Pimco’s Keisel Cashes Out

Great piece over at Pimco by Mark Kiesel:

U.S. Credit Perspectives

“Three weeks ago my wife, Amy, and I sold our house and moved into a rental apartment. I believe the U.S. housing market is set to cool given the current level of prices and fundamental trends. Recent price gains have likely come primarily from rising speculation and “creative financing” because affordability is declining and inventories are rising. When asset prices diverge from fundamentals, I favor taking the other side of the trade – even if it involves moving. Amy wasn’t thrilled about moving, but my sense is she will look back on our sale and view it as a good one. In the end, the fundamentals should win out.”

“The U.S. housing market is turning for the worse and housing price gains are set to moderate. What does housing have to do with corporate bonds? Plenty. Rising home prices have been a key driver of U.S. economic growth, which in turn has played a major role in the tightening of corporate bond spreads. In other words, housing will foreshadow not only the direction of the economy, but also the direction of credit spreads. As the housing market turns, consumers will pull back their spending and the U.S. economy should slow. With a softening housing market, we should expect tighter lending standards, a moderation in the willingness to take risk, a slowdown in the pace of asset price appreciation, less liquid markets, and rising volatility in financial markets. And at that point, “for sale” will not just be a sign you see in front of your neighbor’s yard – investors may also put a “for sale” sign on risk assets as well. Investors in the credit market should therefore remain cautious given the tight overall level of corporate bond spreads and focus on developments in the housing market.”

“Housing is a leading indicator of the overall direction of the economy. As housing slows, economic growth will surely follow. As such, we should expect to see tighter terms on credit extension, less liquid markets and a pick-up in the overall corporate default rate over time with a slowdown in the pace of economic growth. An eventual rise in the default rate, combined with higher near-term volatility, should lead to a more challenging market environment for credit. Watch the “for sale” signs – in both the housing and corporate bond market – my sense is more of both are coming as the market transitions from a mode of risk taking to that of risk aversion.”

This entry was posted in General. Bookmark the permalink.

19 Responses to Pimco’s Keisel Cashes Out

  1. “WASHINGTON Jun 6, 2006 (AP)— Federal Reserve Chairman Ben Bernanke is promising that the central bank will remain vigilant in fighting inflation. The comments sent shock waves through financial markets hoping the Fed was about to call a cease-fire on interest rate increases.

    Instead, Bernanke’s comments are likely to mean further increases in borrowing costs for consumers on their home and auto loans and credit card debt and for small businesses trying to raise money at their local bank.

    The comments to an international monetary conference on Monday were exactly the opposite of what Wall Street was expecting.

    Investors had grown hopeful that a slew of slower-than-anticipated economic reports, including a shockingly small 75,000 job increase last month, would persuade the Fed to call a halt to further rate increases.

    While acknowledging in his comments that economic growth did appear to be slowing, Bernanke chose to also emphasize a number of troubling developments regarding inflation.

    He noted in particular that core inflation, excluding energy and food, was rising at an annual rate of 3.2 percent by one inflation gauge and 3 percent by another.

    “These are unwelcome developments,” he said.

    Bernanke said that the Fed “will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained.”

    That was all Wall Street investors needed to hear on Monday to trigger a stock sell-off that pushed the Dow Jones industrial average down by 199.15 points, or 1.77 percent, the biggest one-day sell-off since the Dow sank by 214 points on May 17, the day the government released a report on consumer prices that showed a worrisome uptick in inflation pressures.

    The Japanese market followed suit Tuesday where the benchmark Nikkei 225 index dropped 283.45 points, or 1.81 percent, to finish at 15,384.86 points on the Tokyo Stock Exchange.

    Bernanke “provided an emphatic commitment to maintaining price stability that suggests to me that he will be pushing for another tightening at the end of the month,” said Stephen Stanley, chief economist at RBS Greenwich Capital.

  2. Sign online Petition to: Address Rising Housing costs so NJ citizens can live & work in NJ

    http://www.petitionspot.com/petitions/njhome

    It’s Free and no effort required. The more people join this effort, more stronger we will get.

  3. pesche22 says:

    you would not want to own housing
    stock unless your short.

  4. Anonymous says:

    Chicago-

    Check with Grim on data you asked for…

    JM

  5. grim says:

    I emailed that info earlier this morning..

    grim

  6. Anonymous says:

    I agree with everything he says, but seems to me to go as far as selling your own home and moving into a rental apartment is a bit of a stretch.
    Investment properties I could understand – but the roof over your own head? Nonsense. Means he is trying to time the market – good luck with that.

Comments are closed.