Fed-ECB Policy Gaps, Chinese Cash, Homebuilder Stocks: Timshel
Commentary by Michael R. Sesit
Feb. 9 (Bloomberg) — Benito Mussolini is often credited
with making Italys trains run on time. Looking at the disparate
monetary policies being pursued at three of the worlds major
central banks, you wonder if these folks could run a model
railroad without driving the toy trains off the tracks.
The Federal Reserve, European Central Bank and Bank of
England are confronted with slowing growth and accelerating
inflation. Yet their policy responses have been so different.
The U.S. central bank has cut its key federal-funds rate,
which banks charge one another for overnight loans, to 3 percent
from 5.25 percent, since Sept. 18, 2007, with the latest
reduction coming on Jan. 30. The Bank of England lowered its base
rate to 5.25 percent this week, marking its second 25-basis-point
reduction in two months. The ECB raised its refinancing rate to 4
percent from 3.75 percent on June 6 and hasnt budged since.
Until recently, ECB President Jean-Claude Trichet was even
warning that rates may have to rise to counter inflation.
Could change be in the offing?
Trichet two days ago acknowledged there was “unusually high
uncertainty about the 15-nation euro-area economy. It was a
welcome admission. Currency gurus immediately read his remarks as
preparing the market for a rate cut.
That would be good news to those folks concerned that
Europes growth prospects are worsening. Last month, the
International Monetary Fund lowered its 2008 forecast for the
region to 1.6 percent from 2.1 percent.
Still Breathing
Even so, traders and analysts shouldnt jump the gun.
Trichets comments showed that the ECB Governing council was
still breathing, not that it necessarily had a heart. And if the
ECB does cut rates, there remain the questions of when, how often
and by how much.
Most of Trichets prepared remarks after the banks council
meeting on Feb. 7 were devoted to containing inflation, not
fostering growth.
“It is paramount that medium and long-term inflation
expectations remain firmly anchored in line with price
stability, Trichet said. “Reflecting its mandate, such
anchoring is of the highest priority to the governing council.
Euro-area inflation was 3.2 percent in January, according to
an estimate by the European Unions statistical agency, compared
with the ECBs target of about 2 percent, which it hasnt
achieved for eight years.
G-7 finance ministers are no more in agreement on a common
approach to boosting global growth than the central bankers. U.S.
Treasury Undersecretary David McCormick urged other countries to
“take prudent steps to spur growth. While the U.K. was on
board, the plea drew a tepid response from Germany, Japan and
Canada.
It would be nice if the worlds top monetary and finance
officials got on the same page. More than nice, it might do
wonders for the global economy.
* * *
It was only a matter of time before paranoia about sovereign
wealth funds and state-owned industries re-emerged after they
were lauded as the saviors of the banking system.
On Jan. 31 after the London market closed, Aluminum Corp. of
China — known as Chinalco — and Alcoa Inc. jointly paid $14
billion for a 9 percent stake in Rio Tinto Group, with the
Chinese kicking in $12.8 billion. That placed a state-controlled
Chinese company into the middle of BHP Billiton Ltd.s hostile
takeover battle for Rio.
Counter Bid
British newspapers said Chinas sovereign wealth fund, China
Investment Corp., has given Chinalco access to $120 billion to
help finance a possible counter bid for Rio.
Chinalco President Xiao Yaqing, on Feb. 4, said Chinas
biggest aluminum producer had no plans to raise its stake in Rio.
Three days earlier, he declined to comment. Chinas goal is to
stop BHP, the worlds biggest mining company, from creating an
entity that would supply a third of the worlds traded iron ore
and be the biggest maker of aluminum and energy coal.
One thing you can say about state-owned money: It can do
wonders for stock prices. The day after the Chinalco-Alcoa
investment, Rio shares in London surged 17 percent.
* * *
Watching the powerful rally in U.S. homebuilding stocks
during the past month or so, its understandable that investors
might be tempted to jump on for the ride. After all, Pulte Homes
Inc. surged 88 percent from its lows on Jan. 8 to its recent high
on Jan. 31, while between Jan. 8 and Feb. 1, KB Home rose 71
percent and D.R. Horton Inc. gained 69 percent.
Still, it probably isnt a good idea.
What happened to technology stocks after the tech bubble
burst in March 2000 suggests the growth prospects for
homebuilders may be sub-par for a long time. For instance, new
orders for information-technology products rose at a healthy
average annual 8.7 percent rate during the five years leading up
to the technology bust. They then fell to a slightly negative
pace in the subsequent five years.
“It is conceivable that tighter credit conditions will
cause future demand for new homes to parallel the experience of
the tech sector, says Jaymie Sullivan, a global equity
strategist at BCA Research Ltd. in Montreal.
So before you find stocks like Pulte Homes,, KB Home and D.R.
Horton too mouthwatering to resist, at least “wait until the
housing under-investment cycle has had more time to play out,
Sullivan says.
(Michael R. Sesit is a Bloomberg News columnist. The
opinions expressed are his own.)
To contact the writer of this column:
Michael R. Sesit in Paris at at
msesit@bloomberg.net
Last Updated: February 8, 2008 22:04 EST
Tags: Bank, bank of england, bhp billiton, central banks, decline, europe, federal reserve, finance minister, finance ministers, global economy, international, mining company, nse, stake, target, treasury, ubs, uncertainty