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Report: Home Boom Not Over Yet

Thursday, 08 December 2005 12:00 AM

It's no secret that investors have short memories. After all, why dwell on the past when the stock market is in full gallop?

The important thing is not to be left behind.

That's especially true of foreign investors, who have shrugged off economic collapses in Mexico (1995), Thailand (1997), Russia (1998) and Argentina (2001) and poured big money into foreign bourses in 2005.

The Investment Company Institute reports that U.S. mutual fund investors sank $9.39 billion into foreign markets but pulled $2.93 billion out of American stock mutual funds in October.

It's no statistical quirk.

The Washington-based ICI details a similar disparity in fund income and outflows for August and September.

And why not?

International funds heavily outperformed the average large-cap U.S. stock fund in the third quarter of 2005, rising 10.6% vs. 4.7%, according to fund-tracker Lipper's third-quarter report. Emerging market funds went even higher, going up 17.5% for the quarter.

Analysts say that while the sluggish dollar may have helped foreign markets like Japan or Latin America in the past, that's not the case today.

"In the past, declines in the value of the dollar have contributed to the strong performance of international funds," says a recent article in USA Today.

"U.S. funds that invest abroad get a bump from a weak dollar because they have to convert their international holdings into dollars. But while the dollar was down vs. other currencies at the beginning of the period, it recovered in September and ended the quarter basically flat."

The paper says that rising commodity prices and outsourcing have also contributed to the foreign investment boom.

While others agree that foreign shores are the place to be right now for investors, some wonder if a stock bubble is developing overseas.

Paul Blustein, writing in The Washington Post, says that billions are being poured into foreign markets by mutual funds and giant pension funds – just because it's the hot place to be.

"There's just a huge amount of money sloshing around looking for a place to go," Desmond Lachman, an economist at the American Enterprise Institute, tells The Post.

It's a huge amount of money that might be yanked out of foreign markets at the first hint of trouble, Blustein writes.

"Turkey's stock market is up more than 50% this year; Mexico's is up more than 30%; Egyptian stocks have more than doubled," he writes.

"Therein lie the makings of future disasters, in the view of many economists, market veterans and policymakers. Having pumped large sums into emerging markets at a time of low interest rates and high prices for the commodities that many developing countries produce, investors may well bolt when conditions deteriorate, with the sudden outflow of cash devastating economies and plunging governments into default."

Blustein quotes Kristin J. Forbes, a Massachusetts Institute of Technology economics professor, who says that a "perfect storm" could be brewing in foreign investment markets. Many of them, such as those in Mexico and Poland, still have a ways to go before they reach real economic stability and are still hammering out prudent economic policies.

So could the foreign investment boom be an illusion?

The Post article maintains that "the influx of cash makes the financial strength of many countries look better than it really is – and deludes government officials into believing that their policies must be near-perfect."

The title of a Lachman article in International Economy says it all: "Even Turkeys Fly When the Winds Are Strong" 

Lately, the White House had been on the kind of economic roll that poker players dream about, cashing in politically on employment gains and GDP growth, as well as on the stock market and inflation fronts.

But with a new jobs report, the Bush team has finally gone bust over news that heavy layoffs in the automotive sector have driven jobless claims up.

The outplacement firm Challenger, Gray & Christmas says that U.S. corporate layoffs were up 22% in November, to 99,279.

It's been that kind of trend all year, says the firm, which conducts its own monthly job poll.

"So far in 2005, corporations have announced 964,232 job cuts, up 3.6% from the year-to-date total a year ago," the firm reports.

"More than 10% of the job cuts this year have come from the struggling automotive sector, which has announced 105,886 cuts this year, including 16,870 in November."

Perhaps seeing its highly touted football team get hammered by USC last week showered the folks at the UCLA Anderson Forecast with a dose of ice-cold reality – because now the economic team is revising its prediction of a housing bust.

Only months ago, Anderson was saying that the California housing boom was over. But now they're saying: "Not yet."

While the market is cooling off in some state sectors, "there is lack of convincing evidence of a slowdown in the big picture," according to the group's quarterly forecast on California's economy.

"Southern California is one part of the state that's got some zip in it," said Ryan Ratcliff, an economist and author of the latest forecast.

"We're not accelerating, but we are still cruising along at 80 to 90 miles an hour."

Anderson maintains that California will see a decline in its housing market throughout 2006 and 2007. And he says that could lead to a 2% decline in construction jobs in the state. 

Right now, it's a real mixed bag in the California real estate market.

While Southern California – particularly Orange County – looks healthy, Anderson reports that home sales in San Francisco County are off 20% from their June 2004 peak, and prices are down 5% from their May high.

"San Diego County's market has lost steam as well, but price increases have leveled off to a flat rate of growth," says the UCLA report. Anderson says that a drop-off in high-tech jobs in Silicon Valley could be fueling the region's real estate slowdown.

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It's no secret that investors have short memories. After all, why dwell on the past when the stock market is in full gallop? The important thing is not to be left behind. That's especially true of foreign investors, who have shrugged off economic collapses in Mexico...
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Thursday, 08 December 2005 12:00 AM
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