Tranquility and Turmoil

Never before have I felt a greater contrast between the tranquility we enjoy here in Palm Beach Gardens and the turmoil were witnessing around the world!

Join me for a typical day this week, and youll see exactly what I mean …

Friday, February 10, 8:50 am. Elisabeth and I are expected at the Weiss School at 9 am to inaugurate a new wing. But were a bit confused about the time. Were still at home in our pajamas, thinking the ceremony is supposed to begin at 10 am.

Hey! says Anthony, who was the schools first student 16 years ago. Arent you supposed to be somewhere ten minutes from now? Like, uhm, cutting a ribbon maybe?

Oops!

Elisabeth breaks all speed records getting dressed. I skip the suit. And theres no traffic. So we arrive just five minutes late.

Under a gorgeous Florida sun, Mayor Joe Russo and Tae Kwon Do teacher Marika Powell join Elisabeth in holding a giant make-believe scissors while I snip the ribbon with a real one.

In my speech, I talk about the loving, caring environment we provide for hundreds of children, pre-K through 8th grade. And I reminisce about Dads old office, which, thanks to the Weiss Groups IT Department, has now been transformed into one of the new, high-tech classrooms.

But even as music teacher Nancy Gall leads the band and we join the children at the new Tyson Family Field, my mind is pulled away by other images.

Anger, Revulsion and Revolution

10:10 am. Im back at my home office, and images are pouring out from my computer screen of the spreading revolt led by Muslim fundamentalists.

Youve probably seen something similar in your local papers. Or you may have noticed it from the corner of your eye during the evening news. But have you stopped to think how serious it is … and how directly it can impact our economy?

This revolution is not a sideshow on the global arena. It has spread to more than a dozen nations, some of which could change the course of history for decades to come.

Nor is it quickly ending as Western leaders had hoped. Rather, its growing in intensity by the hour a warning to Wall Street and investors of still greater upheavals yet to come.

Will the mass street demonstrations, flag burnings and killings subside in the days ahead? Perhaps. But the unrestrained venom and revolutionary zeal, incubated during decades of anger, will not.

Right now, the turmoil has spread to Afghanistan, Pakistan, Sri Lanka, Bangladesh, Kashmir, Africa, Europe, even Latin America.

Its a massive spontaneous uprising unlike any Ive ever seen before. And I fear it may foreshadow the violent overthrow of governments from the west coast of Africa to the easternmost islands of the former Dutch East Indies.

Some people think that the primary issue is religion. But as we explained to you in our Friday issue (Oil Wars), the real dispute is economic especially the control over the planets critical resources especially petroleum reserves which lie directly under the very ground now being shaken by the erupting revolts.

Some people also think the sole target of the revolt is Denmark and some other European countries, where offensive cartoons were published of the Prophet Muhammad.

But, alas, that is also untrue. In the minds of those raising their fists in anger, the enemy is the entire Western world and all the local governments that have aligned themselves with the West in North Africa, the Levantine, the Caucasus Mountains, the Persian Gulf, South Asia, Indonesia, Malaysia.

This is intricately intertwined with the showdown with Iran, the war in Iraq and the boiling dispute with Syria. Its a major threat to the worlds oil supplies. It will drive oil to $100 per barrel and beyond. Inflation and interest rates will follow. And its just beginning.

10:38 am. Im analyzing the energy and precious metals markets. Despite everything happening around the world right now, theyre suffering a price correction, and the natural resource stocks are following them down.

The Oil Service Holders (OIH), for example, has fallen pretty sharply. This exchange-traded fund, representing a basket of large oil service companies, has been leading the sector with a spectacular rise.

Now its suffered a correction. But so far, there has been no change in …

The long-term uptrend that began in August of 2004 …

The medium-term uptrend that began in May of 2005 … or

The short-term uptrend, which started about three months ago, in October.

This layer upon layer of rising values is telling us that powerful economic forces are driving these trends, and that its going to take equally powerful forces to alter them.

We see the same pattern in silver and gold: Theyve taken a bit of a beating. And so have most of the mining shares. But the decline is small in contrast to the recent rocket-ship blast-offs.

Take Pan American Silver (PAAS), for example, an investment that we recommended to our Safe Money Report subscribers not long ago.

This mining company, with major silver operations in Latin America, also fell last week. But just as with the oil stocks, the decline so far must be viewed as largely inconsequential.

The decline has yet to make one iota of difference in the stocks accelerating uptrends. Nor has it altered the rush of capital flowing into the sector.

Does this mean that these natural resource stocks cant go any lower? Absolutely not. Markets rarely move precisely where and when you want them to, and you must always be ready for change.

Nor are natural resource stocks the kind of investments that you can just tuck away in a vault and forget about. As you can see, they offer great profit potential but also harbor risks. Thats why weve been telling you to wait for dips before buying and why we always recommend that you keep plenty of cash in reserve.

Our favorite cash vehicle: 3-month Treasury bills that you can buy directly from the Treasury Department. Or for more immediate access to your money with free checking privileges, use a money market fund that buys exclusively short-term Treasuries or equivalent.

2:10 pm. My morning work session at home, usually from about 4 in the morning to noon, is over. And now, after a work-out, Im at the office starting my afternoon session.

Elisabeth and Anthony complain that Im a workaholic, and I suppose theyre right. But I have a reason: Theres too much changing too rapidly. And to help you keep track, we made the decision last year to stay in touch with you daily through Money and Markets.

Thats no small feat: After just eight short months of daily issues, Mondays Money and Markets will already be our 200th edition.

The team and I are debating its contents right now.

Jack Crooks (extreme right in photo), who watches nearly every market by the hour, says we should tell you about the correction and why its not going to last.

Meanwhile, Mike Larson (second from right), our real estate and interest-rate specialist, is stepping up his warnings about a housing debacle.

Until recently, he was saying that, although the booms peak was probably in the spring of last year, the decline had not yet begun in earnest.

Now, his view has changed: The housing decline is here and its spreading like wildfire.

A key reason: Although long-term bond yields have been holding more or less steady in recent weeks, the yield on medium-term Treasuries, such as the 5-year note, has just made new highs, a response to rising oil prices and fears of inflation.

This is putting a squeeze on many homeowners especially those that have variable rate mortgages.

And its putting an even bigger squeeze on banks and other lenders that now have to borrow money at higher rates, but are not getting higher yields to cover their extra costs.

4:10 pm. Im poring through the trade deficit numbers released this morning by the U.S. Commerce Department.

What I find amazing is that a housing slump is hitting despite the fact that foreigners are still sending money back to the United States by the boatload to finance our deficits.

According to the Commerce Dept., last years trade deficit hit a record-smashing $725.8 billion, double its level of five years earlier. Thats another three-quarters of a trillion dollars in debts that weve piled up, owed to foreigners.

What did we do with the money they lent us? Alas, not one dime went into savings. Instead, all of it and more went into consumer spending, especially in the housing bubble.

Saturday, 3:03 pm. I just heard a ding on my computer, alerting me to a new email.

Sure enough, its from Mike Larson, who, unfortunately, seems to be taking after me spending more time working on weekends and less with his wife and two little kids. Hell deny it, I bet, just like I used to when Anthony was a baby. But his emails are my evidence. The subject of his latest missive:

January Real Estate
Numbers Very Poor

The text, verbatim …

Good Saturday afternoon! Some of the early reports on January sales and listings are trickling in from around the country and they do NOT bode well for the real estate bulls.

December showed a dramatic slowdown and building imbalance between growth in supply and growth (or lack thereof) in demand.

Now get a load of some of these reports, which shows things as bad, if not worse, in January. One of the worst examples: Phoenix, AZ previously one of the countrys hottest markets. Sales were down a whopping 44% year-over-year (so this is not a seasonal decline, since were comparing to the year-ago month). Inventory for sale tripled.

Ive said again and again that the soft landing theory is a bunch of crap.

Below his message, hes pasted the following pertinent article:

Home listings dwarf sales
Real estate experts unsure of what it portends
By MICHELE DERUS
Sun Sentinel

More than 3,200 metro Milwaukee homes sprouted for sale signs last month, over three times the number reported sold, a Friday industry report shows.

That new inventory was 43% higher than January 2005 and 66% higher than January 2004, Metro Multiple Listing Service figures show. The Wauwatosa market-tracking firm reported 936 January sales, a 10.2% slide from 1,042 a year earlier …

Housing is sensitive to interest rate changes, and they have been on the rise for weeks. The 30-year fixed-rate average was 6.24% this week, up from 5.57% a year ago, according to mortgage financier Freddie Mac. The 5-year adjustable-rate average was 5.89%, up from 4.99% a year ago.

Rising interest rates shut out consumers with marginal finances … but also trigger fence jumping, a spate of sales tied to buyers feelings that the best deals are disappearing.

Last, below the article, Mike provides some other highlights from other articles across the country …

Baltimore, MD: For sale listings in the metro area surged to 10,600 from 4,114 a year earlier, up 158%. Sales down 19%.

Phoenix, AZ: Sales down a whopping 44% to 5,260 from 9,360 in January 2005. The story says inventory for sale has TRIPLED in the past year, as of December.

Las Vegas, NV: Home sales down 10.4% from last year to 1,778; listings, up 23.3% to 16,493.

Washington, D.C.: Single family listings: up 61% year over year; contracts, down 8.7%. Condo/co-op listings, up 131%; contracts, down 12.2%.

Sunday, 7:25 am. I just stepped outside to pick up my Sunday New York Times. A critical story is about the finance ministers of the worlds eight biggest economies, meeting in Moscow right now, trying to grapple with the worldwide energy crisis.

The booming growth in China and India, they say, is driving energy prices through the roof.

Yeah. But what are they going to do about it? Unfortunately, whatever it is, it will be too little, too late.

Monday, 6:30 am. You should get this email less than two hours from now. If you dont, or if you ever miss an email from us, go to www.MoneyandMarkets.com and look for it there. Thats also where you can find past issues, going back to October of last year.

My main message to you this morning:

Dont let the business-as-usual
of your daily routine lull you into
a state of complacency regarding
spreading turmoil in the world at large.

This is no time to dilly-dally, waiting for the next shoe to fall. Quite to the contrary,

we are in the midst of one of the greatest booms of modern history (natural resources), and, at the same time …
on the verge of what could be one of the greatest busts of all (the U.S. housing market).

This opens up unprecedented profit opportunities … but also unusual dangers.

To defend yourself against the housing bust, keep plenty of money in cash. And if you feel you need some additional protection, consider investments that are designed to go up when housing goes down such as put options on vulnerable home construction stocks.

To profit from the natural resource boom, stick with the gold and energy investments we have been recommending in our newsletters. (See especially my Safe Money Report and Larrys Real Wealth Report.)

And for the highest-powered leverage in the energy markets, with strictly limited risk, call 877-719-3477. With the correction, the timing couldnt better.

Good luck and God bless!

Martin

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, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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