Thursday, June 15, 2006

Five Things You Need to Know: Rent, In(de)flation, Close Encounters, Ford Meets Lassie, Magna Carta

By Kevin Depew

Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

All About the Rent!

While everyone has a handle on "core inflation," and rising gasoline prices, and so on and so forth, few seem to be focused on a key component of CPI, Owners' Equivalent Rent. Oh, hey there, Mr. Roper! What, Chrissy didn't give you the check? I'm sure she just forgot.
The core CPI yesterday came in with its third 0.3% monthly increase.
Look at the numbers: year-on-year inflation is now up 4.2% from 3.5% previously. Yikes!
However, while one key element in the inflation rise is (naturally) energy, another perhaps more important component is Owners' Equivalent Rent (OER), up 0.6% on the month.
What is OER? OER measures the rent homeowners can obtain for their houses. OER makes up a whopping 30% of the core CPI.
Why is OER rising? Partly, because potential home buyers are now finding it easier to rent than buy houses.

National Multi Housing Council reports
that affordability in the nation's hottest housing markets has been eroding for some time and US rents overall are up 5% year-over-year.
Meanwhile, in South Florida vacancy rates are so low that some landlords are raising rents as much as 28 percent, according to McCabe Research & Consulting, the
Wall Street Journal
reported earlier this week. That sounds like inflation, right? Read on...

Alas poor Inflation. I knew him, Horatio.

"A Modest Rise Still Amplifies Inflation Fears
," the New York times reports. Special Bonus: The Times article mentions Paul Volcker and Alan Greenspan in back-to-back paragraphs!
Hard to blame them. The core CPI yesterday came in with its third 0.3% monthly increase, all but guaranteeing a Fed rate hike of another 25 basis points at the June 29 FOMC meeting.
Year-on-year inflation is now up 4.2% from 3.5% previously.

We looked at OER above. Sure enough, rents are rising. But, according to Merrill's David Rosenberg, OER is also rising due to a more bizarre and complex factor: natural gas prices.
Falling natural gas prices have, ironically, added to the increase in OER because the government subtracts utility prices from the calculation.

According to Rosenberg, if you exclude the OER component, then core CPI rose a mere 0.17%. (Yo, that's a typo, right? You meant 1.7%.) No, that's not a typo. 0.17%.
So, while the market is reportedly focused on inflation, Minyanville's Todd Harrison this morning noted
the real Phantom of the Market
: Deflation. "Who is this Phantom I speak of and what does he want? For me, it's a simple yet unpleasant answer, the type of discussion that nobody wants to have until we actually see his shadow. He is Deflation; painful, all-consuming, watershed Deflation."
The risk is that if we are at the end of the credit cycle, and what appears to be inflation is simply the result of secular monetary hyperinflation from central banks, then the inevitable unwind of that credit cycle - a saturation of risk appetite becoming risk aversion and a decrease in time preferences - will find the Fed possibly raising rates into the teeth of a deflationary unwind. Just thinking out loud here.

C'mon Everybody! Ford Needs Our Help!

Speaking at the Competitiveness Forum
, Ford's president of the Americas Mark Fields asked the federal government for help to "level the playing field" for domestic automakers in the U.S. market.
Hey Lassie!
What is it Lassie? What's wrong?
Ford? What about Ford?
Ford fell in a well?
Oh, Timmy fell in a well. But what about Ford, Lassie? Is Ford in trouble?
What!?! Ford's gonna close 14 plants and lay off somewhere between 25,000-30,000 workers! What do we do Lassie?!
Ford wants us to level the playing field? What does that mean? Handouts? Bailouts?
Oh. Tax credits.
No!!! Oh Lassie, don't tell me Ford's healthcare costs have crippled the company!
Woof Woof!
Ok, Lassie. You run back to Ford and tell them first thing, stop making all those useless cars. Second close all the plants, they're not going to need them. Third, get them to change their name to Ford HMO... and round up as many doctors and nurses as you can! I'll go get the taxpayers!
Read the full Article


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