New home sales jumped almost 10% in July, while the Case-Shiller home price index rose for the second successive month. Yet luxury homebuilder Toll Brothers lost $493 million in the quarter ending July 31, considerably worse than analysts had expected.

Housing stocks are certainly acting as if a recovery must be on the way. Pulte Homes Inc. (NYSE: PHM) has more than doubled from its low. Toll Brothers Inc. (NYSE: TOL) is up around 70% from its bottom. D.R. Horton Enterprises (NYSE: DHI) is up almost four times from its bottom. Lennar Corp. (NYSE: LEN) is up about 4½ times from its low. Finally, Hovnanian Enterprises Inc. (NYSE: HOV) is up almost tenfold from its low after a flirtation with bankruptcy. Yet all of these companies are still racking up quarterly losses, according to their most recently released earnings reports.

In terms of house prices, it would seem unlikely that a bear market bottom has been reached. Yes, the average house price is now back down around its long-term average of about 3.2 times average earnings, or only a little above it. But history suggests that markets don’t bottom at their average valuation: In fact, after such a huge excess to the upside, they overshoot on the downside.

The Case-Shiller 20-cities index is still 42% above its January 2000 level, having outpaced inflation during the last 9½ years. Yet January 2000 was not the bottom of a housing depression – far from it, in fact. That was actually close to the top of the dot-com bubble, when valuations of all assets were at all-time highs. So an average price over the whole country that – even now – remains 42% above the average price recorded at the very top of a huge economic boom does not seem like a market bottom to me.

You also have to remember that the U.S. federal government is hugely subsidizing the market. Interest rates are artificially low, and the U.S. Federal Reserve has bought more than $1 trillion worth of housing debt. Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have been rescued by the government, and provided with more than $100 billion of taxpayer capital. And Ginnie Mae (the Government National Mortgage Association), directly a government agency, has provided almost $1 trillion of mortgages that require a 3% down payment.

And that’s not all.

The government is spending additional billions helping homeowners avoid foreclosure. First-time buyers are given a tax credit of $8,000 towards the down payment on their house – this credit currently runs out on December 1. So the current overall market bottom is propped up artificially. Even if the proposed tax-credit extension is approved, at some point, those props will be removed.

In individual cities, the picture is somewhat brighter. Phoenix and Las Vegas prices are less than 10% above their 2000 levels, having been halved from their respective peaks. In those markets, house prices may truly be reaching a bottom, although the overhang of foreclosures after such a huge drop may make recovery slow. At the other extreme, Detroit housing is 30% cheaper than in 2000, a testimony to the awful economic environment there, with the bankruptcies of General Motors Corp. (NYSE:GRM) and Chrysler Group LLC.

Again, with the government bailouts of both companies, there may be something of a recovery in the local housing market.

Probably the best prospects, however, are in Denver and Dallas, where prices are about 20% above their 2000 level, roughly in line with the increase in consumer prices during that same period. However, the local economies are strongly based on natural resources, particularly oil, whose price is triple its 2000 level. With prices in Dallas and Denver down only about 10% from their 2000 peaks, a true recovery in those cities may be near.

At the opposite extreme are the metropolitan “Big Three” of Los Angeles, New York and Washington, where prices are 61%, 71% and 74% above their 2000 levels, respectively.

Washington will be fine, of course: The Obama administration’s spending-and-legislation plans have attracted yet another huge influx of bureaucrats, lobbyists and lawyers, all of which will boost the housing market to new highs. With New York you have to worry about all the financial-services jobs being lost as a result of the worst financial crisis since the Great Depression.

From a nationwide standpoint, the most likely path for the housing market is for a modest recovery, with some later slippage as subsidies are removed. Housing is likely destined to once again become a highly regional market, as it always was prior to the 2001-2006 market boom, with the cycles in each market being very different.

As for homebuilding stocks, they appear to already be discounting a recovery in their businesses that may well be years away. Selling at well above net asset value (NAV), with Price/Earnings (P/E) ratios that are infinite because the companies continue to lose money, shares of homebuilders represent a very poor value, indeed.

Source: The U.S. Housing Market’s False Dawn

Existing home sales rose 7.2% to a 5.24 million annual rate in July, the most since August 2007 and the fourth straight month the figure increased, the National Association of Realtors (NAR) said Friday. Year-over-year sales grew 5%, the increase since September 2007, just before the markets came crashing down the following month.

“The housing market has decisively turned for the better,” said NAR chief economist Lawrence Yun. “A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales.”

Rising sales numbers in the past few months may have triggered previously discouraged sellers to re-list their homes, according to Yun.

Total housing inventory at the end of July grew 7.3% to 4.09 million existing homes available for sale, representing a 9.4-month supply at the current sales pace. However, the raw inventory totals are 10.6% lower than they were last year.

Sellers are responding to rising inventories accordingly: The national median existing home price was $178,400 in July, 15.1% lower than a year ago. But the fact that buyers are dipping their toes back into the murky depths of the housing market doesn’t necessarily mean the sector is trending toward a full-blown recovery.

Turn of the Year Makes for Uncertain Future

One in three homes sales last month came from first-time buyers who benefited from the Obama administration’s $8,000 tax credit, which ends after November. First-timers accounted for almost the same amount in June with 29%. That means there could be a significant drop in purchases when that program expires.

The real estate industry is lobbying Congress to extend the first-time buyer tax credit, and Nevada Democratic Senate Majority Leader Harry Reid told reporters earlier this month an extension is “something we can get done.”

With or without a tax break, consumers in this economy are looking for a bargain much like they are with retail sales and auto sales. The bulk of the first-time tax credit sales have come from lower-priced homes, and NAR data supports that. Sales of homes that cost less than $250,000 were up almost 17.8% year-over-year through June. Meanwhile, sales decreased 13.3% in the $250,000-$500,000 bracket, 18.6% in the $500,000-$1 million range, and 32.7% in the $1 million – $4 million range.

Lost pricing power in the more expensive homes wasn’t lost on Pulte Homes Inc. (NYSE: PHM), which last Tuesday finished its acquisition of value-priced homebuilder Centex Corp.(NYSE: CTX), making Pulte the largest homebuilder in the United States.

“I’m not seeing a tremendous amount of good news on the job or economic front, so I do think it’s important that the [tax] credit get extended,” Pulte Chief Executive Officer Richard Dugas told The Associated Press.

The turn of the year isn’t likely to yield much good news on the job front. Most economists are expecting the unemployment rate to top out around 10%, and although July’s rate dipped one-tenth of a percentage point, the latest weekly initial unemployment insurance claims were discouraging, rising 15,000 to 576,000 for the week ended August 15.

“The improvement in the labor market has stalled,” Scotia Capital Inc. economist Derek Holt told Bloomberg News following the latest jobless claim figures. “Consumer spending will be pushed back on its heels for a longer time than markets are expecting.”

When the bleeding of jobs does peak, an upturn in employment could take some time as the United States experiences a jobless recovery. With an unemployment rate at or around 10%, home inventory levels could creep back in to 2008 territory.

“[The unemployment rate projection] indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate,” Fed economists wrote.  “This suggests that, more than in previous recessions, when the economy rebounds, employers will tap into their existing work forces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.”

Source: Home Sales Will Struggle to Rebound Without Tax Credit Extension

There are a lot of uncertainties permeating the market right now, not the least of which is healthcare reform. Will that reform entail a public option that could add $1 trillion to the deficit?  How is reform going to be financed?  And is it going to mean higher costs for employers across the board, or just the healthcare insurers?

Investing is made infinitely more difficult when 18% of U.S. gross domestic product (GDP) is hanging in the balance.

And you still have to consider:

• That unemployment is likely to keep rising, perhaps over 10%.
• That the U.S. Federal Reserve’s policy of quantitative easing is slowing down.
• That there is almost certainly a second wave of home foreclosures on top of the current commercial real estate epidemic.
• And that retail sales are still a long way from recovery.

There is also reason to believe that the U.S. dollar will continue to be weak, though it probably won’t sell off precipitously.

The U.S. dollar has weekend against the Euro lately, having fallen 0.8% Friday.  Technically speaking the chart shows a traditional “cup and handle” formation that could lead to an acceleration of the dollar’s downward trend.  Gold prices, up about 13% Friday, confirm this trend and could soon break through the $1000/oz resistance.

Fundamentally, if the economy – encumbered by high unemployment and a relapse of the housing market – does not pick up the dollar could be further imperiled.

Weakness in the dollar will also be affected by the Fed’s withdrawal of liquidity, which is likely to proceed at a gradual pace.

Finally, diversification away from the dollar among the world’s central banks is taking place, albeit at a slower pace than many analysts have suggested, and that too, is weakening the dollar.

Let’s concede that there is no currency that could supplant the dollar as the world’s major reserve currency. So, it’s unlikely that the world’s central banks will simply abandon the dollar anytime soon. However, we must also acknowledge that a reduction in the weightings of the U.S. dollar within central bank reserves is already underway.

An Aug. 14 article by BNP Paribas currency strategist Ian Stannard in Euromoney recently described this gradual shift in currency reserves.  The article noted that only 62.5% of global currency reserves are in U.S. dollars, down from about 66% in 2005.

So I do not anticipate a sudden shift in central bank reserves, but rather a continuation of the measured restructuring we’ve seen so far. Thus, the slow weakening trend in the U.S. dollar is likely to continue.

So, in this very uncertain investment scenario, I prefer to go for more secure returns in bonds.  And we can achieve great diversification at a cheap cost with the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD).

For starters, its weighted average coupon of 6.26% offers a current yield slightly north of 6% at today’s prices.  Investors are assuming interest rate risk, which means that if interest rates climb, the value of the bond has to come down.  But in the short term, there is no immediate threat of inflation.

Looking at the major holdings of the fund – which has no single position that accounts for more than 1.26% of its total holdings – I see some names that have demonstrated continued stability and others that have shown recent signs of improvement, such as American Express Co. (NYSE: AXP).  So I do not expect any major credit spread hiccup here.  I certainly do not see any hiccup that a 6.26% coupon would not compensate for.

For an additional hedge against dollar weakness, I suggest you revisit my June 8 recommendation of the iShares SPDR Gold Trust ETF (NYSE: GLD). You may also consider buying a bit of the PowerShares DB US Dollar Index Bearish (NYSE: UDN) fund.  Do not go overboard. Err on being light, rather than heavy on hedging, since timing currency moves is very difficult.

Recommendation: buy iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSE: LQD) at market.  Consider hedging part of the US dollar risk by buying the iShares SPDR Gold Trust ETF (NYSE: GLD) and PowerShares DB US Dollar Index Bearish (NYSE: UDN). Both funds should account for a fraction of your position.  Have a 5% stop loss on UDN (**).

Source: Buy, Sell or Hold: The iShares iBoxx $ Investment Grade Corporate Bond Fund

Good day… And happy Friday! The data released yesterday morning was a mixed bag, as the leading indicators climbed for a fourth straight month and the Philadelphia fed reported a big jump in their gauge of activity, but the initial jobless claims unexpectedly rose. Unemployment in the US will continue to be a drag on the economy, slowing any recovery and possibly pushing the US back into recession (or as some predict a depression). Today we will get some news on the housing market, and while the media will pump up the fact that month on month sales continue to rise, another report released yesterday showed mortgage delinquencies hit a record high in July. The proportion of homeowners delinquent on their mortgage or in foreclosure rose to its highest levels in four decades. An ominous sign for the US economy is that the problem loans have shifted away from the subprime borrowers to those driven into delinquency by unemployment. More than half the mortgages in the foreclosure process during the second quarter were prime loans. So while this morning’s data may show a bump up in monthly home sales, the US is still far from being out of the housing problems.

The European markets took the Euro higher against the dollar after reports showed German services and French manufacturing unexpectedly expanded in August. Another report showed an index of German services industry grew for the first time in more than a year. This data confirms that the largest nation in the EU is pulling itself out of recession. The German services index rose to 54.1 from 48.1 and the French manufacturing index increased to 50.2 from July’s figure of 48.1. So both indices moved over the 50 mark which is an indication of expansion. And the composite index of both services and manufacturing for the 16 nations sharing the euro moved to 50 from 47, another strong indication that Europe is starting to grow again.

I have read a number of articles and research report which throw darts at the European Central bank for not being more aggressive with ‘quantitative easing’ and stimulus efforts. These latest reports indicate to me that the ECB may have played it ‘just right’. I know it won’t be clear sailing from here, and that the European recovery will still have some bumps, but the ECB left some powder dry and will be able to step in again if needed. And if the recovery sticks in Europe, the ECB won’t have near as much manufactured liquidity to pull in from the markets.

And I’m sure some readers will question how I can trumpet the recovery in Europe while at the same time believing the recovery here in the US won’t have legs. The main difference is what is fueling these recoveries. While many, including your current Pfennig writer, are in the opinion that the nascent recovery here in the US has mainly been driven by government stimulus; you can’t say the recovery in Germany and France is being driven by government intervention. Digging into the recent positive data here in the US shows the government is responsible for most of the spending; the private sector has largely stayed on the sidelines. The recovery in Europe, on the other hand, is being fueled by increased consumer confidence and internal private sector demand. In fact, many of the dollar bulls have continually chastised the European governments for not taking a more aggressive role in providing stimulus to their economies.

England and the US have yet to feel the inflationary impact of their budget busting ‘quantitative easing’ programs; but believe me, inflation is lurking just around the corner. While the US’s Bernanke and UK’s Darling have chosen to ignore the future consequences of these programs, Trichet and the ECB always kept a hawkish eye looking toward the future.

Currency traders got excited about these European data releases and took the Euro back above 1.43. As Chuck would say, the big dog started to move and the rest of the pack followed suit. The leaders vs. the US$ were the Nordic currencies of Sweden, Norway, and Denmark which were 1,2, and 3 overnight vs. the US$. Even the Swiss Franc showed some strength, matching the move up by the Euro.

The Norwegian currency probably benefitted a bit from an article which ran in the Economist magazine. The article was entitled “Which central bank will raise interest rates first?” and pointed out the most likely candidates were Australia and Norway. I believe the Pfenning pointed this out a few weeks ago, but for now the Economist magazine has a bit more readers than the Pfennig, so the article probably had a bit more of an impact on the markets. The article points to the brightening economic picture for both of these countries and the fact that “Because both countries primarily export staples like raw materials and food, their sales abroad have held up relatively well. Australia in particular benefits from Asian customers whose economies have remained pretty robust.” The magazine predicts that Norway will likely be the first to raise rates.

Long time readers of the Pfennig will recall that the direction of interest rates was at one time the largest determinant of currency movements. Those countries with central banks which were looking to raise rates were the favorite of investors. Nations with central banks who were ‘in front’ of the inflation curve and raising rates to combat future inflation were the best places to invest during this time period. Lately the currency markets have been trading on risk aversion, with bad economic news pushing investors toward the dollar, and positive news moving them back into higher yielding assets. As the global recession eases, I would look for the currency markets to return to past trends, and reward those currencies who have rising interest rates. Australia seems poised to benefit under either scenario, as they are already in the ‘higher yields” camp and are also predicted to move these rates even higher.

No big news out of the boondoggle in Jackson Hole, not that I expect any! There was one story which caught my eye yesterday regarding the meeting. Mohamed El-Erian, who is the CEO of bond giant PIMCO was on the news wires with suggestions for the central bankers meeting in Jackson Hole. He apparently is worried about the disjointed approach these central bankers have taken in their intervention with the markets and believes the approach will lead to volatile markets and slower global growth. He also believes we are in for a drop in the value of the US$. “The question is not whether the dollar will weaken over time, but how it will weaken,” said El-Erian. “The real risk is that you will get a disorderly decline.” According to El-Erian, the euro will rise to $1.60 by the end of 2010 and the Canadian dollar will appreciated to 1.01.

And finally, the Mexican central bank will probably keep their interest rates unchanged at their meeting today. Inflation which has been running above their target level will prevent policy makers from cutting the benchmark rates to stimulate their economy. The Mexican pesos has turned in a good month, even outperforming the popular Brazilian real and Australian dollar. But don’t get too excited, Mexico is still very dependent on a strong US market, and at least some of this appreciation has been due to rising oil prices.

Speaking of oil, crude ran through another milestone yesterday hitting the high for the year. Oil exporters such as Norway, Brazil, Mexico, and Australia should continue to benefit from these higher prices. But the other commodities we track, gold and silver, seem to be stuck in a range. Silver seems especially cheap compared to gold right now, and both are good hedges against future inflation. I have to believe both are set for a breakout on the upside at some time down the road.

Currencies today 8/21/09: A$ .8331, kiwi .6789, C$ .9229, euro 1.4329, sterling 1.6574, Swiss .9448, rand 7.8576, krone 5.9725, SEK 7.0928, forint 187.70, zloty 2.8667, koruna 17.7965, yen 93.88, sing 1.4378, HKD 7.7511, INR 48.595, China 6.8313, pesos 12.846, BRL 1.8442, dollar index 78.06, Oil $73.59, 10-year 3.46%, Silver $14.01, and Gold… $944.40

That’s it for today…Hope everyone has a Fantastic Friday and a Wonderful Weekend!!

Chris Gaffney

Source: Mortgage Delinquencies Move Higher…

Far be it for us to call an end to the party. We’ve been warning of the dangers of this rally since it began. And it looks like nobody’s been listening: stocks have continued to climb in the most dizzying Wall Street rally since the infamous bear market bounce of 1929-1930. But that’s what we do here at Notes – we bring you the other side of the economic story. So we figure we’ll plow on.

Legendary short-seller Doug Kass called a bottom in US stocks in March. He was dead on with this call. Now Kass is has turned seriously bearish on the prospect – now almost a matter of dogma in the mainstream financial press – of a V-shaped recovery.

Kass’s reasons for being suspicious of the mainstream’s recovery mantra are eminently sensible… which almost guarantees that nobody will pay any attention to them. They’re even (gasp!) realistic and based on observable facts.

1. Cost cuts are a corporate lifeline and so is fiscal stimulus, but both have a defined and limited life.

2. Cost cuts (exacerbated by wage deflation) pose an enduring threat to the consumer, which is still the most significant contributor to domestic growth.

3. The consumer entered the current downcycle exposed and levered to the hilt, and net worths have been damaged and will need to be repaired through higher savings and lower consumption.

4. The credit aftershock will continue to haunt the economy.

5. The effect of the Fed’s monetarist experiment and its impact on investing and spending still remain uncertain.

6. While the housing market has stabilized, its recovery will be muted, and there are few growth drivers to replace the important role taken by the real estate markets in the prior upturn.

7. Commercial real estate has only begun to enter a cyclical downturn.

8. While the public works component of public policy is a stimulant, the impact might be more muted than is generally recognized. There may be less than meets the eye as most of the current fiscal policy initiatives represent transfer payments that have a negative multiplier and create work disincentives.

9. Municipalities have historically provided economic stability — no more.

10. Federal, state and local taxes will be rising as the deficit must eventually be funded, and high health and energy bills also loom.

(Hat tip, MarketFolly.com)

Reason number 10 scares us, dear reader. Kass is really just stating the blindingly obvious: massive deficits will have to be paid for sooner or later, and when they do, they’ll be paid for by higher taxes.

This hike in taxes isn’t lying somewhere in the distant future, either. It’s happening right now. This from Kass:

We have already witnessed the start of what is likely to become an avalanche of changing tax policy. New York City imposed its first sales tax increase in 35 years (rising from 8.375% to 8.875%), and, on the same day, the state of New Jersey imposed an additional tax hike on wholesale liquor distributors’ sales of liquor and wine, which is sure to be passed on to the consumer. In Oakland, Calif., even the “high life” is being taxed as the city has recently passed a tax on marijuana sales and the state of California appears to be close in following Oakland’s example.

This is just the start of a nascent and broad trend toward much higher taxes, a growth-impeding and P/E-diminishing secular development

Kass not only identifies the obvious when it comes to the future of the US tax regime, but he also hits the nail on the head (in our humble opinion, at least) when it comes to the future of US stocks.

The market optimism that we are now experiencing in the expectation of a clean handoff of the baton of stimulation from the consumer (2000-2006) to the government (2008-???) might be more short-lived than many believe, as the price of stimulation, regardless of whether it’s source is the private or public sector, holds the promise of being more of a growth-retardant. With the debt super-cycle continuing apace (but in a public sector context), the fragility and inherently unstable “balance of financial terror” argues for a not-so-benign and extremely volatile stock market future.

Unquestionably, the animal spirits have been in full force as shorts are scrambling to cover and many more are joining the ever more vocal and growing bullish chorus. But to me, the margin of safety is becoming ever more thin as the enemy of the rational buyer – namely, optimism – reaches new heights.

In summary, since a self-sustaining economic recovery appears doubtful, I do not believe that we have started a new bull market. Rather, it is more than likely that economic growth will disappoint in late 2009/early 2010 as the domestic economy confronts many of the emerging secular challenges discussed above.

*** Here’s Kass’s model portfolio as of June 2009. Interestingly, he recommends holding 29% in cash… a very smart move in our opinion, considering the state of the markets right now.

http://4.bp.blogspot.com/_9MYixPWxtF0/SjbACP6_syI/AAAAAAAAAn0/dG_f2yx8p0I/s1600/doug-kass-model-portfolio.jpg

But there are some overlooked problems with this belief. The first is that while monthly sales of existing homes have improved, on a seasonally-adjusted basis, we are still worse off than we were last year in all regions but the west. Here’s some data from the National Association of Realtors:

The next problem we face is that inventory levels are still quite high. We are down from the peak of 11 months of backed up inventory, during parts of 2008. But today’s inventory level of 9.4 months is about to get a lot worse. Here’s why: Banks are sitting on their REOs (real estate owned a.k.a foreclosures) and are not re-listing many of these properties. Banks may be doing this for a number of reasons. Foremost is that they do not want to flood the market and drive down prices even further. But how long they will hold on to this “shadow inventory” before slowly releasing them on the market? That is anyone’s guess, but there is no doubt that there is a significant backlog of properties that will eventually hit the market.

The final blow to any hopes of a housing recovery are mounting foreclosures. The Obama administration’s “Making Homes Affordable” program has had abysmal results. Bank of America (NYSE:BAC) has modified 4 percent of its eligible loans. Wells Fargo (NYSE:WFC) has modified 6 percent. There is mounting evidence that lenders are simply unwilling to modify most loans since most modified loans end up right back in foreclosure after a few months. According to Renae Merle at the Washington Post, “The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can’t sustain payments without it yet will be able to keep up with new, more modest terms.”

The other two types of distressed borrowers are those that will inevitable become delinquent again or those that can find a way to become current on their loan with a little coaxing. Banks have little incentive or desire to assist these two types of borrowers.

The housing market still has some serious challenges ahead. Sure, we may see a small increase in prices here or there, but long term, the fundamentals are still garbage. I am not saying that you shouldn’t buy a home right now, either as an investment or as a primary residence. There are screaming buys out there right now, and long term, real estate is still a great buy. Just don’t expect to be able to buy a property today and flip it for a huge profit in the next twelve months. You may see a small decline in your property value, but the huge drops seem to be behind us. We will still face a very long recovery period. But as Samuel Clemens said, “Buy land, they’ve stopped making it.”

Respectfully,

Christian Hill

Source: Don’t Believe What You Hear About a Housing Recovery

The mainstream press would have us to believe a real estate market rebound is imminent. They keep glomming onto any data that shows the slightest sign of stability.

• For instance, Bloomberg jumped all over the July 1 report from the National Association of Realtors that showed pending sales for previously owned homes rose for the fourth consecutive month.
• Other outlets had a field day with the news out of the Mortgage Bankers Association that refinancings hit a three-month high in early July.
• And ditto for the news that foreclosures dropped 11% in the second quarter.

But these “signs of stabilization” are bogus. Or to beg, borrow and steal from value-investing legend, Whitney Tilson, they are the “mother of all head fakes.”

Fact is, these short-term improvements were fabricated. They materialized because of temporary factors like the $8,000 first time homebuyer tax credit (set to expire November 30), artificially low interest rates (remember the Fed’s been buying Treasuries, en masse, since March to suppress rates) and government and bank moratoriums on foreclosures.

In the end, all this massive intervention is doing is propping up short-term results and prolonging the inevitable. Furthermore, to turn a blind eye to all this government meddling and pretend it’s not artificially influencing demand and prolonging foreclosures, would be irresponsible.

Don’t get me wrong. I’m happy to see an improvement in the market from bad to less bad. But overall, the numbers are still crap.

Three Obstacles to a Housing Market Rebound

Over half of the homeowners who took advantage of loan modification programs, are delinquent again. They weren’t paying before they got interest rate and/or principal reductions. And go figure? They’re not paying now. Great idea Washington!

On top of that, housing prices are still too high to attract buyers yet too low for sellers who are underwater on their mortgages. Such out-of-whack supply/demand dynamics will only foster more uncertainty.

In my opinion, before any meaningful recovery in real estate prices can take root, we need to overcome three major obstacles…

• Rebound Obstacle #1: Inventory Glut. Nearly 10% of all homes built this decade are sitting vacant, compared to a historical average of 2.2%. In total, we’re sitting on almost 10 months worth of inventory versus a historical average of four months. If we factor in the “shadow inventory” – the roughly 600,000 homes that banks are withholding from the market – the problem worsens. Excess supply always erodes prices.
• Rebound Obstacle #2: Loan Resets. Forget subprime. We’ve already worked through 80% of those resets and written down $1.47 trillion in the process. Now we’re facing a $2.5 trillion mountain of Alt-A loan resets. The first big wave hits mid-2011, with the peak expected to come in early 2013. So we’ve still got time, but the early stats hardly instill confidence.More than 20% of Alt-A loans are already 60-plus days late, up from an average of about 3% for the last decade. If interest rates creep up even modestly in the next two years – a near cinch given the likelihood of inflation – payments will increase notably. In turn, so too will default rates.Bottom line, another wave of massive writedowns looms on the horizon.
• Rebound Obstacle #3: Foreclosures. One in four homeowners are now underwater. If we break it out by loan type the picture gets worse – 25% of prime loans, 45% of Alt-A loans, 50% of subprime loans are severely underwater. Add in the 6.5 million Americans out of work since the recession began and it doesn’t take an Einstein to predict where foreclosures are heading. Credit Suisse estimates that we’re in store for a total of 6.5 million by 2012.Even the Mortgage Bankers Association (MBA) concedes the obvious in its first quarter update, saying, “Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve.” Since the rosiest prediction doesn’t expect unemployment to peak until early 2010, as the MBA acknowledges, “…It is unlikely we will see much of an improvement [in foreclosure rates] until after that.”The fact that the social stigma attached with “walking away” has been severely (and sadly) diminished over the past decade only adds to the foreclosure heap. And more foreclosures will inevitably push prices lower.

The Housing Market’s Reality Bites… But We Can Still Profit

As I’ve said, a simple supply and demand equation underpins the housing market. Right now, there’s way too much supply. Thus, prices can only go lower. And in my opinion, they’ll go significantly lower.

Since the peak, home prices have dropped 34%, based on the Case Shiller Index. However, prices still rest roughly 10% above the long-term trend line.

But given the supply imbalance is so dramatic, and the fact that markets consistently overshoot resistance and support levels, I’m convinced that prices will crash right through the trend line, falling another 20% to 30% before we see a legitimate turnaround in 2011.

I’m not alone, either. Mortgage insurer PMI Group estimates that a 75% chance exists that the majority of our metropolitan areas will experience price declines through the first quarter of 2011. And if we experience a double-dip recession, all bets are off on how low prices will go.

The brave at heart can look to profit from the decline by shorting any of the major homebuilders like:

• Pulte Homes (NYSE: PHM)
• KB Home (NYSE: KBH)
• DR Horton (NYSE: DHI)
• Toll Brothers (NYSE: TOL)
• Or Lennar (NYSE: LEN)

Be warned, though. The ride will be volatile.

Otherwise, the newly launched MacroShares Major Metro Down ETF (NYSE: DMM) is an option. The exchange traded fund is benchmarked to the S&P/Case-Shiller Composite-10 Home Price Index and features three times (300%) leverage. For every 1% decline in the index (i.e. real estate prices), the ETF should increase in value by 3%.

For the truly conservative investor, I recommend the “nothing ventured, nothing lost” approach. In other words, wait to go long when buying real estate because we’re nowhere close to a bottom. At the very least, wait for the prevailing shrink-wrap frenzy to end.

Good investing,

Louis Basenese

Source: Three (More) Reasons Real Estate Isn’t Rebounding

U.S. gross domestic product (GDP) shrank 1% in the second quarter, following the first quarter’s 6.4% drop. The $787 billion Obama stimulus package, smaller decreases in business spending and slowing erosion of the housing market all helped to slow GDP contraction, according to the Bureau of Economic Analysis. A poll of 78 economists surveyed byBloomberg News showed a median estimate of a 1.5% decline in GDP.

“The recession is slowing but we still need to get households and businesses to start spending again,” said Joel Naroff, president of Naroff Economic Advisors, Inc.

With such a dramatic drop in the rate of contraction, the third quarter could sport the first expansion in more than a year. The last time the GDP grew was the second quarter of last year, thanks in large part to the $112.4 billion in stimulus payments to taxpayers.

Despite rising unemployment and a looming jobless recovery, Naroff is optimistic about consumer spending.

“Vehicle sales were actually up from the first quarter and are likely to be even better this quarter, so consumer weakness should not be a major concern,” Naroff said, adding that he’s optimistic that strong growth isn’t far off. “[GDP growth] could be either the third or fourth quarter and could approach 5%.”

Still, until there is real growth in consumer spending, any recovery will be difficult to sustain.

“We’ll get more support from government programs in the second half, but if you want a strong recovery, you need a strong consumer, and we are not seeing that,” Nigel Gault, chief U.S. economist at IHS Global Insight Inc. told Bloomberg.

A recovery may have to rely on business and government spending. Business investments, while still falling, slowed to a rate of 8.9% in the second quarter, a far cry from the first quarter’s 40% drop. The decline equipment and software purchases also slowed, falling a modest 9% compared to 36.4% in the previous quarter.

On the government side, federal officials – including U.S. President Barack Obama – say less than a quarter of the stimulus package has been spent so far.

“You just can’t push [funding] out that quickly, partly, not just because the federal government has to process applications but also because states and local governments have to gear up to get these projects going,” President Obama said in an interview with Fox News earlier this month.

Without consumer spending, which makes up more than two-thirds of the economy, any recovery will likely be agonizingly slow.

“We’re going from recession to recovery, but at least early on, it’s not going to feel like one,” said the chief economist at Moody’s Economy.com, Mark Zandi in an interview with The New York Times. “For economists, this is a seminal part in the business cycle, but for most Americans, it won’t mean much.”

Indeed, the unemployed or the underemployed struggling to make ends meet it’s hard to be optimistic, even as the markets, corporate profits and other economic data show improvement.

“At some point it becomes Obama’s economy, not Bush’s economy anymore,” said Dean Baker, co-director of the liberal research group Center for Economic and Policy Research told The Times. “He made a big mistake in overselling the first stimulus, and then in celebrating all the ‘green shoots.’ That just opens the door for people to say, ‘Where are my green shoots? I still don’t have a job.’ ”

Source: U.S. GDP Contraction Slows, but the Road to Recovery Will Be Rocky

Let’s make some trades this morning. We asked Rick Rule, a living legend here in Vancouver, what’s the next bubble market?
“The Canadian market does not care about small oil and gas companies,” he told us yesterday. “Which means that small Canadian O&G companies are selling for 50-60% of net asset value. They are very, very, very cheap. They are unloved, with no finance options and no trading liquidity… and I love that. This value is free. There will be much money made in small-cap Canadian energy.

“But that will pale in comparison to alternative energy. This is what investors need to pay attention to. There is money to be made in solar, wind, even something as stupid as biofuels. Alt energy is now politically and socially correct. It has the full backing of the U.S. government.

“I would encourage you to look at small hydro and geothermal. The others have problems. Solar has one big problem — night. Wind doesn’t always blow either, and people don’t like to live places where the wind blows all the time. You might make money in solar and wind, because government likes it, but I don’t have the courage to buy a biz that’s success is determined by the Governator.

“Geothermal is always there. It is spectacular. So is hydro. In the short, medium and long term, you will all turn out to be happy. They are the uranium of this generation. I think we are on the verge of an incredible mania in alt energy.”

Which specific geo and hydro businesses? Rick has named company after company after company to our attendees at this year’s Investment Symposium. We’ve recorded nearly every second of his presentations and recommendations… you can hear them too with the Symposium CD/MP3 set.
“The world’s biggest energy player has thrown $600 million into a research partnership to study algae oil’s potential,” reports Greg Guenthner in a similar vein. Not coincidentally, we’ve heard several Symposium speakers mention this exact transaction. “Exxon Mobil and human genome researcher Craig Venter have teamed up in an attempt to make algae oil a viable fuel source.

“‘There has been so much hype and hope about the potential for algae that this announcement should act as a reality check for everyone,’ Venter told the Financial Times.

“Of course, this new partnership does not mean we will be filling our tanks with pond scum biodiesel just yet. Developers will still need to tackle genetic engineering and oil extraction issues…

”But Exxon Mobil’s leap into the algae oil market effectively legitimizes the industry.”

Want Greg’s microcap algae play? Check it out here, along with the rest of his Bulletin Board Elite portfolio.
Of course, alt energy is dead to Wall Street (all the more reason to buy). For the last two weeks, surprise blue chip earnings anouncements have led the market up, and today is no exception. Better-than-expected earnings from AT&T and 3M are in the spotlight today, and the S&P is up 2% as we write.
Hell, even The New York Times is making money again.The Old Gray Lady earned almost $40 million in the second quarter, the paper reported this morning. The NYT pulled it off by jettisoning staff and cutting opperating costs by 20%… and there was this little “favorable tax adjustment” that boosted earnings by $37 million.
Exisiting home sales rose for the third straight month in June, the National Association of Realtors says today, adding to the buying frenzy. Sales of previously owned homes inched up 3.6%.

“We have finally bottomed out,” PNC’s chief economist told Bloomberg. Heh, we’ve got a fine bridge to sell that fellow…

Best we can tell, the market-clearing process is still chugging along. Of all the sales in June, 31% were distressed. Prices are still plunging — the median price is down 15% from the same time last year, to $181,000. There is a still a historically high 9.4-month supply of exisiting homes on the market. Is that what a bottom looks like to you?
Not to mention, the job market still stinks. This morning, the government said there were 554,000 initial jobless claims last week. That’s off crisis highs of over 600,000, but obviously not by much. Continuing claims rang in around 6.2 million.
“Chicken sales will probably lead unemployment numbers as an economic indicator out of the recession,”writes our resource man Alan Knuckman, just back from annual National Chicken Council conference (sounds like a real hoot!). “Chicken growth has slowed with the toughening economic conditions, but still is three times that of beef. Restaurants and home consumers have seen a shift in protein demand and replacement with chicken or other chicken parts.

“These guys do volume because people love chicken to the tune of over 700 million pounds a week, with per capita consumption now at 86 pounds per year. In fact, consumption has quadrupled in the last 40 years and doubled in the last 20. BSBM — boneless, skinless breast meat — has paved the way for growth, but now dark meat is making a move as consumers cut food costs.

“Now, all this chicken talk is fun and interesting, but how does this make us money? BRIC consumers (Brazil, Russia, India and China) all have expanding middle-class populations that are now in the position to buy better food. Not fancy cars or electronics, but simply better protein to feed themselves and their families.

“Here in the United States, there is a 0.95 correlation between chicken consumption and income and personal consumption expenditures. More money to spend means more chicken bought. As others have their incomes rise worldwide, those citizens can add more meat to their diets.

“This growth will put tremendous upside pressure on the base inputs: commodities, which are used to feed, process and transport the protein of chicken, beef, pork and even farmed fish. Protein is what’s for dinner, and the U.S. is serving the rest of the world.

“The income growth in underdeveloped countries will continue to put our farmers in the leadership position to deliver. Plus, all along the way, we’ll be ready to profit here at Resource Trader Alert.”

If you want to trade this trend, you’ve got to check out Alan’s latest report on his “no-brainier” trading strategy.
The 2011 state budget crisis has already begun. You likely read the headlines last week, that state governments around the country were able to close $142 billion worth of budget gaps for the 2010 fiscal year. Well, according to the latest from the Center for Budget Policy and Priorites, 12 states and D.C. are already facing new budget gaps totalling $23 billion.
That’s not great for the ol’ U.S. dollar, nor is today’s stock rally. The dollar index is down to a fresh six-week low of 78.5.
What would be the best way to get money and yourself out of the country if there is a sudden collapse in the U.S. dollar? That question was posed last night to our Whiskey Bar panel — one of the highlights of the Symposium thus far. We managed to round up our most opinionated, venom-spitting editors for a panel discussion — Doug Casey, Chris Mayer, Eric Fry, Byron King, James Howard Kunstler, Gary Gibson, Patrick Cox and Barry Ritholtz. There’s no way to paraphrase a group like that, so here’s a snippet:

Casey: “It is still possible to send all the money you want out of the country… very possible to buy real estate. I bet in two years, it will be a problem to do both. I think the fuse is getting really short. Once you send it out of the country, buy something like real estate. My two favorites are Argentina and Thailand. I think Argentina is about to change radically, like New Zealand in the ’80s.”

King: “You need to start wrapping your brain around this. When I was in South Africa, I was told by this old Dutchman — and now I really don’t mean to offend anyone, this is just what he said — when the Jews leave, it’s time to leave. When the Portuguese leave, it’s too late.”

Ritholtz: “Keep your boat fully fueled and get ready to sail… pretty safe out there. I don’t think it’ll be an ongoing firestorm. You’ll just need a place to lay out for a week while the worst of it passes.”

Kunstler: “It’s important for those in business leadership to start thinking about defending your country and doing things that make this culture better. We have no time to be crybabies. Just too much to do to get this country back together again.” (Spontaneous applause.)

Gibson: “I’m looking to get work on Bill Bonner’s ranch.”

The event likely peaked when Doug Casey called everyone in the room “whipped dogs that roll over and wet themselves” whenever they’re scolded. Evidently, he was upset there was no gunpowder or tobacco allowed at an event sponsored by Whiskey & Gunpowder. Heh. For more from Doug, be sure to check out his presentation in the Symposium CD/MP3 set.
With that in mind, one last note — a genuine tragedy: The Brits are taxing one of their few national treasures into extinction:

As if the legnedary British watering hole didn’t have enough head winds — smoking ban, the recession, etc. — the Economist reports that recent tax hikes on booze are causing over 50 pubs to close every week. Taxes on a pint were around 8 pence 30 years ago… they are 38 pence today. Maybe it’s just the reminants of last night’s Whiskey Bar still in our bloodstream, but what a shame!
“Your reader who was looking at Florida real estate hit the nail on the head,” writes another reader. “My wife and I also went last year to Florida to look at ‘super’ deals and foreclosures and short sales. We concentrated in the Palm Coast area and learned that most banks had stopped foreclosing and were doing all things possible to help short sellers (except take less than what was owed by any great degree). The banks realized that if they foreclosed, THEY would now have to pay the taxes, upkeep, etc. on the properties, and, even in the case of condos, maintenance fees or dues!

“Most of the properties we looked at were in the $300,000-600,000 price range, and, as a result, had taxes of $6,000-7,000 and maintenance fees of nearly equal cost! Ouch! We too have decided to rent — unless you live there at least six months out of the year, it doesn’t pay to ‘own,’ and even then it may not.”

Source:  The Next Bubble, The Chicken Indicator, Surviving the Worst Case Scenario and More!

Good day… A quiet trading day to start the week off yesterday. As I turn on the computers this morning the dollar index is trading right at the level it was yesterday morning. The currencies were up a bit through most of Monday’s trading day, but the dollar came back in Asian trading leaving us right about back where we started.

The only data released yesterday was the index of US leading indicators which rose slightly in June for a third consecutive month. The numbers gave a bit of hope for all of the bulls, with many exclaiming that the US economy has turned a corner and the recession has ended. I am not so sure, as rising unemployment and continued weakness in the housing market will likely hold any recovery back.

Aaron Stevenson sent me a story he read on CNNMoney.com yesterday which highlighted the labor problems here in the US. The article states that more than 650,000 Americans will have used up all of their unemployment benefits by September, and the Labor Department is expecting the problem to accelerate. “In the next few weeks, the victims of the mass layoffs that happened six months ago – when the pace of layoffs was at its zenith – will start running out of their basic benefits. A total of 4.4 million people are expected to face this fate – or 65% of the entire filing population. And while they may have up to another year of unemployment insurance benefits – thanks to the confusing patchwork of extensions that were enacted last summer – they will soon be unaccounted for in government unemployment reports.”

As Chuck has continually pointed out, the Labor Department doesn’t track anyone who has been unemployed more than 26 weeks, and has no plans to adjust the way the report claims (even though they know they are under-reporting the actual unemployment rate!). As a result, the weekly jobs data will probably start showing declines in continuing filers later this year. But these declines won’t be because of an improved job market, but instead will be because many of these filers will be falling off the Labor Department’s radar.

Even the director of the White House’s National Economic Council, Mr. Lawrence Summers, isn’t feeling so rosy about the prospects for recovery. “I don’t feel there’s a basis for predicting that income growth is going to resume in the near term,” Summers said in an interview yesterday. So while the US economy may not be sinking any more, Summers doesn’t believe the economy will be able to quickly pull itself back up from the deepest recession in a half a century. “The pace of growth next year I think is very much in doubt, and difficult to predict, and will depend crucially on our effectiveness in implementing the programs that have been legislated and the kind of confidence that’s provided by what Congress is able to do in crucial areas like health care and financial regulation and energy,” Summers said.

The focus today will shift to Federal Reserve Chairman Ben S. Bernanke who will be giving his semiannual monetary policy testimony to Congress today. The markets are looking for Bernanke to map out an ‘exit strategy’ for the loose money policies which have been enacted over the past few years. Bernanke gave a sneak preview of his testimony in an opinion piece which he wrote for the Wall Street Journal yesterday. “When the economic outlook requires us to do so,” the central bank will employ a series of tools to tighten policy, Bernanke said in the piece. He outlined five different ways the central bank will be able to prevent the record reserves that banks have accumulated from causing money supply and inflation to surge.

I don’t doubt that Bernanke and the Fed have the means to pull liquidity out of the system. What I question is if they will have the cojones to use these methods when the time is right. In order to stem inflation, the Fed will be required to start tightening policy just as the economy is starting to recover. If they tighten too early, they could squash the recovery, and if they wait too long, inflation could spiral out of control. History has shown that the FOMC is typically late in their move to tighten.

And the likelihood of an anemic recovery heightens the risk that the Fed will be late in reacting. The recovery will be weak compared with historic recoveries from recession. I just can’t imagine Bernanke stepping up and pushing rates higher in the face of a weak economic recovery. But we will see what he has to say to congress today. His testimony could be good for the dollar, if he is able to convince the markets that he and his compatriots will step up to the plate and keep inflation at bay. Again, I just don’t believe he has the fortitude to time his move correctly.

Chuck sent me a note after reading a great piece by the Mogambo Monday.. The Mogambo doesn’t think Bernanke will be able to rein in inflation, and believes investors should protect themselves by purchasing gold:

“And if you don’t think that gold will shoot up when inflation starts roaring like that, then you are obviously new at this investing business and you haven’t had time to look at what happened to the price of gold when it was $35 an ounce in 1970 and over $800 an ounce by 1980 when the inflation (from the vast expansions of the money supply needed to simultaneously finance the War on Poverty and the War in Vietnam) was rising along this same parabolic ride.”

I love how you always know exactly where the Mogambo stands on things! I can’t argue with his logic and agree that gold is a good hedge against rising inflation which I’m sure we will see on the other side of this recession/depression. Every investor should have a portion of their overall investment portfolio dedicated to precious metals, and our unallocated metal select accounts are one of the most efficient ways I know of to hold gold.

Speaking of the precious metal, gold held above $950 an ounce overnight, and seems to be on a fairly sharp upward path. Gold has gained just over $45 in the past two weeks and looks set to test resistance levels around $960. If it can push through these levels, the next resistance would be around $985. And just think what the price will do once we start seeing signs of inflation creeping back into the global economy.

So the dollar will likely move up today as long as Bernanke can ‘deliver the goods’ in his testimony to congress. But if the dollar does rally, I would take advantage and look at the move as an opportunity to purchase currencies at better levels. Some of the largest, and smartest investors are looking to do the same, and share our believe that Bernanke will be unable to turn the liquidity pump off in a timely fashion. PIMCO, the manager of the world’s biggest bond fund, said it is looking to buy the Brazilian real as the dollar slumps and growth in emerging economies outpaces that of developed nations. According to a report published by PIMCO, investors should buy emerging market currencies to protect themselves against the risk that US policy makers will allow the dollar to slide should they lack the skill to “drain the system of emergency liquidity at the appropriate time.” The report goes on to say “In light of an expected long-run erosion in the value of the US dollar, Pimco will look to take positions in select emerging market currencies that we believe have the most compelling appreciation potential.”

Want to take a position in the emerging markets without the risk? Why not look at our new BRIC MarketSafe CD. It combines Brazil, India, Russia, and China into a 3 year CD which is protected against any downside risk. I think we came up with a real winner on our newest MarketSafe!

Currencies today 7/21/09: A$ .8132, kiwi .6548, C$ .9040, euro 1.4217, sterling 1.641, Swiss .9362, rand 7.8703, krone 6.2998, SEK 7.685, forint 191.68, zloty 2.9982, koruna 18.1561, yen 94.20, sing 1.4419, HKD 7.750, INR 48.4337, China 6.8305, pesos 13.2694, BRL 1.8987, dollar index 78.923, Oil $64.16, 10-year 3.61%, Silver $13.555, and Gold… $947.85

That’s it for today… It is food day here today, as we celebrate everyone with July birthdays. The crew is coming in with food galore; Krispy Kremes, Cake, and every imaginable form of dip n chips. It is going to be a real challenge for me to stick to my diet today (but I guess I can have a free day every once in a while right!?!?) Hope everyone has a Terrific Tuesday, mine is sure shaping up to be one!

Source: US Leading Indicators Push Higher