seeing in the economy.
Summary: weak job gains and five year highs in average
hourly wages are opposing forces in the
FED's equation on what to do at their next meeting on August 8th.
At the FED, job 1 is too keep
the inflation genie in the bottle and maintain the purchasing
power of the US dollar.
So the question is, has job 1 been accomplished? There is a
slew of data on the economy that
will be released between now and August 8th, the FED's next meeting.
There is a good chance,
that in a week or two, the importance this jobs report had today
(July 7th), will have faded away.
It is also a good idea to never put too much weight on just one
release of one indicator.
Oil prices
closed on July 7th at $74.09, which
is about 2 dollars per barrel higher than at this
time last month. The all-time intraday high was on April 24th
at $75.35. Since that high, oil has
made three runs at the $75 area and failed twice. The 3rd run to
go beyond $75 also looks like
it will fail. As of Friday, July 7th, oil traded above $75, but
closed down sameday at $74.09.
The crude oil chart has made a "double top" formation with the
two tops being the price highs
of April and July 7th. Double top formations are considered "topping" formations
and often,
but not always, erode to lower prices. Erode that is, if the
second top fails to rally beyond the
first price high, which in this case would be April's price of
$75.35. Friday, July 7th's price
got as high as $75.78, before pulling back and closing at $74.09.
As the chart looks now, with
Friday's price action failing to break out, I would expect lower
crude oil prices next week.
However, world events from the mid-east
or far east could change that.
This
is from the March 2006 newsletter, and will be relevant for many
months to come.
There are several fundamental factors
that indicate that these new higher oil prices are here to stay
for quite sometime:
- Emerging economies
around world now have market economies, and are now using
oil at historic and record
levels,
i.e. China, India, and Latin America (primarily south America).
Barring a global recession, this will only
get worse
over time. How much gas and oil do you think China &
India will need when, on a percentage
basis, they
have just 25% of their families with a car?
- as one would expect,
higher prices have lead to increased exploration and drilling
for oil. Today, versus two years
ago, twice as
much drilling is occurring, BUT, it is only finding
the same amount of oil, not more as one would hope.
This means
that all or most of the easy oil has
been found.
- 80% of today's existing
oil supplies are controlled by 3 state owned firms: Aramco
in Saudi Arabia, Pemex in
Mexico,
and Petroleos in Venezuela. These companies are
big, slow, and lack innovation. These companies
own oil fields
that are 30 yrs + old, and could be nearing the end of their
economic life. Most of the Saudi oil
fields date back
to the 1950's.
- Investor, or privately
owned oil companies, control about 20% of the worlds oil reserves.
These are the companies
that are responsible for 100% of all new innovation and technological
advances in oil exploration and development.
Horizontal
drilling, 3-D seismic scans, and super deep water drilling were
all developed by investor owned oil
firms, yet
these are also the firms that are under attack in the US
and around the world. The US needs more
imported
oil than any other nation in the world, yet the very companies
that provide this service are attacked
and criticized
by some of our own congressional and govt leaders.
- increasing domestic
supplies, due to the "environmentalist movement", can't happen
to the degree needed to alter
the domestic supply &
demand equation to drop prices. Politically, it is just
not going to happen. To illustrate the
total futility
of domestic drillers to "get past" the environmental lobby in
this country, China, Venezuela, and Cuba have
entered into
a joint venture to drill for oil 50 miles off the coast of Florida. What
is the US doing about
it?
Nothing, it's
international waters.
- the middle east, a
primary source of oil, is politically unstable, and is under the
constant threat of terrorism, thus
we have the
"terrorist premium" on the price of oil. This "premium", analysts
say, is estimated to be in the $10 to $20
per barrel range.
Terrorist actions have reduced Nigeria's exports by 300,000 barrels
per day. In Iraq, that number
is 600,000 barrels
per day. Nigeria, one
of OPEC's 5 largest exporters, is in the midst of a revolution,
with it's
oil fields the
battlefield and prize.
- Iran has taken it's
oil profits and invested heavily in arms, modern arms. They
have the Chinese silk-worm missile
and
sea mines that lay on the bottom, but they float up when the mine
detects a ship. The Iranian President
says
that if
the US, or any other country, bombs Iran's nuclear program, he
will shut the Strait of Hormuz, where
20.7M barrels
of oil per day passes in oil tankers.
- Bolivia has nationalized
it oil industry; Venezuela has done the same, repudiating
contracts with Exxon and Total Fina,
and seizing
the oil fields and rigs these companies developed and operated
for years. Ecuador and Peru are moving in
the
same direction. The technicians and
engineers that operated these oil rigs have been replaced with
soldiers
and political
friends. Nationalization is a synonym for "stealing".
- if future hurricanes
again damage Gulf refineries, higher gasoline prices will be the
result. Regardless of the supply of
oil on hand, if the
oil cannot be refined into gasoline, gas shortages will be the
result, and we all know what
that means.
Hurricane season runs from June 1st to November 1st. A gasoline
refinery has not been built in this
country for 30
years. To my knowledge, none are planned.
- And as if we needed
another geo-political concern, in early July, North
Korea shot off 7 missiles, presumably tests
for range and
accuracy, into Japan's (et al) air space. Reportedly, one
of their longer range missiles was aimed at
Hawaii, but
fell into the ocean after just 40 seconds. These missile
launches pushed oil prices up to a previous high,
the $75 per barrel
range.
What we do know is this:
the current price of oil is a limiting factor
on US economic growth. While it is true that
consumer and retail spending
have held their own during this run up in oil prices,
the question should be asked,
"What would retail spending
be if oil were $30 per
barrel cheaper? Or $30 per barrel more expensive?" If
oil
keeps rising, at some
point, it will dramatically
hurt consumer
spending. Record high
oil prices also has the FED
on edge. I don't
think the FED is comfortable
stopping this
cycle of rate hikes with oil
prices ramping up daily.
A slowing economy could
also help soften oil
prices, which
would please the FED.
The stock
market, as represented by the S &
P 500, is
still struggling from May's decline. The July 7th
close of 1,265 is below
last month's close of 1,288. Stock market investors are
still in doubt as to when
the FED will end this
cycle of rate hikes, and the eventual effects of those rate
hikes. The S & P 500 is
in an overall price consolidation,
which is also known as an indecision pattern. The recent
price high on
the S & P 500 was
May 7th at 1,326. That number would be the top of the trading
range. The bottom
of the trading range
is the 1,230 area. The stock market is beginning to show
real fear of a possible
recession, or at least
a much slower economy. Rising interest rates are the culprit.
At some point, rising
rates will slow
the economy, which is negative for corporate earnings. If
the market believes earnings are
going to fall in the
future, investors will sell their stocks now, not when slower
earnings are already a fact.
Rising interest rates
creates one more problem for stocks; rising rates create
an alternative asset class with
little to
no risk. One year CD rates are now in the 5% range.
That 5% comes with little to no risk, with only
inflation rate the concern. With
financial markets is a chaotic state, many investors are putting
their funds
in cash equivalents,
taking advantage of rising rates and avoiding the volatility of
the markets. A rising rate
atmosphere reduces the
amount of risk investors are willing to take. In general,
capital markets thrive on
investors willing to
take risk. It is my own view, that when risk is uncertain
and is difficult to measure, versus
the potential reward,
one should be in cash. Of course, the older one is, the
more important a defensive
strategy becomes.
Summary: on
a short term basis the SP
500 chart has a neutral look, but
the price momentum is more negative
than positive.
The market acts best when it is lead by the technology and financial
sectors. Presently,
technology is very weak,
with the financial sector moving sideways. I do not expect
any sustainable rally
until we get past the
seasonal weak period of Sept-Oct. For technology, lower
prices look highly probably.
The BKX, the banking
index, is still moving sideways, as if it is waiting, waiting
for the FED to declare victory
over inflation.
Market weakness in the summer will
create some great values in the fall. As of this writing,
the
strongest sectors of
the stock market are the oils and precious metals, but they too
have their fair share of
volatility.
========================================================
Henceforth, this
section will be a summary of the economic data provided
by the ECRI.
Founded by Geoffrey Moore, theECRI
provides growth and inflation data to individual and
institutional investors all over the world on 20 different
industrialized countries.
The Wall Street Journal has called Geoffrey Moore, "the father
of leading indicators".
The ECRI has compiled dataon
the US economy dating back to January of 1967.
I have such great respect for their research, that I pay for
it.
Leading
Weekly Index (economic growth index)
June 2006-
136.8
Last month- 136.4
Six months ago- 135.8
One year ago- 133.7
Two years ago- 131.2
ECRI remarks-
"Weekly leading index growth
has declined steadily in recent weeks and is
now at a new
one-year low, thus US economic growth prospects continue to
fade."
Future
Inflation Gauge (FIG) leads cyclical inflation
turns by 9-11 months
June 2006- 122.6
Last month- 121.8
Cycle high (Oct
2005)- 125.7
Six months ago-
121.9
One year ago- 117.3
Two years ago- 116.8
ECRI remarks-
"Influenced by lower commodity prices and faster supply
deliveries, inflation
pressures eased
in the US in June. With the FIG declining in June, inflation pressures
remain in a
gradual easing
trend that began after it hit a 5 1/2 yr high in October
of 2005. In the context of
the July 7
news of higher average hourly earnings, the continued easing
of the FIG should give
analysts some
comfort."
Interest
rates
FED News
in June
June
5th- Federal
Reserve Chairman, Ben Bernanke, speaks to an international
banking forum in Washington DC.
Bernanke tells
the forum that, "There is strong
a consensus among Federal Reserve Governors to keep inflation
low. To keep
inflation anchored, the FED must have a strong commitment
to maintain price stability and also a
consistent pattern
of policy responses to emerging developments, as needed, to
accomplish that objective. With
the economy now
evidently in a period of transition, monetary policy must
be conducted with great care and with
close attention
to the evolution of the economic outlook as implied by incoming
information. We at the central
bank will focus
our attention on the medium term outlook for inflation."
Bernanke on the
economy: a slowdown of the US economy is no longer just
a forecast; it's happening now.
Moderation of
GDP growth is now underway. Consumer spending has been
slowing in recent weeks, the housing
market is slowing,
and job creation in the monthly employment reports,
has decreased 3 months in a row. Although
the US economy
is beginning to slow, it is still necessary to fight inflation.
"Core inflation readings, over recent months
have reached
a level, that if sustained, would be at or above the upper
end of the range that many economists and
myself (Bernanke)
consider consistent with price stability and the promotion
of long term growth", said Bernanke.
Bernanke also
said that the FED will seek a growth path for the
economy near the trend rate of growth, which
analysts say
is in the 3% range. These comments kicked off another brutal
decline in the stock market, this one
lasting 7 days.
Comment:
if it were that easy to steer the economy, not only in the
desired direction, but at the desired magnitude,
we would never
have recessions. The US economy is just too big to be
micro-managed. The FED can speed it
up and slow it
down based on monetary policy, but beyond that, the US economy
goes it's own way, at it's own
speed.
If in fact, Bernanke can slow inflation, while getting 3%
GDP growth, that would be an amazing feat. Possible,
yes, but put
me down as skeptical.
June
15th- Bernanke says that the FED is closely
watching the effects of higher energy prices on inflation.
He also said
that higher energy and commodity prices could account for
some of the recent pickup in the core
inflation rate, that
these events bear watching. Bernanke said higher energy
prices hit the economy in two phases.
The first phase
is the higher prices paid by consumers for energy. The
second phase, which Bernanke says is more
important, is
when businesses pass on these higher costs to their customers,
which creates an "inflation psychology"
in which consumers
come to expect higher prices. Bernanke says that the
effects of this second phase of inflation is
critical for
the FED's monetary policy. This is why the FED watches
the core rate (less food and energy) of
inflation so
closely, to see if higher prices are filtering through other
areas of the economy. Bernanke says that
he agrees with
market participants that the days of persistently cheap energy
are behind us. In finishing, Bernanke
said that if
energy prices do not go sharply higher from their already
high levels, the inflation situation appears
to be manageable.
For the first five months of this year, the CPI is rising
at a 5.2% annual rate. In 2005, the
CPI rose 3.4%.
June
29th- As expected, the FED raises the Federal Funds
rate 1/4% (25 basis points) to the 5.25% level.
It is the highest
Fed Funds rate since March of 2001. As always of late,
the FED's released comments after their
meeting was seen
as more important than their actual action of the rate increase.
Much of the FED's language
in their post
meeting release, emphasized the future, not what has happened
in the past. The future course of
growth and inflation
will matter most. As one analyst put it, "The
FED has moved into the zone of maximum
discretion.
They can do whatever they want." Another
analysts put it this way, "The big question going forward
is what happens
to the growth rate in the second half of the year." The
implication being that growth at too high
a rate will keep
inflationary pressures intact. The FED wants inflationary
pressures to recede. For what it's
worth, the FED
does believe that the economy is slowing, moderately, as seen
in the housing market, and
further expects
a gradual cooling in the overall economy.
Historical
look back...........The FED, in March of 1999,
fearing inflationary pressures, began raising short term
interest rates.
From March of 1999 to January of 2001, the FED took the Fed
Funds rate from 4% to 6.5%.
One year later,
in March of 2000, the $6 trillion dollar stock market meltdown
began. By late January of 2001,
it was obvious
the economy was contracting. The Bush administration
not only had to deal with an economy
that was producing
less jobs and wealth, but also a stock market that was destroying
wealth- a double edged
sword.
The FED, in January of 2001, then decided it was time
to come to the rescue, and began cutting rates.
That cycle
of rate cuts, which just ended in June 04, took the
Fed Funds rate down from 6.5% to just 1%.
The
FED has now
raised the Fed Funds rate from 1%, to the now current
rate of 5.25%. We now have had rate hikes
in June, August, September,
November, & December of 04, and in February, March, May, June, August,
Sept,
Nov, and Dec of
2005, and now Jan, March, May, and now June of 06.
That is 17 FED meetings and 17 straight
increases in
the Fed Funds rate. The FED's next meeting is August
8th.
The
Fed Funds rate, now
at 5.25%, is
the rate banks charge each other for overnight loans to comply
with the
FED's reserve requirements.
The Discount
rate, now at 6.25%, is
the rate the FED charges member banks when borrowing from the
FED.
The Prime
rate is now at 8.25%,
and is the rate banks charge their best corporate customers.
BankRate.com on
7-7-06 (the
following rates are industry averages & will vary lender
to lender & area to area)
-15 year fixed
mortgage was 6.10%
-30 year fixed
mortgage was 6.41%
-30 yr jumbo
fixed mort. was 6.58%
- 1 yr CD- 5.04%
30
Year bond yield- Interest rates
began their breakout on April 7th. Since that time the
overall
trend of rates
has been up, which is one reason the stock market is struggling.
The 30 yr bond closed
on July
7th at 5.17%, which was down .52% for the day.
The June jobs report, while it did hurt
the stock market,
actually rallied bonds, driving down rates. The recent
previous high here was 5.30%
in mid May. While
the overall direction of rates is still up, the 30 yr bond
did give a short term sell
signal on July
7th, so I expect it's yield to fall next week. If
correct, and interest rates do fall next
week, support
lies at the 5.00% level. Overall, we are still
in a rising rate environment, but weak
economic data
can cause strong counter-trend moves.
The Banking
Index (BKX)-
this index is a basket of bank stocks that are very interest
rate sensitive. Rising
interest rates
hurts the banking industries earnings, and falling rates makes
them more profitable. Knowing
this, the
behavior of this index could very instructive as to when
the FED is done, or about done. When investors
feel that most
of the interest rate risk has been removed from these stocks,
meaning that interest rates are
done going up,
or at least almost done going up, they will be buying the
stocks in this index and the index will
rally sharply. Once
this index breaks out strongly, it will mark the peak
of interest rates and the beginning of a
new cycle of
falling rates. It could also mark the beginning of a general
market rally. If so, the banking stocks
should be a market
leader in that rally. How does this index look
now? Generally, it has been in a consolidation,
or indecision
pattern, for several months, waiting, just like everyone
else, for the FED to get done. The bottom
of this trading
range, or consolidation, is 101 and the top is 114.
The July 7th close was 107, just about in the
middle of the
range. This index on a chart looks like a coiled snake
ready to strike; we could be close to a
big move.
However, with the current price in the middle of the range,
in the short term, it could just as easily go
to the 101 area
as to the top of the range, at 114. A clear breakout
on strong volume above 114 will mean the
game is afoot.
A decline below the 101 area would mean that the FED will
be raising rates more and longer
than the market
had hoped. Falling below the 101 area would be the market's
way of capitulating to that fact.
Banks have been
hurt in June as the issue of the "negative yield
curve" has resurfaced. An explanation from
John Murphy at
stockcharts.com : "A negative yield curve is present
when the 10 yr bond yield falls below the
2 yr bond yield.
Banks pay out interest on short term yields and lend at long-term
yields. When the yield curve
is rising, long
term rates are higher than short term, with the spread being
the banks profit. When the yield curve
goes negative,
banks lose money because they are paying more out than they
are taking in."
Keep in mind,
when the FED is done raising rates, there won't be "bells
ringing" or any public pronouncements
by the FED.
The evidence of such will be in the action of the bond
market and the interest rate sensitive stocks
like the BKX.
Public announcements will come later with these stocks already
10% + down the road.
Summary
/ Forecast of the Economy
Although at times
I wonder, I don't believe that the FED wants to put the
US economy into a recession.
However, their
greater fear is that the inflation genie may get out of the
bottle. That would be a real mess,
hurting all sectors
and participants of the US economy. Presently the
US economy is steaming along, with
clear skies.
However, not visible to the eye, but visible on the radar
screen, are some potential storm
clouds. Those
storm clouds are the unknown factors of how high interest rates
and energy prices will go
in this cycle.
As we stand right
now, I foresee three possible economic outcomes:
The soft
landing scenario-
this is what the FED is shooting for, a gradual decrease in
growth, with the economy
leveling out at
1% or 2% growth rate, with inflation pulling back as growth
weakens. This is why all FED
rate hikes have
been only a 1/4% point; they fear going to fast and too
far, so they prefer to take "baby steps"
in slowing the
economy. Taking "baby steps" reduces the risk that
the FED will go one step too far. The
1994-95 period
saw a soft landing, at least for most of us. In 1994,
bonds were awful, losing - 27%, as rates
were rising.
The
hard landing scenario-has
the FED raising rates too much and slowing the economy into
recession.
Presumably, if
oil prices go even higher, this would also help fulfill
this scenario. Every post WWII recession
has been preceded
by rising interest rates and rising energy prices. However,
this does not mean that
the hard landing
is a slam dunk. In this scenario, inflation would also
moderate or pull back. Recession is
defined as two
consecutive quarters of negative growth, or a GDP below
zero (being negative). Most of us
in the economy
will feel the effects of a hard landing long before the
definition of a recession is fulfilled.
The stagflation
scenario-this
would encompass a slowing of the economy, but with pick-up of
the inflation
rate.
The last time we had stagflation was in the "Carter" years,
the 1978-80 period. Stagflation is like a
case of the "flu",
that just won't go away; everyone is miserable. This would
be the worse of all outcomes.
The FED would not able
to cut rates to stimulate the economy as it would still be battling
inflation.
The wild card in
the above scenarios is the new FED Chairman Bernanke.
He has no track record on which
investment markets
can wage a bet. For this reason, the investment markets
hang on every word Bernanke utters,
looking for clues
as to the future direction of FED policy. The markets
will accept a FED that is tough, and raises
rates to fight
inflation, for the markets fear inflation above all else. On
the other hand, the markets will not accept
or respect a FED
Chairman that appears timid and weak against the battle on inflation.
The markets know that
all recessions
eventually end and do create opportunity. Markets cannot
accept an economy ravaged by inflation
and the psychology
that grips it. For this economic recovery
to continue, we need now is a little bit of economic
weakness.
Enough weakness to satisfy the FED that the economy is not going
to cause higher inflation rates, a
"soft landing"
if you will. A GDP in the 2% area would probably
do the trick. Correspondingly, we would also
have to see the
core rate of the CPI fall below it's current 2% level.
The FED does not want to be the bad guy
here, but, if needed,
they will put the economy at risk to kill off this up cycle
of inflation. The most I think we could
hope for, is that
the FED will finish up this cycle of rate hikes in the 2nd half
of this year. At the end of July, we
will get a look
at the first reading on Q 2 GDP. That could be a
very important number. The FED itself says that
they are "data
dependent" which means they too are "reading the tea leaves"
as the economic data is released,
day by day, week
by week.
------------------------------------------------------------------------------------------------------------------------------------
Defense
& Aerospace News
None this month.
____________________________________________________________________________________
Antelope
Valley News
June
5th- The community
of Rosamond dedicated their new fire
station, which will be a county facility.
The fire station is located
on 35th St West, near the library and community services district
building.
The new fire station replaces
the existing one, which was built in 1947 and is located
near 20th St West and
Rosamond Blvd. The new
fire station is located on 1.13 acres with a 5,600 sq
ft building on it, which is
almost 3 times larger than the
old fire station. The new facility can sleep up to 6 firefighters
and has
automatic roll-up doors.
Said a long time advocate of the new fire station, "We may
still be a township,
but we can still look like a
city."
June
7th- The City of Palmdale announces that the
improvements to the Ave S corridor are now complete.
The improvements cost $24M and
run from the Fwy 14, east to 40th St East. The improvements
include
the widening of Ave S to
4 lanes (2 each way), bike paths, improved turn outs and traffic
signals, bike paths,
and a landscaped median.
The City estimates that 25,000 cars per day use Ave S to
access the Fwy 14,
or to drive across town.
June
15th- Palmdale Mayor, Jim Ledford, has proposed
that the first leg of the state's high speed rails system
go from Palmdale to Los Angeles.
The Palmdale to LA leg would cost $3B, with funding coming
from
several different sources.
The train would connect Palmdale with LA's Union Station,
then go on to LAX.
It is believed that the train
would help lighten traffic on the 405 Fwy around the LAX area,
and get Palmdale
commuters into Los Angeles in
about 30 minutes. Since the train would go in
both directions, it would also
make Palmdale's unused air terminal
immediately viable. The statewide system would one day be
700 miles
long and cost somewhere in the
area of $35B in 2006 dollars. Ledford pitched his idea last
Spring to
Los Angeles World Airport (LAWA)
officials. This summer LAWA officials have agreed to review
research
on the technology of high speed
trains as to their cost and reliability. High speed rail
and mag-lev are the two
technologies being reviewed.
A Palmdale City official said, "Everyone
agrees that we need to set the route and
then later determine which technology
to use to move us forward."
June
19th- The City of Palmdale
learns that the House version of their Transportation Appropriations
bill
includes $500,000 for a key
Palmdale road project. The money will be used to
widen Rancho Vista
Blvd / Ave P from 4 lanes to
6 lanes. The first phase of the project will be from Sierra
Hwy to Lockheed
Way. Eventually, the widening
will extend east to 30th St East and will service the Plant 42
area as well
as relieve traffic congestion
in the area. When completed, Rancho Vista Blvd (Ave
P) will be 6 lanes wide
from Fairway
Dr, near the AV Country Club, to 30th
St East. The intersection
of RV Blvd and 10th St
East will be improved and get a traffic signal.
June
21st- According to 2005
US Census Bureau estimates, Lancaster was the 14th fastest
growing city in
the nation, with Palmdale
coming in at 31st. The estimates included cities of
100,000 or more in population.
Demographers say that this
confirms a national trend that has been ongoing for decades; in
general, people
are moving to the south and
west and are moving into communities that have affordable housing
and better
schools. The other trend
that is also working in the AV's favor, is that people are also
seeking to get out
of the large cities, preferring
to find smaller communities where the schools are better and where
they feel
safer, but yet are in proximity
to the big city amenities. In
case you are wondering, Elk Grove, Ca was THE
fastest growing city in the nation with 11.6% growth rate in 2005.
Lancaster grew at a 4.2% annual rate
while Palmdale a 2.8% rate.
June
23rd- The AV Mall, located
in west Palmdale and open since 1990, holds celebrates the
end of
it's renovation. Some
lucky shoppers had their purchases paid for by roving mall employees.
Others
received
promotional items, giveaways, drawings, and the like. The
renovations included a change of
the color
scheme from dark green to lighter colors, new granite flooring,
remodeled food court and restrooms,
updated
landscaping, and new "soft seating" areas to allow tired
shoppers to take a rest. The AV Mall
is 1M square
feet and has 140 stores and currently has an occupancy rate of
98%. Additional changes
are coming:
the theater inside the mall will be closed and move outside as
a free standing structure. The
exterior
walls are already up on the new theatre. New, as yet
to be named restaurants are also coming.
While it
has not been confirmed, one rumor has the "Claim Jumper"
restaurant moving into part of the
vacated
space of the old movie theater, but as I said, this is only
a rumor, and not confirmed.
June
25th- Hwy 138, as it heads east from Palmdale
towards the Fwy 15, is having two additional
lanes of traffic added as part
of an overall $44.4M project. This phase of the widening is occurring
in San Bernardino County, between
the Phelan cutoff and Hwy 2 cutoff to Wrightwood, a 2 mile stretch
of road. Summer time
was chosen so as to not interrupt school bus schedules.
In the 2 mile portion
of the work, speed limits have
been reduced from 55 mph to 25 mph. In the summer of
2007, another
stretch of Hwy 138 will
be widened, working it's way east, closer and closer to the
Fwy 15.
July
6th- The Lancaster Redevelopment Agency will acquire
two parcels on 10th St West that will
expand the Lancaster Auto Mall
to the east side of the street. The City's goal
is to land an upscale
luxury car dealer that is currently
not offered in the AV. Presently, the car dealers in
the auto mall
include Ford, Honda, Toyota,
Subaru, and Dodge.
July
6th- Mojave airport officials report that
over the last 4 years their facility has gone from under
utilized to
one where now all of the airports industrial space is fully
occupied. With the successful
flight of SpaceShipOne, a private
venture into commercial space, airport officials say that the
facility
now has a major reputation as
the "Silicon Valley" of the emerging commercial space industry.
Proponents of the commercialization
of space say that Mojave could become
an "incubator" for
this emerging industry. The
airport is also located at a crossroads
for major highways (Hwy 14
and Hwy 58) and rail routes
which has it's industrial park growing
as well. One of the young companies
thriving at Mojave is XCOR,
which builds rocket engines. Founded in 1999, has recently
had to
increase it's work force to
30 to handle the ever-growing number of contracts.
XCOR has a $3.3M
contract with NASA to develop
an engine for NASA next manned space vehicle.
----------------------------------------------------------------------------------------------------------------
National
Housing Market- The following housing
data is subject to large sampling and other
statistical errors.
Substantial revisions in this data
are common. It can take up to 6 months
to firmly establish a new trend in sales activity.
The following data in on the NATIONAL
housing market, and may or may not be in "sync" with the
AV housing market.
May housing starts (Commerce
Dept), released June 20th, surprises everyone and rises +
5% to an
annualized rate of 1.96M.
The strong gain follows three months of declines. Last January
was the highest
level of housing starts in 33
years. Versus May of 2005, housing starts are down 3.8%.
Starts increased
in 3 of the 4 regions of the
country. In the West, housing starts were up 15.8%, while
in the mid-west, they
were down 15.8%.
The FED has predicted a slow down in housing, but not a sharp
decline. Housing
analysts comments: "With
inventory of new homes high and rising rapidly, it makes no sense
for home
builders to continue adding
new supply at anything like the current pace."......................and,
"The underlying
slowdown in residential construction
is likely to be gradual."....................and,
"We don't see any reason to
take interest rates higher;
bond yields don't indicate any concerns that inflation is
out of control."
May building permits, (considered
a leading indicator and a signal of future activity) also
released June 20th,
fell 2.1% to an annual rate
of 1.93M, the lowest level since November of 2003. It was
the 4th monthly decline
in a row for building permits.
Year over year, building permits are down 8.5%.
May existing home sales (Natl
Asso of Realtors), released June 27th, fell
1.2% to an annual rate of
6.67M homes. Existing
home sales have now fallen in 3 out of the last 5 months.
Supply of existing homes
rose 5.5% to 3.6M, a 9 year
high. At May's sales pace, this represents a 6.5 month supply.
One year ago
supply was at 4.3 months.
However, over the last 12 months, the median price did increase
6% to $230,000.
Existing home
sales were fractional higher in the west and south, but down in
the mid-west and NE. Most
analysts feel
that the existing home market will continue to weaken over
the next 3 months. As one analysts
said, "Consumers
are being hit by 3 forces: higher interest rates, higher
energy prices, and shrinking home
equity."
May new home sales (Commerce
Dept.), released June 26th, surprised everyone by rising
for the second
consecutive month. May's
rise was + 4.6% after April's 4.9% rise. May's increase
was at 1.234M annualized
level. May, which was
expected to be down, was the strongest month since last December.
New home
supply fell .7% to 556,000 from
April's record high of 560,000. May's inventory number
represents a 5.5
month supply. Regionally,
new home sale rose in all areas of the country, except for the
NE, where they
fell - 7.9%. Analysts
say the overbuilding does not appear to be a problem. The
median price of a new home
in May was $235,300, up + 3.1%
over the past 12 months. During this same time frame, new
home sales are
down - 5.9%.
For what it's worth, on June
20th, UCLA's Anderson Economic Forecast released their annual
economic outlook
for California. In the
report, a bit late I may add, they say "the housing boom is over;
the only question that remains
is whether it will be a hard
landing or soft." And, "As of April, there are few signs
of this housing slowdown
spilling over into the wider
economy."
--------------------------------------------------------------------------------------------------------------
Antelope Valley Median Home Prices
(source: DataQuick, most recently
published data)
City
April 2006 %
Change vs 4/2005
Lancaster- west
$295,000
+ 22.7 %
Lancaster- west & Quartz
Hill $360,000
+ 13.2 %
Lancaster- east
$316,000 +
25.4 %
Palmdale- west
$430,000
+ 15.9%
Palmdale- mid town
$320,000 +
15.7 %
Palmdale- east
$355,000
+ 22.2 %
Littlerock $340,000
+ 23.6 %
DataQuick Information Systems is
reporting that homes sales in southern California slowed for the
6th
consecutive month, with
May 2006 sales the slowest since May of 1999. The slowdown
appears to be
most evident in the upper end
(most expensive) of the market. Entry level and mid-market
homes are not
slowing as much, and are still
appreciating, albeit at a slower pace. In May, the median
price for a home in the
6 county southern Cal area was $485,000,
which is up from May's 2005 figure
of $456,000 (+ 6.4%). That
increase was slowest yr over
yr gain since July 2000. Dataquick
also says that indicators of market distress
are still largely absent, that
foreclosure activity is edging up, but is still low, and that
the use of adjustable rate
mortgages has dropped over the
past 6 months.
========================================================
=========================================================================
AV New
Home Sales Data (source:
The New Housing Monitor, a Hanley Report)
As of June 25th, 2006
-New Homes sold
year to date - 1,570
-New
homes sold since last
month- 266
-New homes selling per
day - 8.92
-New
homes projected to sell this
year based on current sales pace- 3,256
-New home sales
pace in 2006 vs 2005 (- 29%)
2005 - total
of all new homes sold- 4,579
2004 - total
of all new homes sold- 2,503
2003
- total of all new homes sold- 1,820
2002-
total of all new homes sold- 1,162
1990- total
of all new homes sold- 4,900
+
Number
of "new home" builders in the AV- 36
Open subdivisions
with sales in 2006- 75
Home
builders in the AV (alphabetical order)
American Premier
Beazer Homes
Capital Pacific Homes
D R Horton
Eliopoulos Enterprises
Empire Homes (Anaverde)Fieldstone
Communities
First Pacifica
Forecast Homes
Frontier Homes
Gibraltar Homes
Grenhill Development
Harris Homes
Hearthside Homes
John Laing Homes
KB Homes
Larwin Co
Lennar Corp.
Matthews Homes
MBK Homes
Mitchell Development
Pacific Communities
Pulte Homes
Rancho Vista Development
Richmond American
Standard Pacific
Stratham Group
Sun Cal Communities (Ritter
Ranch)
Tandis Homes
Trimark
US Home Corp.
Warmington Homes
Western
Pacific
=========================================================================
Land Market
Supply closed
out June at 2,975
which means that supply continues to rise,
if only slightly. Supply, versus last
month, was up 4.2%. Supply
has now risen 14 consecutive months, having risen almost 70% since
the low of
April of 2005 at 1,751 active
land listings. That is an additional 1,224 more active land
listings. The good news
is that the rate of the rise
appears to be slowing, with 4% rises in both May and June
after several months in which
the rise was in double
digits. If the current trend continues, we could see the
rise in supply flatten out sometime
over the next 6 months. The
amount of time needed to sell all standing inventory, or active
land listings, has gone
from a low of 5.6 months in
May of 2005, to it's present level of 11 months. Historically,
rising supply, when
accompanied with weakening demand, has
eventually lead to a weakening of prices.
Supply
numbers in perspective:
Supply change vs last
month: + 4.2%
Supply change, year to
date: + 31%
Supply in June 06
vs June 05: + 65%
----------------------------------
Supply at end May 2006-
2,975
----------------------------------
Supply at the end of 2005-
2,264
Supply at the end of 2004:
1,902
Supply at the end of 2003:
1,607
Supply at the end of 2002:
1,770
Supply at the end of 2001:
1,665
Supply at the end of 2000:
1,800
------------------------------------------------------------------------------------------------------------
Why
is the supply number important?
The market value of all things, eventually, comes down to the
basic principle of supply and
demand. The supply number helps to tell us the psychological
condition of
buyers and sellers, by it's
change and it's rate of change. Large drops in supply could
be signaling speculative
behavior as investors fight it
out to get into our market. If supply were to increase rapidly,
that could be telling
us that buyer's are backing
off, and/or, that numerous new seller's are coming into the market.
In combining
this data with the demand number
below, we can assess the current status of the land market. When
supply
numbers approach historical
highs and lows, they can also be useful in signaling major
turning points. Example:
at the peak of the 1988-90 market,
supply made a low in May of 1989 at 587. In hindsight, May
1989 was
at or near the point of
peak speculation in our market, as demand over-whelmed supply,
drawing it down.
The value in following supply,
is not in the number itself, or what any one number might
mean. The value
comes from when it changes, and
the magnitude of that change.
-----------------------------------------------------------------------------------------------------------
Demand
in June, at
266, fell off slightly
from May's 271 figure. This is a decrease of only 1.8%,
a statistically
insignificant number.
Since April's number of 323, land sales have fallen two months
in a row. Versus the
record month in April of
323 land sales, volume is down 17.6%. Average sales per month
for 2006 now
stands at 274, so June's performance
was below the average. The April volume number was
a revisiting of
the mid summer strength of 2005. Going
forward, it will be interesting to see how this market
handles the challenge
of rising interest rates and
the fear of the unknown: how far will the FED will go. In
June, this struggle was evident
almost daily in the stock market. Land
sales the first 6 months of 2006, versus the same period last
year, are down
about 2%. May of 2005
was last year's strongest month at 320 land sales. In
June, the average time it took to
sell a land listing was 142
days. This is a new statistic just recently
made available by our MLS system and will
now
appear here monthly.
Demand
numbers in perspective:
Land sales year to date- 1,646
June 2006 vs June 2005 -
12.2% (down)
Land sales projected for all of 2006- 3,292
Land sa |