Friday February 25, 2005 - 11:25:20 GMT
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Black Swan Capital - www.blackswantrading.com
Housing, bonds, and the dollar
“The ego generates opinions based on its own needs. You can’t get a clear picture of what’s happening in the market if your mind is already made up. You have to trade with an empty mind.”
Edward Toppel, Zen in the Markets
You’ve heard the expression: “As homebuilders go, so goes the dollar!” You haven’t heard that one? I hadn’t either. I think I coined the phrase after noticing yesterday the stock price chart of homebuilder Centex looked an awful lot like the US $ Index—at least so far this year. See for yourself:
Sure, possibly a chart of sunspot activity would line of with the dollar index over some time frame of choice! Granted! But maybe there is something that is driving both the US dollar and US homebuilders. And maybe that something is long bonds. Here is the chart above with 30-year US Treasuries added to the mix (blue line):
No surprise homebuilders and bonds are moving in unison—to them it’s all about demand for their product. In one case its demand for paper and in the other it is a demand for brick and mortar. Both require willing buyers with cash. And it appears the bond market may have those buyers lined up for a while. At least I gleaned this from Bond King Bill Gross’ excellent monthly investment outlook for March as he attempted to solve Fed Chairman’s low long-rate “conundrum”:
“In light of our rationale, which attempts to explain the great "conundrum," an interested reader might wonder why our durations and overall strategy appear so defensive. After all, if foreign central banks and others continue to absorb 70%+ of the bond market’s new supply (900 billion out of an estimated 1.3 trillion in 2004), why wouldn’t this "squeezing" out of domestic investors continue unabated, with yields continuing to move lower? The insensitivity to price/yield exhibited by Asian central banks in an effort to cap their own currencies might seem just as illogical 50 basis points lower as it does right now. And if the lack of global aggregate demand reflected in a surfeit of savings is really the primary cause, the malady is not likely to improve for years. Point granted.”
And if long yields remain low, it seems US consumers will be able to keep buying houses, or at lest have the wherewithal to buy houses even if they reduce their pace.
So maybe the dollar direction comes back to almost everything else that drives the US economy—Mr. Consumer. He has been pronounced dead at the scene many, many times before—as has the dollar. Mr. Consumer’s balance sheet has been thoroughly examined by the experts and pronounced dismal and dangerous. He has no future, the experts have exclaimed. The dollar can sympathize with Mr. Consumer—it has been disparaged by almost everyone.
But the interesting thing is both keep coming back to life. It means either the experts are missing something, or Mr. Consumer and the dollar have more lives than you average cat can only dream of.
So, if you like houses, why not add bonds and dollars to your shopping list!
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