THEME: INTEREST RATES & INFLATION
There has been a lot of buzz about interest rates & inflation. The market is now turning bullish on the basis that the market has already priced in 25 basis point moves for each of the next 5 FOMC meetings. Clearly the Fed understands that not acting aggressively to bringing back rates to a "neutral" 2.5-3.0% risks stoking inflation.

What is not discussed is whether the consumer has priced in five 25 basis point hikes! I think that consumers are always reactive rather than proactive, so that when these hikes start hitting in a noticeable way, i.e. when the money outflow starts to hit, they will change their behavior in an abrupt way. This is a serious risk that has NOT been priced in.

THEME: OIL TOP
Looks like my call on 5/18 about a top in oil was a good one. Front crude was $41 and it is now at $36. The sentiment was quite clear. Hysteria was in plain view. I am not so sure what's next for oil, but is unlikely to collapse. $31 downside would be a buy.

THEME: REAL ESTATE BUBBLE
More dangerous signs of a real estate bubble. Timing of the burst is uncertain, but with the Fed wanting to get back to 3% Fed Funds, all of these over-leveraged 1st time buyers are going to create the great consumer implosion...

NYT article
ANAHEIM, California For years, Ray and Shahrazad Daneshi sought to buy a home, only to be told that they did not earn enough to qualify for a mortgage.

But they recently managed to buy a small house in the shadow of Disneyland for $360,000 - six times their annual income - thanks to a lender who allowed them to borrow the entire value of the home, with no down payment.

"We will not be going to any movies or eating out at restaurants," said Ray Daneshi, a self-employed wedding photographer who came here from Iran in 1988. "But in two years, the house will be worth a lot more, and we will have something to show for it."

The Daneshis' purchase underscores the new, ever-optimistic economics of home buying. A kaleidoscopic array of mortgages for people with little cash or stretched budgets has enabled families of modest incomes to take on debt that once would have been beyond their reach. As long as new home buyers could count on rock-bottom interest rates and housing values were going nowhere but up, this seemed a virtuous circle. But now, with the Federal Reserve expected to embark on a series of interest rate increases starting with its meeting next week, some experts worry that recent first-time buyers could find easy home ownership a lot harder on their wallets, possibly causing housing prices to wobble in some high-price markets. With the Daneshis, for example, rising interest rates on the two adjustable-rate mortgages they took out to buy their house would mean that their monthly payment of $2,500 - already more than half their monthly income - could go up substantially in two years. Ray Daneshi realizes that but is unconcerned.

"Why worry?" he said, adding that he believes rising home prices will help him obtain a better loan deal by then. With interest rates going up, that might be wishful thinking. Many analysts agree that there is no nationwide U.S. housing bubble because prices have climbed only slowly in Midwestern and Southern states even as they have soared on the East and West coasts. Still, if rising interest rates cause housing prices to dip, even slightly, industry officials warn that some new buyers will have no equity in their homes and could choose to walk away from their loans if they run into trouble with payments.

"Thanks to God for finding me a mortgage program that let me buy my own house," Daneshi said.

THEME: Real Estate Bubble
Yet more evidence of overconfidence in real estate...

Schwab, along with the Ariel Mutual Funds, co-sponsored their seventh annual survey of black and white households earning more than $50,000 per year.

Fully 61 percent of blacks and 51 percent of whites said real estate is the best investment overall. Throughout the survey, blacks have consistently named real estate as the best investment, Foster noted. This was the first year that a majority of both black and whites said real estate was the best investment overall.

Theme: Real Estate

Cable news network CNNfn is tweaking its programming schedule and will announce today that it will replace a stock market show with a new program devoted to real estate.

Gerri Willis, CNN's personal finance editor and author of "The Smart Money Guide to Real Estate Investing," will host "CNNfn Open House," which will hit the airwaves on June 28. The show will air from noon to 12:30 p.m. and will re-air at 3 p.m. each weekday.

Its interesting that the same audience that prefers People and Time and CNN over WSJ and CNBC are more interested in real estate now than the financial markets. Sure, stocks have done nothing in 2004. Sure some older folks have sworn off stocks altogether. But, it is not a healthy sign that they are approaching real estate with the same fervor as they did stocks in 1999.

The real estate run is probably over, unless the Fed decides that Deflation is still the fear.