Wanted: Skilled Labor in Nevada

Back on August 5th of this year, when certain readers of this blog goaded yours truly into making an actual investment call—as opposed to merely tossing out “sarcastic and rambling” content, as BusinessWeek put it—I stated then and there that the housing cycle as we knew it had peaked.

At the risk of doing a Bob Dole by referring to myelf in the third person, here’s the quote from that day’s piece called “Playing the Spot Market…For Houses”: I guess—like the old-time money managers in 1999-2000 who either closed up shop or got with the New Economy—I’d better either jump on the real estate bandwagon or stop barking at the tires.Nope. I’ll put a stake in the ground right here, and say what so many others have been saying for so long that they’ve shut up already: the housing cycle is over. The high-water mark has been reached, today, August 5, 2005, when the 2 year yield hit 4.10%. Now, the point of today’s piece is not to talk about how smart that call looks. It could still be wrong, and, in hindsight, very dumb.

After all, Tuesday’s Wall Street Journal reported that the hurricanes that have caused such havoc and destruction along the Gulf Coast have also caused something else…real estate mania:

“It’s like we got on the map with the storms,” said one Pensacola realtor: “We’re getting investors from Massachusetts, Colorado, Oklahoma—places we never saw buyers from before.”

Recently, one such buyer from Oklahoma bought a property for $200,000 and sold it weeks later for $395,000… Now, I am sure somebody from Massachusetts or Colorado or Oklahoma is much smarter than a chuckle-headed Pensacola native willing to sell his battered house to a speculator from Wellesley and take a rental down the street.

But before leveraging up to the eyeballs, those somebodys had better check their Bloomberg screens, or, at the very least, the interest rate tables in their Daily Oklahoman and Boston Globe.

If they do, they will see that the yield on the two year note, which bottomed at a mere 1% before the Fed started jacking up rates last year, reached 4.37% yesterday—higher even than the 4.10% yield which, I concluded on August 5th, was high enough to put the kibosh on the housing bubble.

Why, you may ask, is the two year yield so high relative to the benign “core inflation” number of 2% that all the TV economists toss around?

Well, perhaps the bond market is no longer restricting its reading material to Federal Reserve meeting minutes and Steve Roach End-of-the-World forecasts, but is observing what is actually happening out in the real world, by, say, listening to some of the third-quarter earnings calls that are freely available to all comers.

If so, the New Bond Vigilantes would have heard management from the King of Beers last night discuss “significant” increases in packaging costs and “huge” increases in utility and energy costs.

For the moment, those higher-than-core-CPI costs will not show up in the price of a can of Bud, because the company is engaged in a market-share battle with a newly revived Miller while both lose drinkers to hard liquor. So Bud eats the cost increase.

Not so for home builders and cruise line operators, however.

Pulte Home’s average selling price was up 9% over last year, while Royal Caribbean Cruises raised prices enough to more than offset a 6.4% increase in cost per passenger. And while it is quite literally coining money thanks to decade-high prices for gold, Newmont Mining is struggling to deal with “shortages of skilled labor in Nevada and higher prices for energy.”

And thus the “core inflation” rate—i.e. “ex food, energy, beer cans, utilities, housing, gold, insurance, health care and skilled labor in Nevada”—can be manipulated to look pretty much as it always has: 2%.

But the bond market is no longer fooled: it wants 4.37% for a two-year commitment to government paper.

Housing buyers beware.

Jeff Matthews I Am Not Making This Up

Note: this piece was written prior to the announcement of an SEC investigation into accounting practices at General Motors, which has caused an early-morning “flight to safety” in the treasury markets, bringing the two-year yield down to 4.35% as I write this. Still a far cry from the 4.10% of August 5th, and the 1% bottom in 2004.

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.