I hate it when my dire forecasts come true. But my job is to call it like it is, and help you make sound investment decisions. So I keep my emotions out of the process, and focus on reality.
And when I look around me and see what’s going on in the markets right now, I see two nasty scenarios coming to pass.
Today, I want to tell you why the worst is not yet over in housing, and why the dollar will continue to get crushed …
Mega-Trend #1:
Housing’s Elusive “Bottom”
Keeps Getting Pushed Farther Out
Hardly a day goes by without some pundit somewhere calling a “bottom” in housing. Two-bit real estate agents … ivory-tower economists … starry-eyed portfolio managers … they can’t seem to help themselves!
But as I told you a month ago, my on-the-ground work tells me the worst is not behind us. Sales remain weak and inventories are extremely high. Prices simply have to fall further to right the ship.
Nothing I’ve seen has changed my mind. If anything, things are getting worse, especially for the public home builders. Get a load of the latest news out of these guys …
March 27: Lennar, the largest homebuilder by sales, reported a stunning 73% plunge in quarterly profits. CEO Stuart Miller, who only a couple months earlier prompted a big rally in building stocks by releasing an optimistic earnings target, did a dramatic about-face. Not only did he say the company wouldn’t meet his earlier forecast, he also said things were so poor and the outlook so cloudy that he couldn’t even set a new goal!
April 4: Ryland Group said first-quarter sales dropped a sharp 26%. Meanwhile, the company announced a hefty $65 million charge because of slumping land and property values from one end of the country to the other.
April 10: D.R. Horton, the second-largest homebuilder, dropped a bomb of its own. The company said second-quarter orders plunged 37% … average prices dropped almost 6% … and that “the spring selling season has not gotten off to its usual strong start.”
Result: These stocks continue to trade like death warmed over. And if the key spring season finishes as poorly as it began, these companies are in for even more pain.
Meanwhile, the mortgage problems that were supposedly “contained” are seeping into other areas. For example, I’m seeing major problems with companies that lend to the so-called Alt-A borrowers, people who fall between the subprime and prime categories:
Shares of a big Alt-A player, M&T Bank, just plunged the most since 1998. Reason: Bond investors soured on Alt-A loans, which drove down the value of the mortgages on M&T’s books.
Another company, American Home Mortgage Investment, saw its stock lose 15% in one day. It said demand for higher-risk mortgages had dried up, and that it would have to boost reserves to account for borrower defaults.
And FirstAmerican LoanPerformance, a research firm, said the 60-day late payment rate on Alt-A mortgages has more than doubled to 2.6% in the last year. Thirty-day delinquency rates are even higher — around 5%.
As a result, lenders are cutting back on their riskier loan programs. That, in turn, is going to knock marginal home buyers out of the market and exacerbate the housing downturn.
And that’s not the only trend I see right now …
Mega-Trend #2:
Higher Foreign Interest Rates
Are Driving Down the Dollar
Clearly, the U.S. housing outlook stinks. That’s forcing the Federal Reserve Board to keep interest rates stable, despite clear and present inflation dangers.
Meanwhile, the economic outlook overseas is great. Countries like China, India, Japan, Brazil, Australia, and Canada are all outperforming the U.S. by virtually every measure. In a just-published Safe Money Report, Martin and I go into great detail about each of these markets.
Because of that strong growth, foreign central bankers around the world are steadily hiking interest rates …
- The Reserve Bank of Australia raised rates three times in 2006, and I expect another hike in the weeks ahead.
- The European Central Bank has increased rates to 3.75% over the past several months, and based on their comments this week, I’m expecting another hike in June.
- The Reserve Bank of India raised its key rate twice this year.
- The People’s Bank of China is boosting its benchmark interest rate.
Heck, everyone from Taiwan to Norway to Latvia is boosting rates.
What happens when foreign central banks get serious about fighting inflation while our Federal Reserve pussy-foots around? The dollar gets sent to the woodshed!
The broad U.S. Dollar index is already down almost 4% from its January high. It’s trading at its worst level against the euro since January 2005. It’s getting trounced by the British pound, closing in on the two dollars-for-every-one-pound level for the first time since 1992. And it has plunged to a 17-year low against the Australian dollar!
None of This Makes Me Happy,
But It Can Make You Money
The good news: These unfolding trends should come as no surprise to you. Martin and Larry have been talking about the weak dollar for ages. And I’ve been updating you on the housing bust every step of the way for almost two years now.
Hopefully, you’ve been following our advice on how to make the most of these trends. For instance, I’ve devoted previous Money and Markets columns to telling you how to profit from a falling dollar by investing in overseas stocks and bonds.
How have those strategies worked out? Well, the exchange-traded fund I mentioned in my February piece was recently up about 5% — not bad considering the late-month market meltdown.
In the same story, I hinted at a pick that’s in our Safe Money Report portfolio, calling it “a diversified European financial firm that’s shedding underperforming businesses and expanding in new markets.”
Now that our paying subscribers have had ample chance to get on board, I don’t mind letting the cat out of the bag: I was talking about ABN Amro Holding (ABN). Its U.S.-traded American Depository Receipts are up a whopping 38% since then, not only because of the weak dollar and ABN’s restructuring moves, but also because the Dutch firm is the subject of a full-scale takeover battle.
I’ve also been telling you to stay the heck away from long-term Treasury bonds. That was good advice — long bond futures have been falling for weeks now, and are trading near seven-month lows.
In short, many of the big picture trends I’ve laid out for you here … and that my colleagues have spelled out as well … are unfolding right before our eyes. And there will be plenty more profit opportunities in the months ahead.
Until next time,
Mike
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