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Here are some recommended ETFs for energy and commodities. Investment timeframe: 1Q-2Q 2008.

 

Northeast Is Toughest Place in U.S. to Sell Homes (Update1)

By Kathleen M. Howley

 

Jan. 8 (Bloomberg) -- The toughest place to sell a home in the U.S. in November was the Northeast.

 

An index measuring signed contracts for previously owned homes fell 13 percent in the region, the most of any area in the country, the National Association of Realtors said today in a report.

 

The index's drop in states including Massachusetts and Connecticut was triple other U.S. regions and demonstrates home sellers there are having to lower expectations as the real estate slump worsens. Nationally, the number of Americans signing contracts to buy previously owned homes fell 2.6 percent in November from October, according to the Realtors' Pending Home Sales Index.

 

``The continued decline in residential investment has heightened the risk of a more significant downturn in the overall economy,'' Federal Reserve Bank of Boston President Eric Rosengren said today in a speech in Hartford, Connecticut.

 

The Realtors report showed pending resales fell in three of four regions. In addition to the Northeast's 13 percent drop, the pending sales index decreased 4.1 percent in the Midwest and 2.1 percent in the West. The pending sales rose 2.3 percent in the South. The figures are seasonally adjusted.

 

Home prices in Massachusetts declined 2.3 percent in 2007's third quarter from the same period a year earlier, according to the Office of Federal Housing Enterprise Oversight. That made it the fourth-worst market in the country during the quarter, after Michigan, California and Nevada.

 

Rapid Fall?

At a Dec. 11 meeting of the central bank's Federal Open Market Committee, Rosengren voted against the panel's decision to lower the benchmark short-term interest rate by a quarter percentage point, voting in favor of a half-point cut.

 

The Boston Fed president said in today's speech that last year's home price declines have prompted widespread foreclosures, and added that a worsening in conditions may occur.

``Since prices have declined substantially even in a relatively benign economic environment, one cannot discount the possibility that they could fall more rapidly should economic performance not remain strong in 2008,'' Rosengren said.

 

U.S. home prices may fall 12 percent from their peak through 2010 as ``the toughest housing correction in our lifetimes'' drags on, Fannie Mae Chief Executive Officer Daniel Mudd said.

 

Dire Situation

The outlook for the economy hinges on ``whether we pull together and deliver a recovery sooner, or we wait and hope until later at the cost of time, money and human suffering,'' Mudd, who runs the largest U.S. mortgage-finance company, said in a speech to the U.S. Chamber of Commerce in Washington today.

 

If the market doesn't improve, it may force a career change for Eric Hanlon, a real estate agent in Easton, Massachusetts. Three of his colleagues already have left real estate for other jobs, he said.

 

Hanlon, 36, is looking forward to March for two reasons: his third child, a son, is due to be born, and the so-called ``spring selling season'' will be just around the corner.

If the market is going to recover this year, it should happen by then, he said. Traditionally, more than half of all U.S. home sales occur in the three months between April and June, according to Frank Nothaft, chief economist of Freddie Mac, the No. 2 U.S. mortgage buyer.

 

Tough Times

``I'm at the whim of the market,'' said Hanlon. ``If things don't turn around I'm going to have to start thinking about another job, with a five-year-old, a two-year-old, and a newborn to support.''

 

The National Association of Realtors' index of pending home sales fell to 87.6 in November, following a 3.7 percent gain in October that was larger than previously estimated, the group said today in Washington.

 

The Realtors association estimates 5.7 million homes will be sold in 2008, little changed from an estimated 5.65 million last year. Purchases of new homes will fall to 669,000 from 773,000.

 

Fannie Mae has a bleaker outlook. The mortgage buyer estimates 4.9 million previously owned homes will sell this year, a drop of 13 percent from 2007.

 

U.S. home prices probably will tumble 4.5 percent in 2008 and 2.6 percent in 2009, Fannie Mae economists Molly Boesel and David Kogut wrote in a Dec. 19 forecast. Last year, home prices fell 2.2 percent, they said.

 

``The large number of unsold homes on the market is putting downward pressure on house prices,'' the economists said in the report. ``This price weakness is likely to extend into 2009 until a combination of a projected rise in home sales and decline in unsold inventories leads to perhaps a modest gain in prices by 2010.'' 
 

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The U.S. dollar has been on a seven-year decline that is affecting everything from job markets in Europe and Asia to coffee exports from Africa. "The dollar was the dominant force in world economics for 100 years -- we had no competition," said economist C. Fred Bergsten. "There was no other economy close to the size of the United States. But all that is now changing."

 

Market insights and related articles.
 

 

A Merrill Lynch & Co. index puts U.S. Treasury returns at 8.7%, their best year since 2002, fueled by investors fleeing from subprime issues to the relative safety of government debt. "U.S. bonds have been boosted by a flight to quality since the subprime crisis erupted," said Stephen Lewis of Insinger de Beaufort in London. "Two-year yields are telling you the market's reluctant to stray from what's perceived as being the safest assets." SIFMA has recommended trading of Treasuries close at 2 p.m. New York time and remain closed for New Year's Day in the U.S., the U.K. and Japan.

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Treasuries Set for Yearly Gain; Reports May Show Slowing Growth

 

U.S. Treasuries are set for the best year since 2002 before reports this week that may show the housing recession is slowing economic growth.

 

Treasuries returned 8.7 percent, according to a Merrill Lynch & Co. index, as losses tied to subprime mortgages stoked demand for the safety of government debt. Ten-year yields are almost 1 percentage point more than two-year rates, signaling investors have sought shorter maturities as the Federal Reserve reduced interest rates. In March, they yielded about the same.

 

``U.S. bonds have been boosted by a flight to quality since the subprime crisis erupted,'' said Stephen Lewis, chief economist at Insinger de Beaufort in London. ``Two-year yields are telling you the market's reluctant to stray from what's perceived as being the safest assets.''

 

Two-year Treasury yields fell 2 basis points to 3.08 percent as of 9:33 a.m. in London, according to bond broker Cantor Fitzgerald LP. The price of the 3 1/4 percent security due December 2009 gained 1/32, or 31 cents per $1,000 face amount, to 100 10/32. The yield on the 10-year note was little changed at 4.07 percent.

 

The Securities Industry and Financial Markets Association recommended trading of Treasuries close in Japan for a holiday today. It also recommended trading stop at 2 p.m. New York time and stay shut tomorrow in Japan, the U.K. and the U.S. for New Year's Day.

 

Economic Reports

Two-year notes added to two weeks of gains before a National Association of Realtors report today that may show existing-home sales matched a record low in November. The Institute for Supply Management's factory index on Jan. 2 will show manufacturing almost stalled this month, according to surveys of economists by Bloomberg News.

 

Employers hired 70,000 workers in December, slowing from 94,000 last month, according to the median forecast in a Bloomberg survey before a Labor Department report Jan. 4.

Ninety-two percent of money managers surveyed by Ried, Thunberg & Co., a research unit of ICAP Plc, the world's largest inter-bank broker, say 2007 will be remembered as the year of the global credit crunch.

 

Subprime-mortgage defaults led to at least $80 billion in writedowns and losses at the biggest securities companies and banks, including Citigroup Inc. and UBS AG. The Fed, led by Chairman Ben S. Bernanke, reduced the target rate for overnight loans between banks by 1 percentage point this year to 4.25 percent. The Fed and the European Central Bank added funds to the financial markets to try to revive corporate debt trading.

 

2008 Outlook

Ried, Thunberg's index measuring attitudes toward Treasuries through the end of March held at 51 for the week ended Dec. 28. A number above 50 indicates investors expect prices to rise. Its index for the end of June declined to 50, which is neutral, from 52. The 24 investors surveyed by the Jersey City, New Jersey, company manage a combined $1.21 trillion.

 

Bloomberg surveys of economists show they are less optimistic on Treasuries for 2008. The 10-year yield will gain to 4.48 percent while the two-year rate will climb to 3.76 percent by year-end, the surveys show, with the most recent forecasts given the heaviest weightings.

 

The so-called TED spread, the difference between what the U.S. government and banks pay for three-month loans, indicates lenders are becoming more willing to do business. The gap narrowed to 1.58 percentage points today, from this year's high of 2.4 percentage points set Aug. 20.

 

The three-month London interbank offered rate, set Dec. 28, was 4.73 percentage points, declining 1 percentage point from 2007's high on Sept. 7.

 

Traders expect the world's largest economy to slow enough to lead the Fed to cut interest rates at least twice in 2008, judging by futures contracts on the Chicago Board of Trade. The contracts show there's a 90 percent chance policy makers will reduce the target rate by a quarter percentage point to 4 percent at their Jan. 30 meeting, and that the odds of a further cut on March 18 are 58 percent.

 

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Exchange-traded funds, which act like mutual funds that follow indexes and trade like individual stocks, are becoming a more common choice for investors. In a MarketWatch commentary, John Spence explores whether ETFs are the best choice for investors. "I suspect that too many ETFs will prove, if not suicidal to their owners in financial terms, at least wealth-depleting," said Vanguard Group founder John Bogle.

 

On the long-running television drama "Law & Order," fictional district attorney Jack McCoy's persuasive arguments often win over an undecided jury and seal the fate of that episode's villain du jour.

 

Now, the actor who plays the hard-driving lawyer, Sam Waterston, is making a case for exchange-traded funds in TV ads for online broker TD Ameritrade Holding Corp.

The commercials featuring the recognizable actor are another sign that ETFs -- essentially mutual funds that follow indexes and trade like individual stocks -- are moving into the mainstream.

 

Still, like a signature Jack McCoy cross-examination, the ads raise tough questions. Do many investors really know what ETFs are? Should you buy ETFs?

 

There were 603 ETFs with over $550 billion in assets and $75 billion in daily trading volume as of Nov. 12, according to Morgan Stanley. In recent years, the number and assets of ETFs have grown exponentially with more players entering the business and the investment products mirroring ever-complex strategies.

 

On the other hand, ETFs still represent a relative drop in the bucket for the $12 trillion mutual-fund business, although that could change if long-awaited actively managed ETFs become a reality.

 

This column champions the low costs, tax efficiency, transparency, diversification and trading ease of ETFs. However, it has steadily cautioned investors since its beginning to research and dig below the surface of more exotic ETFs before committing money. This closing column of 2007 looks back at what was another year of meaningful growth for ETFs and peers ahead at what could be the top storylines for 2008.

 

ETFs and investors: Shotgun wedding?
With truly actively managed ETFs possibly on the cusp and existing offerings now covering obscure corners of the market, it's even more important for investors to do their homework.

The ETF revolution has empowered small investors to use strategies once reserved for large institutions. Like individual stocks, ETFs can be shorted or bought on margin, for example. Yet considering the bleak track record of individual investors trying to time the market, such flexibility is questionable.

 

For example, Vanguard Group founder and index-fund champion John Bogle has decried narrowly focused ETFs and the temptation to trade, even as Vanguard continues to build out its own lineup of ETFs.

 

"I can't help likening the ETF -- a cleverly designed financial instrument -- to the to the renowned Purdey shotgun, supposedly the world's best. It's great for big-game hunting in Africa. But it's also excellent for suicide," Bogle said in a 2006 speech. "I suspect that too many ETFs will prove, if not suicidal to their owners in financial terms, at least wealth-depleting."

 

When the first big wave of ETF development hit the market in the 1990s and early 2000s, they were seen simply as index funds in another wrapper. But in recent years, the benchmarks tracked by ETFs have become more sophisticated, and it could be argued they have at least elements of active management embedded in them.

 

The business has also expanded beyond offering exposure to just stocks, to cover bonds, currencies, commodities and other asset classes. And in a bid to capture the "holy grail" of ETFs, some firms have filed products that follow pure active approaches, although they face disclosure and regulatory barriers.

 

Winners and losers in 2007
ETFs tracking emerging markets, steel and energy were among the top-performing funds this year. Energy Select Sector SPDR (XLE) , for example, soared 38.6% in the year through Dec. 28, according to investment researcher Morningstar Inc. Meanwhile, iShares MSCI Emerging Markets Index (EEM) gained 34.7%.
 
Conversely, those investing in home builders, financials and real-estate stocks were hammered by the credit crunch and subprime-mortgage concerns. Financial Select Sector SPDR (XLFS) reflected this slump, losing 19.2%

 

In terms of new-product launches, this time last year it seemed that 2007 would yield an even bigger crop of ETF listings than 2006, when more than 150 ETFs were issued. See archived story.

 

Indeed, as of mid-November, about 230 new ETFs had been launched, and there is still a glut of product filings at the Securities and Exchange Commission.

Click here to learn more about ETFs and your retirement savings.