A.G. EDWARDS & SONS, INC.
One North Jefferson, St. Louis, Missouri
314-955-3050
(February 28, 2002) FINANCIAL INSTRUMENTS: The housing sector has remained very strong throughout this recession. Low interest rates and steadily rising incomes have boosted prices and encouraged sales and building. Even with these favorable fundamentals, we were surprised that January existing home sales jumped to a new record. We suspect some of this increase was due to unseasonably warm weather. To examine the impact of temperature on housing starts, which is related to existing home sales, we compared the change in starts in May to January, in relation to January temperature's deviation from average.
January Temperatures And Spring Housing Starts
Chart courtesy of A.G. Edwards.
This scatter gram suggests a mild inverse relationship. Lower temperatures in January tend to bring stronger starts in the spring. This is because it is more difficult to build in cold weather. The government does adjust for seasonal factors, but not extremes. During warm January years, more starts occur, and the seasonal adjustment process accentuates that factor. Thus, there is less "pent up demand" during warm January years for spring housing, and starts are often depressed.
The relationship is far from perfect, as interest rates play a much larger role. We expect that housing will remain robust, but not at the same levels as we are seeing now. This will appear to suggest some slowing in housing, which will be bullish for interest rates.
We recommending buying September Eurodollars, entering one position at 97.25 (ob), adding a second at 97.15 and a third at 97.00, risking to 96.85, with an objective of 98.00.
Bill O'Grady
www.agedwards.com