The Independent Market Observer

Another Slow Day

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jul 20, 2012 10:24:12 AM

and tagged Yesterday's News

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The papers this morning really only have two stories in common. The first is the U.S. drought and its effect on food prices; it’s covered on page 1 of the Financial Times (FT) in “U.S. Drought Triggers World Food Crisis Alert” and on page A1 (picture) and A11 of the New York Times (NYT) with “Widespread Drought is Likely to Worsen.” The FT compares the situation to 2008, when price peaks set off riots in 30 countries, noting that corn and soya prices are above the 2007–2008 levels and that wheat is up more than 50 percent in five weeks. The NYT reports that this is the most widespread drought in more than a half century; one-third of the nation’s counties have been declared federal disaster areas because of the drought, covering more than half of the continental U.S.

This means food prices will be increasing around the world—an annoyance in the U.S. but a critical problem in poorer countries where food is a significant part of the total budget for most families. We can expect to see bumps in inflation rates around the world, which may present a particular problem for China. One more story to keep an eye on over the next couple of months.

The second story shared by today’s papers highlights some good news—for a change—on the European front. Page 3 of the FT and page B6 of the NYT report that the German government has approved the Spanish bank bailout. This removes an important layer of uncertainty from the bailout process, as it indicates that Germany remains onboard, despite its grumbling. The news is not all good, though—Spanish rates rose above 7 percent again, partly as a result of the debate over approval, and the German Constitutional Court still has to weigh in as well. Nonetheless, a good sign.

The Wall Street Journal (WSJ) had two interesting articles on the housing market. The first, on page A2, is “Housing Shortage Slows Sales.” The story is pretty much explained in the title, but the details include that the number of homes listed for sale is now down more than 20 percent from last year, due largely to declines in foreclosures by banks and a growing number of investors buying homes to rent out. A drop in supply is a necessary condition for a market bottom. As we now see prices recovering in many markets, and as I have been saying for several months, I believe we have hit the market bottom in housing. I also suspect the recovery might well be stronger than anyone currently expects.

The WSJ’s second housing article, which supports the first, is “Wall Street’s Latest Housing Play: Packaging Rent Payments for Sale” on page C1; it is about the companies that are investing in homes and renting them out. Private capital has already started to flow into the residential market to the point of stabilizing it. Adding institutional or Wall Street capital could well accelerate the process considerably—which could, as I said, lead to a much faster recovery than is now expected. The pieces are moving into place.

One more WSJ article worthy of note—on page A3—discusses something I consider a positive trend. “Towns Cut Costs by Sending Work Next Door” talks about how municipal services are being centralized between towns. Net result: lower costs for everyone. This is an excellent example of how all entities in the U.S. are adapting to the new conditions, and this will be exactly how we get out of the hole we have dug.

Have a great weekend!

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