Beige Book Highlights

2006-09-07

Today's Thought of the Day is about pricing power and credit standards from Kevin Depew at Minyanville.

Open the September Beige Book to follow along.

From Kevin:


Pricing Power: "Manufacturers found little ability to pass through higher costs into the prices of manufactured goods." The report noted that the exception was energy-intensive goods and services in the San Francisco district. But the bottom line is a continued inability to pass through higher costs from manufacturers.

Credit Standards: "Credit standards were reported to be steady to slightly tighter," the report noted. "Overall credit quality was generally described as good, and delinquency rates were little changed in most Districts, though a few noted scattered increases."

It's early. But this is how a credit bubble unwinds: Pricing power evaporate, credit standards begin to tighten, delinquencies rise and Bob's your uncle, what appeared to be inflationary (rising energy and raw materials costs) becomes deflationary as the ability to consume comes under pressure forcing an adjustment in the prioritization of expenditures.

Speaking of a lack of pricing power, shares of Tomkins Plc, the world's biggest maker of car wiper blades and timing belts, fell the most in 14 years after the company said profit will miss targets on slumping U.S. demand for its auto parts and home fittings, according to Bloomberg.

• London-based Tomkins Plc fell as much as 16% after the company said 3Q profits will fall short of analyst estimates.
• What does a UK company have to do with the U.S. consumer?
• Tomkins gets two-thirds of its sales from the U.S. where it makes air- conditioning systems and bathroom fixtures for houses.
• The company also supplies parts to Ford Motor Co. and General Motors.
• According to Bloomberg, Tomkins makes one in four U.S. bathtubs.
• Well, they're car-related, so the slowdown in sales is natural given the weak condition of American auto makers, right?
• No, the slowdown is as much building related as auto related. "North America has slowed down markedly at a time when building activity would normally accelerate,'' Tomkins said.

Mish:

Earlier we talked about pricing power in The Psychology of Deflation and Intermediate vs. Finished PPI.

It started with weakness in housing and spread to restaurants and now seems to be spreading to wiper blades, air conditioning units, and bathtubs. I confidently precict it will spread into other goods and services, lead by a decline in housing and housing related jobs.

The National Association of Realtors is reporting US New Home Sales Seen Down 16.1% In 2006.

New and existing home sales are expected to fall substantially this year, while home price appreciation will also slow precipitously, as the market works through an inventory backlog, according to new projections released Thursday by the National Association of Realtors.

New home sales are projected to fall 16.1% to 1.08 million in 2006, and existing home sales dip 7.6% to 6.54 million, according to revised NAR projections.

NAR expects housing starts to drop by 9.6% to 1.87 million this year.
David Lereah, NAR's chief economist, said the dramatic downshift in price appreciation was noteworthy. "A year ago we had record home sales and tight supply with buyers bidding over the asking price," Lereah said in a statement.

"Under these conditions, we'll probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory," he added.

The cooling housing market means investors who purchased homes last year intending to sell them shortly thereafter could face losses.

"Buyers in most of the country who plan to stay in their home for a normal period of homeownership can pretty well bank on those historic averages, but people who purchased last year with the intent of flipping are likely to get burned," Lereah said.

I see Lereah is now talking about "flippers getting burned". Fancy that. Of course he is doing his best to put lipstick on a pig by stating "we'll probably see prices dip temporarily below year-ago levels". Given that prices have already dipped substantially below a year ago levels if one looks at incentives, there is no "probably" about it. Of course he goes on to say that this dip will be "temporary". Sure it will. Every condo buyer who bought at the peak in Florida will NEVER break even. That is how "temporary" I expect it to be.

Check out this interview with Toll Brothers on September 6th.

A U.S. housing sector downturn may last for years because of excess supply and faltering consumer confidence stemming from worry over U.S. foreign policy and federal government competence, the head of nation's largest builder of luxury homes said on Wednesday.

Robert Toll, chairman and chief executive of Toll Brothers (TOL.N: Quote, Profile, Research), said the current slump in prices and sales volumes was more severe than the "soft landing" for housing predicted by some analysts. He said the market recalls the recession of the late 1980s when prices took more than three years to recover.

"This isn't a soft landing, it's harder than a soft landing," Toll told Reuters in an interview. But he denied the market was headed for a more dramatic decline in prices as some observers fear. "We are not crashing," he said.

He argued that demand for housing and consumer confidence in general have been hurt by concerns about terrorism, the war in Iraq and the response of the U.S. government to Hurricane Katrina.

An index of U.S. consumer confidence by The Conference Board, a business research organization, fell sharply to its lowest level of the year in August.

"It appeared that we were no better prepared for floods than Bangladesh and now that's been exacerbated by continuing bad news out of Iraq," he said. "It gets into the psyche of the American consumer."

The current downturn is mostly the result of a "severe overhang" in supply that Toll estimated at 15 percent to 20 percent more than the market can easily absorb.

That was driven by "tremendous speculation" by home buyers who never intended to occupy seeking a quick profit from a rising market, and by builders who constructed homes before securing buyers, he said.

The current slowdown is "strange" because it cannot be explained by macroeconomic factors such as interest rates or unemployment that traditionally reduce demand for houses, Toll said. "We have an apparently decent economy," he said.

Toll said this is the first time since he began in the home building business in 1967 that a market downturn cannot be explained by macroeconomic factors.

Toll declined to predict when the market would rebound, but said when the time came it would do so as sharply as the decline because of pent-up demand stemming from a growing economy and an influx of immigrants.

Toll keeps building even though the supply of houses is more that people can buy in the wake of the biggest speculative boom the world has ever seen and Toll struggles to understand the economics of it.

Questions For Toll

1. What about overbuilding do you fail to understand?
2. Do you realize home prices have outstripped wages and rental prices by 4 standard deviations?
3. Do you not see the ever lowering credit standards that it took to keep sales going as long as they did?
4. Does everyone need three homes?
5. How can anyone not understand what has happened?

As for "pent up demand" Toll is off his ever loving rocker. Who does not have a home that wants one and can afford one? The idea of pent up demand on the heels of the biggest ever speculative boom in housing is simply absurd. If there was pent up demand we would not be seeing record numbers of listings. If there is a pent up demand for anything it is for cashing out.

Forclosures.Com currently has 1,398,314 listings. I don't know about you but that seems like a pretty big number to me. As bank REOs rise, and listings swell and homebuilders still building, price pressures on real estate are going to continue to mount.

Right now, with builders still building and retail stores still going up in previously built areas, the falloff in jobs has not been that severe. But how many more Walmarts, Home Depots, and restaurants do we need? I think we have too many already, and declining sales and lower prices proves it.

On a completely different note, here is a chart I am watching closely.



Hmm. Today the dollar closed above the 50 EMA at 85.53
Where is that "rising inflation" from a US dollar blow up?
The Fed paused, the UK tightened (once), Europe is supposed to tighten and the dollar was supposed to get smashed.... at least according to all of the inflationists I read.

So what happened?
What happened is everyone is still reading the inflation handbook while ignoring all the signs that people like Kevin Depew and myself keep pointing out.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/