Mike Larson here with an urgent update on the housing market and interest rates, my specialty in Money and Markets.
Right now, we are at a very critical juncture in the housing cycle. You still have a chance to take defensive steps. But you don’t have much time.
To fully grasp the urgency of the moment, visualize the cartoon character Wile E. Coyote.
Like Wile E. Coyote, the housing market has just run off a cliff: Investors have vanished from the hottest regions. Home sales have plunged. Supplies of unsold homes are the worst in history.
And like Wile E. Coyote, home prices are still hanging in mid air: Despite all the huge supplies, most sellers have so far been reluctant to discount their homes.
But just as soon as they look down — just as soon as they see there’s nothing to support the market — they’re likely to slash asking prices aggressively.
Home values could fall like a rock.
For a sneak preview of what’s ahead, just look at the latest stats pouring in from around the
country …
In Phoenix, sales of existing homes have fallen 46% year over year so far in 2006 …
In Minneapolis-St. Paul, sales down 28% year over year …
In San Diego, they’re down 31% …
Homebuilder Toll Brothers just reported a 30% drop in new home orders, with other major builders seeing similar drops nationwide …
The National Association of Home Builders just announced that its index of sales activity and buyer traffic has fallen another 12% in May to an 11-year low …
Housing starts have just slumped to their lowest level since November 2004 …
Home foreclosures have jumped 72% in the first quarter vs. the same period a year ago, and most ominous of all …
About $2 trillion in adjustable-rate mortgages are due to reset their rates to much higher levels this year and next.
That’s why interest rates are such a huge factor in this market. And that’s why more interest-rate increases are such a big threat.
Mortgage Rates
Headed Sharply Higher
The yields on long-term bonds are already rising, and mortgage rates are going up in tandem — already a big threat to the housing market.
Now, however, long-term bond yields are bound to go even higher as their price plunges.
Why? One reason is that the biggest buyers of U.S long-term bonds — European and Japanese investors — are turning sour. Just put yourself in their shoes …
- If you’re a European investor who loaded up on long bonds at the beginning of the year, between your losses in the dollar and your losses in the bonds, you’re already down more than 13%.
- If you’re a Japanese investor, you’re down almost 12%.
- And even if you’re an American investor, you’ve lost almost 6% — more than 1% per month.
These bond investors are obviously not happy about the situation. How could they be?
But what really ticks them off is the fact that …
The U.S. Government Is Letting Its
Finances Go to Pot In Three Ways
First, Congress is spending like drunken sailors.
There’s a new “emergency†spending bill of $109 billion in the works that’s overflowing with pork. They’re still spending almost $6 billion a month for the war in Iraq. And despite everything, Congress is also extending tax cuts in a bill that will cost at least $70 billion.
Second, the Treasury Department is throwing its “strong dollar†policy out the window.
The greenback is down more than 6% against the yen this year and 8% against the euro. And April was the single-worst month for the dollar since September 2003.
Why? We’re running a $60 billion+ trade deficit each month. The current account deficit, which is a broader measure of the same disease, hit a whopping $225 billion in the fourth quarter of 2005. These deficits are causing a huge, excess supply of dollars to build up overseas.
To make matters worse, in April, the G-7 countries — the seven largest in the world — called for China and other Asian nations to allow their currencies to rise in value.
Problem: Stronger Asian currencies = weaker dollar. So that prompted a big wave of dollar selling. The Japanese tried to counter the decline with “verbal intervention†– calling the decline “excessive.†But U.S. Treasury officials jinxed the dollar further by letting out that they don’t care, that a dollar decline is actually what they want.
No, you won’t see Treasury Secretary John Snow openly admitting it on CNBC. But for all practical purposes, America’s so-called “strong dollar†policy is now dead.
Third, the Federal Reserve is out to lunch when it comes to inflation.
Despite the latest correction, gold is still close to $700. Oil is not far from $70. And other prices are also jumping — health insurance, airline tickets, hotel rooms, electric power, college tuition, even garbage collection. And sure enough, this week, the government announced an eye-popping surge in consumer prices — up at a seasonally adjusted annual rate of 5.1% in the first four months of 2006.
Despite all this, so far, the Fed’s response has been a bunch of namby-pamby quarter-point rate hikes plus a healthy dose of happy talk about “well-contained†inflation. Certain Fed officials have even hinted at taking a break from additional rate hikes.
In sum, bonds are going down. The dollar’s decline just makes it worse. And the government isn’t lifting a finger to change the trends.
That all means much higher interest rates and a sharp rise in mortgage rates coming.
What to Do Now
Ask my wife, and she’ll recommend you keep your money in a coffee can in the backyard. When it comes to safety, she’s even more conservative than Martin.
I’ve talked her out of that vehicle, but I’m glad she’s insisted on keeping a nice chunk of change in safe places.
Reason: We have two beautiful daughters — Maya who’s 3 1/2, and Zoey who’s just six months. So it helps us sleep at night knowing we’ve got money tucked away for unexpected surprises.
First, I recommend you do the same: Keep the lion’s share of your fixed income money in short-term Treasuries or Treasury-only money funds.
They’re safe, liquid, and there’s none of the market risk you get with long-term bonds.
Next, don’t stretch for yield with high-risk corporate, junk, or mortgage bonds. Their yields are simply not high enough to compensate for the additional risk.
Third, for a hedge against rising interest rates, consider inverse bond funds like Rydex Juno (RYJUX). They’re designed to go up in value as interest rates climb.
Fourth, if you’re aim is to turn the inevitable rate rise into a speculative opportunity, consider this: With just a $500 investment, you can control $1,000,000, never risking more than the small amount you invest. With that kind of leverage, just a modest rate rise could generate huge profits. Call 1-800-815-2917 for more details.
Above all, never underestimate how far and how fast interest rates can go, as Martin will show you now.
In 1980, the Short-Term
Treaury-Bill Rate Zoomed
from 6% to 16% in Four Months!
by Martin D. Weiss
In 1980 we experienced the greatest interest-rate surge in American history.
It was the fastest, zaniest, and, for some, the most wildly profitable market surge of all time. Hard to believe, but true. And I remember those days intimately.
Like today, I had a partner who worked with me closely and helped me write my reports. And like my partner today, he was specialized in interest rates.
I’m talking about my father, Irving Weiss.
Dad knew what sometimes causes rates to move in dramatic and massive swings. He often knew what kind of surprises interest rates held in store for us. And he gave us frequent tips on how to transform those surprises into profit opportunities.
One investment, for example, representing interest rate options, could be bought for a meager $500 or less with the potential to control $1,000,000. All you needed was a relatively minor move in rates and the investment could be worth many times more.
Those were Dad’s favorite leveraged investments, and they’re among Mike Larson’s favorites now.
Today, when I compare what’s happening to what was happening back then, uncanny similarities pop into my mind almost as clearly as A-B-C:
A. In 1980, like today, a showdown with Iran was a major trigger for surging interest rates, especially when the U.S. embassy in Tehran was taken over by student mobs led by radical Shiite revolutionaries.
Investors feared the crisis would remove millions of barrels of Iranian oil from the world markets.
Ironically, it seems one of the student leaders taking over the embassy was the very same man who is now Iran’s president — Mahmoud Ahmadinejad.
B. When the Fed lost control over interest rates in 1980, gold had recently surpassed $700 — just as it did last week.
Bond investors took one look at surging gold in 1980 and gasped. They were scared skinny that runaway gold prices signaled runaway inflation … that the inflation would destroy the value of their dollars … and that the falling dollar would gut the value of their bonds. So they dumped ‘em — by the truckload. Bond prices plunged and interest rates surged still further.
C. To help convince investors to start buying U.S. bonds again, President Jimmy Carter had to offer the most attractive interest rates in the history of our country — even more than the rates offered by President Abraham Lincoln during the Civil War.
So Fed Chairman Volcker forced up the official rate (on Federal Funds) by as much as two full percentage points at a time — all the way up to 20%. Why? He had no choice. That was the only way he could persuade investors he was serious about fighting inflation and the only way he could get them to buy bonds again.
Today, Wall Street squirms when the Fed jacks up its rates by a meager quarter point at a time. Hah! Wait till they see the real fireworks that are possible when the dollar falls and inflation fears run amuck.
Also wait to see what that will do to the price of gold and other natural resources …
Ground Zero of The
Next Gold Buying Wave
by Larry Edelson
While the U.S. stock market was plunging this week, I was visiting the Shanghai Gold Exchange here in China. This is ground zero for one of the biggest waves of gold buying in history.
Three years ago, when the exchange was first opened and gold trading in China was freed for the first time in 54 years, I told readers that it would unleash a new surge in gold demand.
And that’s exactly what’s happened: There are an estimated 300 million investors in China, more than the entire population of the United States, and a growing number has been buying gold with both fists.
They’ve poured money into gold jewelry, where sales were up 29.5% in April alone.
They’ve poured money into the Shanhai Gold Exchange, where gold bullion trading volume has surged beyond that of Hong Kong, London and even New York.
And they’ve emerged as a powerful new force helping to drive up the world price of gold in recent years.
But That Was Just the First Wave of Buying.
Now Get Ready for an Even Larger Wave …
Investors around the world are souring on the U.S. stock market. And they’re looking for other alternatives.
That’s especially true here in China. And it looks like Chinese investors will soon have a brand new vehicle for doing that.
The big news:
A few short months from now, China is likely to introduce a gold exchange-traded fund for domestic residents.
For the first time in history, hundreds of millions of ordinary Chinese citizens will be able to invest in gold without buying gold jewelry, gold coins or gold bars.
They won’t have to worry about storage, transportation or security. They will be able to buy the gold ETF in thousands of banks and brokerage offices all over the country. They will be able to buy online. And they are almost certain to generate a new, powerful source of demand never before seen in the world gold market.
We’ve already seen the dynamic impact of gold ETFs in Europe and the United States. These are the fastest growing ETFs in history, with U.S. ETFs attracting $8 billion in about 18 months. These funds played a major role in doubling the price of gold. And now, I have no doubt that …
The New Gold ETF in China Could
Send Gold to $1,000 — and Higher —
A Lot Faster Than Expected!
Gold is already being driven by a perfect storm of forces — spreading fears of a showdown with Iran … billions in petrodollars seeking a safe haven … the falling U.S. dollar.
So even without the new gold ETF in China, gold was moving toward the $1,000 level and beyond.
Now, with a new gold ETF being launched in China, gold could reach the $1,000 mark a lot faster and a lot sooner than anyone expected.
Why? One reason is this:
The four largest banks in China who are sponsoring the Chinese gold ETF can’t wait around to start buying the needed gold bullion. They will have to start buying physical gold now in order to back the ETFs that will soon be issued.
Where I Think Gold
Is Headed Next
The new wave of gold buying from China just adds more momentum to the perfect storm of forces driving gold higher. In this context, here’s what we’ve got:
1. We have a confirmed bull market in gold. That fact is now undisputed.
2. This week we saw another normal-but-brief, scary-but-healthy pullback in gold.
Never forget: Gold has soared from $540 to $732 in a little over two months. So it’s perfectly normal for gold to experience some profit taking. But that’s all it was: profit taking.
3. The dollar is in big trouble. It has lost ground quickly in the last month, and it’s on its way to losing a lot more in the near future. That’s naturally going to force the price of gold, denominated in cheaper dollars, to adjust upward very promptly.
4. Hot spots like Iran and Venezuela are not going away. Iran and the U.S. are headed for a confrontation, especially now that U.N. inspectors have found weapons-grade enriched uranium in Iran. Meanwhile, Venezuela’s President Chavez is starting to sound just like Iran’s President Ahmadinejad — accusing the U.S. of genocide and telling Bush that he should be in prison.
5. This recent correction won’t last long. When it’s over, I think you’ll see gold at $740 an ounce. Next, it will run to its all-time U.S. dollar high of $875 … and then toward $1,000. After that, the sky’s the limit.
The fun is just beginning … so stay on your toes. Sharp corrections in a commodities bull market are often a prelude to even bigger upward moves.
U.S. Tech Stocks
Getting Hit Hard
by Tony Sagami
In case you haven’t noticed, U.S. tech stocks have been falling further than the broad market, plunging to a brand new low of the year this week.
Why? One good reason is deteriorating fundamentals at tech bellwethers like Dell Computer.
Dell recently warned that its first-quarter sales and profits would be below expectations. The company told Wall Street to expect profits of $0.33 a share from sales of $14.2 billion.
Dell’s numbers were way below Wall Street’s forecast of $0.38 in profits from $14.5 billion in revenues. Plus, the results show that …
Dell is going backwards! In the first quarter of 2005, it reported a profit of $0.37. As recently as last July, Dell had beaten earnings estimates for 18 straight quarters. Clearly, Wall Street isn’t used to Dell spitting up hairballs like this.
How Taiwan Will
Benefit from Dell’s Pain
Dell’s only option for saving itself is cutting costs. And the company’s latest program includes an aggressive $12.5 billion purchasing plan of lower-cost Asian computer components.
As a result, a small handful of Taiwanese companies are about to sign billion-dollar contracts with Dell.
One of those lucky Taiwanese customers is AU Optronics, the third largest maker of liquid crystal display screens in the world. If the name AU Optronics sounds familiar, you probably remember it from the same March 28 issue where I warned you about Dell. Now, AU Optronics just reported that April sales increased to $22.4 (Taiwan) million, a 50.5% year-over-year increase.
That’s serious growth!
But my larger point is that …
Taiwan Is Chock Full of Similar Opportunities!
So are Japan, South Korea, Singapore, and China!
Here are three things to remember:
1. The best investment opportunities, and some of the most attractive valuations, are in Asia. If your portfolio doesn’t include meaningful Asian exposure, I believe you’re missing out on one of the very best opportunities you will see in your lifetime!
2. Even if your portfolio already includes a hefty dose of Asian spice, don’t make the mistake of ignoring Taiwan. Most investors I talk to are loading up on China and completely ignoring Taiwan. Yes, China should definitely be part of your portfolio. However, most of my favorites right now are in Taiwan.
3. Lastly, the biggest mistake a tech investor can make today is investing in old tech names. It is NOT too late to dump stocks like Dell, Intel, Micron Technology, Cisco, Applied Materials, and Oracle. Sure, you should have sold the first or second or third time I warned you, but all these stocks are on a very slippery slope and headed for a lot more pain.
Best wishes,
Tony
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About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. 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. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
© 2006 by Weiss Research, Inc. All rights reserved.
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