Posted by: Aaron Pressman on August 9, 2006
James Stewart had an interesting throw-away factoid in his WSJ column today that caught my attention. I certainly agree with his top line advice that long-term investors shouldn’t care much about whether the Fed is done raising rates or not after yesterday’s pause. Many brilliant investors, guys like Bruce Sherman and Will Danoff, buy companies when they are cyclically out of favor and reap the rewards by selling when the cycle turns. Of course, you have to be careful not to confuse a cyclical downtown with a more permanent change (newspapers, anyone?), but that’s what they get paid the big bucks for.
Anyway, Stewart looked back to 1914 and found that the Fed has never paused in the sense that when it stopped raising rates its next move, after some delay, was always to cut rates. Stewart seems to think history is destiny here, but the market is leaning the other way. Just over half of traders in the interest-rate futures market expect another 25 basis point rate hike by year end, down from 81% five days ago, according to today’s Bloomberg News bond report.
It’s more than an academic question not so much because of the level of rates but because of what the Fed’s moves show about the state of the economy. The reason the Fed has never resumed raising rates before is because it almost always raised them far enough to push the economy into a serious slowdown or recession within 12 to 18 months. If Stewart is correct and the next eventual Fed move is to lower rates that would mean that the economy is in for a tumble. If the bond market is correct and the next move is another hike that would indicate continued moderate or better growth.
I don’t have any great read on the economic tea leaves, but I did notice today luxury homebuilder Toll Brothers announced a sales slow down and write-offs for property options it owns. Shares dropped to 7% to $24.65, down 20% from $30.77 when I first fretted about the company’s prospects. And I loved this quote from CEO Robert Toll who has been a font of optimism on housing since forever:
“It appears that the current housing slowdown, which we first saw in September 2005, is somewhat unique: It is the first downturn in the forty years since we entered the business that was not precipitated by high interest rates, a weak economy, job losses or other macroeconomic factors. Instead, it seems to be the result of an oversupply of inventory and a decline in confidence: Speculative buyers who spurred demand in 2004 and 2005 are now sellers; builders that built speculative homes must now move their specs; and nervous buyers are canceling contracts for homes already under construction.”
This from a guy whose front web page was until a little while ago still touting his April CNBC appearance about “the surge in new home sales.” But whether the declining fortunes of Toll and other homebuilders signal bigger problems, I think the jury is still out. Any thoughts out there in the blogosphere?
(Updated after Toll changed its web page)