[A-List] US housing boom casualties

["Michael Keaney" <michael011@xxxxxxxxxxx>]

THE SHORT VIEW MARKET COMMENT BY PHILIP COGGAN
By Philip Coggan
Financial Times: March 3 2006

Corporate profits have been strong in recent years and there has been
little sign, as yet, of that trend changing. According to Dresdner
Kleinwort Wasserstein, earnings estimates for the current year have been
unchanged over the past month and those for 2007 have actually been
pushed 0.8 per cent higher.

Within that total, however, there are significant regional patterns. The
European corporate sector looks very strong, with the trend in analyst
upgrades running at its strongest since the late 1980s. Over the past
month, forecasts have risen by 1 per cent for this year and 0.9 per cent
for next. The trend in Japan is also strong, with upgrades running at
about 65 per cent of all changes over the past three months.

The laggard in the data is the US, where earnings estimates are flat for
both years; as many companies are now being downgraded as upgraded.
Analyst optimism has tapered off markedly since the autumn.

Perhaps the trend in US earnings forecasts is related to that
much-debated topic, the inverted yield curve (that is, short rates are
higher than long yields). Chris Watling of Longview Economics points out
this is an English-speaking phenomenon with the US, UK, Australian and
New Zealand curves all inverted, while the eurozone, Japanese and Swiss
curves are all upward-sloping.

This suggests there is more to the phenomenon than simply a global
savings glut that is driving down long yields. Mr Watling thinks the
answer lies in the housing market, with the English-speaking countries
all having deregulated housing and credit markets and thus experiencing
residential property booms on the back of low interest rates.

Now that short rates have risen, consumer spending growth has slowed in
the UK and Australia, and many analysts expect the same process to occur
in the US later this year.

Mr Watling thinks US consumer spending could be hit by about 0.5 per
cent a year in each of the next two years. That would be enough to slow
the economy and may be what earnings forecasts and the yield curve are
anticipating.


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