Major U.S. Economic Indicator Flashing Red

Yesterday I wrote about the bad news in the U.S. new home market and how new home prices actually declined 2.2% in March 2006 from a year earlier. I often write about activity in the U.S. housing market because right now it’s likely the single most delicate industry. American consumers have overextended themselves in the belief housing prices will only go higher. A big mistake.

Millions of people in the U.S. are employed in the construction industry, most of those people involved with new home building. What I’m telling my subscribers is that if the housing market in the U.S. gets any softer, the repercussions for the U.S. economy could be hugely negative.

With millions of Americans holding variable rate home loans that are costing them more every month because of higher interest rates. with millions of people who have taken interest- only loans hoping their homes will rise in price to offset future principal payments, consumers will be in big trouble if housing prices decline even marginally.

Unfortunately, I believe the stock market is telling us the future of the housing market in the U.S. is very poor. This morning, the Dow Jones Construction Index (which includes the stocks of the biggest American home builders) fell to a new 52-week low. This all-important indicator is flashing red! The market is telling us the home builders are in trouble, which ultimately means big trouble for the economy.

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It looks like the U.S. Fed has tightened too much again. If you are holding marginal real estate, you might want to seriously consider unloading it before things get worse. You may also want to delay any future property purchases. You should also look seriously at your stock portfolio to unload any stocks that are sensitive to weakness in consumer spending.

NEWSFLASH–the Canadian dollar hit a new 28-year high yesterday. This currency has been the best performing currency of any of the industrialized countries this year. I’ve often urged my American readers to make their stock purchases in Canadian dollars on the Canadian TSX exchange (Canada’s equivalent of the NYSE) so that they make money on the currency play as well. Many of the major American companies are listed on the TSX. I’m expecting the Canadian dollar to continue strong for the remainder of the year.