Fed Hikes Rates! Oil Surges! Home Builders Fall!

In the wake of Hurricane Katrina, most of Wall Street hoped the Fed might engineer a brief pause in its relentless string of interest-rate hikes.

Yesterday, the Fed proved them wrong.

The Street also hoped the Fed would at least make some change in its official statement — to give them a hint that the rate hikes will end someday.

Wrong again.

In fact, the Fed did precisely the opposite. It hinted that inflation, although still “contained,” is no longer “well contained” — a not-so-subtle recognition that inflation is emerging as a prominent problem … AND that their rate hikes WILL CONTINUE.

Inflationary Spike

In last Tuesday’s Money and Markets, with the subject, “Fed Rate Hike Next Week!” I put it this way:

“The pressure on the Fed to hike interest rates next week is building.

“This pressure is not coming from a hypothetical scenario or a future forecast. It’s coming from forces that are active in the marketplace right here and now — surging energy costs … an incipient spike in gold … a new decline in the dollar.

“Nor is this pressure being weakened by Hurricane Katrina. … Quite to the contrary, we are now staring down the barrel of a Post-Katrina Inflationary SPIKE.

“The events and efforts in the wake of Hurricane Katrina are now raising serious new concerns about an acute, short-term surge in inflation — over and beyond the inflation that was already building before the storm.”

Within days of this e-mail, the financial markets signaled their general agreement: Gold blasted to the highest level in 17 years … long-term interest rates turned sharply higher … and this morning, oil prices have rebounded sharply.

Within days, two government announcements — on producer prices and consumer prices — gave us hard data that further validate the inflationary trend.

And now, with the Fed’s actions and statements yesterday, we have the clinchers. The Federal Reserve has confirmed — and double-confirmed — what we’ve been warning you about all along … an inflationary spike that’s threatening to turn Wall Street upside down, inside out.

To gain a grasp of the magnitude and intensity of this inflationary spike, consider the events that are unfolding right now …

Event #1
Oil Prices Rebounding
as Hurricane Rita
Gains Strength

The predicted path, however, is the same: It’s expected to strike somewhere in the 250-mile coastline between Corpus Christi and Port Arthur where eight of the nation’s 20 largest refineries are located.

In response, the price of crude oil has rebounded sharply, surging past $67 per barrel early this morning.

Most people believe that this latest oil-price rise is strictly related to Hurricane Rita.

I disagree. And I do so for four distinct reasons:

FIRST, it’s blatantly clear that the upward trend in crude oil prices began long before Hurricanes Katrina and Rita.

SECOND, it’s equally clear that the price of crude oil HELD firmly within this upward trend.

THIRD, it did so despite powerful forces in the marketplace that were deliberately designed to neutralize the impact of Katrina — the release of massive amounts of strategic reserves … OPEC’s agreement just yesterday to make even more supplies available … and more.

FOURTH, after all is said and done, the fact remains that oil prices are now going back up.

This reflects a lot more than just hurricanes and OPEC. It reflects the massive, still-surging demand for oil Larry has been telling you about for many months.

It reflects the chronic — and acute — shortage of refining capacity around the world.

And it reflects global changes that are still very poorly understood — shifting geopolitical alliances, emerging cultural conflicts and even changing weather patterns.

Your action: Stick with the Enerplus (ERF), Oil Service HOLDRs (OIH), Royal Gold (RGLD) and the other investments I’ve recommended. When I think it’s time to take profits, I’ll do my best to let you know.

And if you have speculative funds available, seriously consider Larry’s Energy Options Alert. There are only 263 slots left in the entire service. (Call 1-877-719-3477 for further details).

Meanwhile, please recognize that the events unfolding today are not limited to interest rates and oil. Michael Larson, Weiss Research’s Managing Editor and our resident expert on the real estate market, explains how they are also striking closer to home …

Event #2
A Crack in the
Housing Boom
by Michael Larson

In February of this year, I helped Martin write a blockbuster issue of his Safe Money Report, with the headline “Real Estate Boom … and BUST!”

In it, we issued three alarming warnings of the coming decline: Mortgage demand starting to fall, home inventories starting to rise and rental rates clearly sagging.

Then, in April, we followed up with an even harder-hitting issue, alerting readers that the coming bust in housing could make the earlier bust in the stock market seem small by comparison.

(Our two blockbuster real estate issues of the Safe Money Report are free when you subscribe. Call 1-800-236-0407 to sign up.)

At first, the housing boom seemed to be continuing unabated, and we wondered if our warnings of a bust were premature.

But now, everything I see tells me it’s here: The housing boom which exceeded everyone’s hopes is rapidly turning into a housing bust which will likely exceed everyone’s fears.

The Worst
in My Lifetime

In November, my second daughter will be born, and about two weeks later, I will turn 30.

But never before in my lifetime have I seen anything like this. And I hope, for the sake of my family and yours, that I won’t ever again. I fear, however, that the fall-out of the housing bust could last up to a decade.

Right now, many real estate investors and speculators are retreating, panicking … and dumping. As a result, the inventories of unsold homes are surging nationally.

For existing homes, the inventories are at 17-year highs.

For new homes, they’re at the highest in history.

And in certain parts of the country, the market is being flooded. In the Sacramento area, for example, there were more than 9,000 homes for sale in mid-August, over DOUBLE the number just one year earlier. Ditto for San Diego.

In the Boston area … Southwest Florida … Washington, D.C. … Phoenix and Tucson, Arizona … we see a similar pattern developing.

Home Building Stocks
Falling Apart

The clincher comes when smart investors see the handwriting on the wall and start dumping shares in real-estate-related companies.

A classic example: Lennar Corporation, a Florida-based homebuilder with operations across the
USA
.

Investors now foresee profit margins shrinking … demand falling off a cliff … pricing power collapsing … and worse.

So they’re selling.

That’s why the stock peaked on July 28 at $68.13 per share. That’s why it fell to the $62 level several weeks ago. And that’s why, just yesterday, it broke down and plunged by 8.3%, foreshadowing a likely bust in the entire industry.

Other stocks in this sector, such as Toll Brothers, KB Home and Beazer Homes are also plunging — by as much as 20% just in the last few weeks.

So I’m glad Martin warned you away from these stocks well ahead of time. And I’m especially pleased to see that the put options we recommended in our IRCT service have jumped so nicely in value. (Call 1-800-815-2917 for further details.)

But there’s much more to come. So if you have a substantial commitment to real estate — either via the stock market or in physical properties, now’s the time to take firm action to reduce your exposure.

Event #3
Falling Revenues in
Key Industry Sectors
by Tony Sagami

While fuel costs, inflation and interest rates are rising, sales revenues at key companies I watch are falling.

Case in point: Brunswick Corporation, a stock that plunged even more sharply yesterday than the stock Mike just told you about — by 13%!

The company is widely known for its bowling balls and pool tables, but most of its revenues come from its boat division. In any case, they’re all discretionary extras that make life a little more fun to live … and also one of the first things that Americans cut back on when times aren’t so good.

Brunswick warned Wall Street that it would only report 70 to 74 cents of Q3 profits — way below Wall Street’s 82 cent forecast — and $3.20 to $3.25 for the year instead of its earlier guidance of $3.39.

What’s the problem? Weak boat sales!

Why? Brunswick points fingers at nearly everything in sight: High fuel costs, lower consumer confidence, Hurricane Katrina, and more.

No surprise here … at least not for us. It’s just more of the same retail woes that we’ve been consistently hearing from Wal-Mart, Best Buy, and dozens of other.

Estée Lauder
in the Same Boat

I don’t buy cosmetics. But I know Estée Lauder is a big name in the business.

Trouble is, bigness isn’t helping them much, especially now that they’ve warned that business is “significantly” worse today than it was last year.

The company expects its revenues to grow by 5% to 6% for the next six months, below the 7% to 8% it had previously promised. And this is Estée Lauder’s SECOND profit warning since August.

Their reasons are eerily similar to Brunswick’s mantra: higher gas prices and Hurricane Katrina.

Beware: You’re going to hear a lot more corporations come out with similar, “dog-ate-my-homework” excuses for their earnings shortfalls.

Of course Hurricane Katrina didn’t help. But even before Katrina, consumer spending and confidence were already declining due to sky-high energy prices and rising interest rates.

Maytag Complains About
Rising Fuel and Commodity Prices

The Wall Street crowd was anticipating 14 cents for Q3 and 52 cents of full-year profits for Maytag.

Wrong! While Maytag wasn’t specific, it did say it would “significantly” miss those rosy forecasts.

The problem? AGAIN, the Street overestimated the impact of rising energy and commodity prices on corporate profits. Consider this statement:

“Results for the third quarter and full-year 2005 will be significantly lower than the guidance previously provided by the company due to higher costs negatively impacting performance.

“The burden of high manufacturing overhead, increasing distribution and fuel expenses, and rising raw material costs are the primary drivers of these cost increases.”

I’m sure the rising raw material costs Maytag is talking about are steel and aluminum.

So the next time you hear some talking head on TV tell you about “well contained” inflation … or about “how well America is adapting” to $60-plus oil … just remember Maytag, Estée Lauder, and Brunswick.

Our advice: Stay on course. That means plenty of cash. And plenty of investments that go UP with rising oil, gold and other natural resources.

Best wishes,

Martin Weiss,
Michael Larson, and
Tony Sagami

---

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

© 2005 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478