Well folks, it has been a LONG time since I have been actively posting to the website.  Now that I once again have a broadband connection expect lots of new information and regular updates to the website.

The following are my updated thoughts on each of the subjects below:

• The Housing Market:  I expect the housing market to remain strong as long as interest rates remain low.  The overall interest rate environment should remain favorable due to a stop-go economy.  As the economy strengthens rates go up.  As rates go up it will drive up the borrowing costs of consumers and businesses alike. 

I think that overall home prices won't grow at the astronomical rate they have for the last 3 years in some markets.  As rates go up and increasingly larger number of homeowners will be forced out of their homes due to using ARMS (adjustable rate mortgages).  Many bought the maximum size house they could afford but higher rates will put them over the edge, causing them to sell or go into default.  This should help to increase the supply of homes in the market, particularly in expensive areas where usage of ARMs has increased dramatically (LA, NY, San Fran).

Additionally, higher interest rates increase the cost of ownership dramatically.  a 2% increase in the cost of a fixed 30 year note nearly DOUBLES the cost of a mortgage.  As rates go up 2% in the next 3 years the cost of a desired house will DOUBLE to consumers not currently in homes.  As a result, many will purchase smaller homes, older homes or forego that purchase altogether.  

Don't get me wrong, an improving economy is good for home prices and homeownership, in general.  I am just saying that everything isn't as good as most journalists and politicians would like to tell you they are.

• The Stock Market: Last year the market went up 25% in my face (I said the market would be flat to down) as bottom line EPS results improved (which I expected).  However, I still continue to believe that the stock market will languish due to weak TOP LINE growth in sales.  Without sales growth companies must trim costs to grow EPS and, in the long-term, companies can only lay off so many workers before it impacts customer satisfaction results.  Despite the recent stock market increases (joy for war?) I believe that people will have to "wake up and smell the coffee" at the end of the war.  When they do they will realize we are running the largest government deficits in history, we have trillions in national debt, states are increasing tax rates, business investment continues to languish and that consumer spending is beginning to turn negative despite record low interest rates.  I believe that valuations are only slightly overvalued today but the only reason they look somewhat attractive is because other options (banks, bonds, CD's) pay absolutely nothing.  I think this year will be negative to flat (80% odds) with a slight chance (20%) of positive returns.  I only say this because I don't see that many positive catalysts in the near future and a war ending sure as heck doesn't cause economic growth.  Does anyone look at balance sheets anymore?  

• Business investment:  Businesses are starting to buy technology stuff again, although alot of it is to replace previous equipment bought during the "dot com" era.  As you can see from the below chart, capacity utilization is on the rise but it isn't anywhere near previous "growth levels."  Most economists consider a growth economy over 80% utilization.  Most businesses don't invest substantially in new capacity until they attain 85%-90% utilization rates.

• Consumer spending:  I cannot emphasize that the consumer is 2/3 of the U.S. economy.  While business investment is important the U.S. consumer and their overall sentiment is the most important driver of the U.S. economy.  Job growth is occurring and I can see that by perusing Monster.com and hotjobs.com and comparing results vs. late 2002 when I returned to the DFW metroplex.  Things are picking up.  I am concerned, however, about rising default rates on cars, homes and overall consumer income growth, which is languishing. 

• Auto sales:  This part of the economy has been cracking for a year.  The only way the U.S. companies can sell their cars today is to give HUGE rebates and 0% interest rates.  For the last 2 years they have taken future customers and given them reason to buy via HUGE discounts and rebates.  I think that the tap is starting to run dry and that we should hear some interesting stories about the U.S. auto industry lagging, especially towards the end of 2004.

I hope everyone finds the facts/insights presented in this article valuable.  If you find them interesting please send me a comment @ dan@betterbizbooks.com and forward the article onto as many friends as you want to.  If you want to receive further articles such as this click on the subscribe button on the right to sign up for my Free Newsletter.

7/16/02 - End of the "Housing Bubble?"

7/12/02 - A Falling U.S. Dollar - Why it Matters

4/28/02 - The U.S. Housing Report

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