Case Shiller Index - March 2009

The Case Shiller Index fell another 2.2% in March 2009 and now stands 32.2% below its peak level hit in July 2006. Prices have declined to levels last seen in May 2003, with some of the worst regions (i.e. Phoenix, Las Vegas) having retreated to 2001/2002 prices. On a positive note, last month was the first month since August 2008, where sequential increases were observed in any of the index’s 20 metro areas. Denver and Charlotte inked out sequential gains, rising .1% and .3%, respectively. Certainly nothing to get too excited about, but further confirmation that housing is slowly, but surely finding a bottom.

Railroad Data - Where are the Green Shoots?

If green shoots are indeed sprouting up in the US economy, they certainly aren't showing up in the weekly carload data reported by the Assocation of American Railroads. As suggested in the chart below, carloads are down approximately 25% for each of the last 5 weeks, with declines most severe in heavy metals and scrap (~40-60% declines).

Official Gold Holdings as of April 2009

Here is an interesting chart from the World Gold Council showing the current tonnage of the 20 largest holders of gold. Despite China being the 7th largest holder, gold only represents a mere 1.6% of the country’s $2 billion of foreign reserves – and this is after increasing their holdings from 600 metric tonnes at the end of 2008. As discussed in prior posts, Chinese officials have hinted at their plans to increase their gold holdings to as much as 4,000 tonnes, which could have significant implications on the supply/demand forces underlying the yellow metal. While recent IMF sales have kept a lid on the price of gold, once this artificial selling pressure abates, we could easily see gold surpass $1,000/ton, particularly as concerns over the US’s ability to fund its mounting deficits become a self-fulfilling prophecy.

California Home Prices Stabilizing

Home prices in southern California have declined by 51.1% from their peak levels reached in July 2007. The most severe declines have been in Riverside and San Bernardino (composing the Inland Empire) where prices are down 58.3% and 63.6%, respectively. While prices have declined precipitously from their peak, they have remained fairly very stable at approximately $250,000 since the beginning of 2009. As such, year-over-year volumes have increased approximately 30-50% for each month this year. Foreclosures have driven a significant chunk of this volume, with DQ News reporting that distressed sales comprised 53.6% of total sales in April. In the worst markets, foreclosures account for nearly 70% of sales. While foreclosures and plummeting prices reflect the difficult challenges in California’s housing market, I would argue that the market is firmly in the correction phase. Savvy investors and first time homebuyers are taking advantage of low prices, cheap financing (thanks to the artificial suppression of mortgage rates by the Fed), and government incentive programs (i.e. $10,000 CA home price credit; $8,000 federal tax credit for new home buyers), which in turn is helping the market slowly find a bottom.

China & Taiwan Make History

Despite being overshadowed by the swine flu news coverage, a major milestone in Taiwan's developing economic ties with China were reached last week, when Taiwan relaxed a 60 year ban prohibiting Chinese mainland investors from buying Taiwanese shares. The two sides have been enemies since Taiwan lost a civil war to Mao Zedong’s communist armies in 1949. Subsequent to the defeat, Taiwan banned any investment from Chinese investors, fearing that foreign ownership would result in the island becoming economically dependent on China.

As evidence of China's growing interest in the island, China Mobile followed the announcement by buying a 12 per cent in Taiwan’s third-largest telecom operator, Far EasTone, for $529 million. Ever since taking over the leadership of Taiwan in May 2008, President Ma Ying-jeou has pledged closer ties to China, and I would expect further investment in the months to come. In fact, there is even discussion of potential reunification, which would be signficantly bullish for Taiwan.

Despite rallying on the news and being up 30% year to date, Taiwan remains over 40% below its highs reached last year. Further, the market trades at a healthy 10x PE. Investors can most easily gain exposure to Taiwan through the iShares MSCI Taiwan ETF (Ticker: EWT). Although I am fairly bullish on Taiwan and believe it represents a cheap way to gain exposure to China, the ETF is highly exposed to the technology industry (as is Taiwan in general), so investors are encouraged to due diligence on the underlying companies. Some of the major components of the ETF include Taiwan Semiconductor, Hon Hai Precision, AU Optronics, HTC, and Cathay Financial. Other Taiwan focused ETFs include Taiwan Greater China Fund (TFC) and Taiwan Fund (TWN).