Wooden Woes - 18th May

Week ahead…
After a relatively quiet weekend with very little news to cause excessive levels of acid in the stomachs of investment managers around the world, it’s a little too early to start projecting where we are headed this week, with a lot of uncertainty surrounding the major markets in early trading. So far, Asia has provided a mixed picture to anyone looking for a bit of clarity: Japan was off ahead of some of the busiest reporting days in the year, as full-year results continues to come in thick and fast – Panasonic and Aozora Bank two of the larger names this morning providing some food-for-negative-thought on future guidance. Everyone is fully aware of Japan’s export woes, but it seems the reminder of just how bad the situation is an excuse to cause a (let’s hope brief) re-lapse into depression. Other markets in Asia doing better, with China, Hong Kong and Taiwan rising confidently, but nothing when compared to the limit-up day on the Sensex in India (+17% today, now +46% YTD!) – India’s market jumped as previous indications to the 3-way spit proved inaccurate and the ruling Congress party-led alliance came in with an emphatic victory – who said exit polls were accurate (ehhm, and apologies for the misinformation last week that the conclusion was a 3-way split). For those still not confident on Asia recovering faster and then performing better than any other area, check out even Vietnam’s stellar performance +24% YTD.

Mid East markets are all trading higher as the return of oil towards $60/brl takes place and some opportune investments are made by those that have recently learnt more about the region and the various industries that exist within. Iraq (whilst not part of the GCC) even announcing a $66bn investment plan (albeit post-paid) that has had some positive repercussion on surrounding markets – remains to be seen whether all the contracts for infrastructure etc are simply awarded to US firms as in the past.

In Europe, markets have opened quite muted with no large news over the weekend to shape investors’ thoughts. The majors are all holding on to some modest gains though. Most interesting piece of news that Porsche and VW have brought the long-running family-saga to a premature end as the VW Chairman flexes his muscles and puts down his counterpart (also his cousin) in a rather public and brutal manner.

Gold had a strong run last week, up four days out of five, but is currently trading very slightly off, -0.04%, Interestingly, there was a lot of talk of renewed inflows into the Gold ETFs, as investors apparently have been positioning for the next qtr and not expecting much excitement. The gold price across consumer markets is still holding steady though (as attested to by a visiting tourist to Dubai’s empty Gold Souks last weekend) - demand for actual gold jewellery continues to languish at low levels without any sign of an imminent return to strength. Of course, our favourite leading indicator, the Baltic Dry Index continues to rise (12 days in a row now, +33%) – without getting too excited it is mostly a sign that inventory levels were so low for so long that shippers and traders are expecting at least some pick-up in the major trade routes as shelves are replenished with the goods consumers still want to (and most likely have to) buy.
On currencies, we’ve had a lot of talk in the last few days concerning Sterling’s perceived uncalled-for weakness – probably worth watching cable to be on the look-out for some short-term technical breaks. The Yen has come off a little this morning after strengthening all of last week vs US$ - Japan’s Finance Minister was warning against “excessive moves” in the currency.

Economic Releases this week: a relatively light schedule
US: Housing Starts (520k cons), Building Permits (530k cons), ABC Consumer Confidence (-42), MBA Mortgage Applications, and later in the week, Initial Jobless Claims (625k cons), Continuing Claims, Leading Indicators (+0.8%)
Europe: Euro-Zone Trade Balance (0.4b vs -0.3bn cons, Construction Output, PMI Manufacturing (38.3 cons)

Many missed this on Friday…for those not addicted to their troublesome and devilish little tech accessories, here you go…

Wooden Woes…
On returning from a recent trip to the US, an astute, and often correct investor pointed out that there are a vast number of very attractive and well appointed houses on sale on the west coast for roughly one third of their value just a year ago – but are there any buyers? Nope. And why not? Well, it’s not because mortgages aren’t available – they are, and in abundance, and it’s not because the wealth isn’t there – those living in San Francisco have some of the highest GDP per capita in the country.
The reason then? Most US homes are built using timber and other woods, meaning that even if some US investors decided to “go-for-it” and buy into a nest-egg home at must-buy prices, they would still have to pay a number of utility bills (heating for example) to prevent the house from suffering through damp and other wear-and-tear.
This results in two indicators: the first being that even the wealthier inhabitants of the wealthier parts of the US are worried about being able to make future payments on their utility bills for fear of losing their jobs within the next 12mths. The second, a great number of homes on the US west coast are likely to deteriorate (damp breeds termites), as they sit uninhabited, and may require demolition – leading to a squeeze on supply probably around the same time demand creeps back in, pushing prices higher and helping the many industries involved in house building!
It seems the termites may turn out to be the US’s saviour – if you can afford the house, and the termite exterminator bills for the next few years, go buy that dream home in San Diego.