New banking and housing fears
Editor's note: Today's Digest is brief... We're all off to Switzerland for our annual Alliance conference next week.
The market seemed to wake up this morning with the idea that printing more money may not solve all our problems. Tops on the list of troubling developments: More pressure on home prices. Laurie Goodman of Amherst Securities (which is probably the leading authority on the U.S. mortgage market) says one in five mortgages will go through foreclosure. Losses on mortgage notes continue to mount, which may cause another crisis in the top 25 banks.
You can see signs of the housing stress in shares of Pulte, which is now the largest homebuilder in the U.S. As readers of my newsletter Stansberry's Investment Advisory know, I predicted in late 2008 that Pulte would eventually go bankrupt. The value of the collateral on its balance sheet (mostly land and homes) has evaporated, leaving behind $4.2 billion in debt. Two things happened to make my prediction wrong...
First, the government stepped in and gave homebuilders billions of dollars in tax refunds. And second, the government manipulated the market by giving tax credits to new homebuyers. These moves only forestalled the inevitable. As you can see, shares of Pulte are now back to crisis levels:
But shouldn't the Fed's money-printing lead to inflation in home prices? That would stave off more foreclosures and save the banks. In theory, yes, that's what should happen. The problem is, the faster the rate of depreciation in the dollar, the more consumer confidence will fall. That will make it less likely people will buy new homes.
Remember, inflation only means increasing the money supply. It may or may not result in higher prices for consumer goods, financial assets, commodities, and homes. Generally speaking, the pace and magnitude of the debasement, as well as demographics and other trends, will usually dictate where the inflation ends up (which prices go up). To me, it looks like people are so afraid about what's happening at the Fed, they're going to be unwilling to buy much beyond gold, silver, energy, and agriculture.
Our friends at SentimenTrader point out a few other worrisome signs: Assets in the inverse Rydex mutual funds are at eight-year lows. (No one is short this market.) Rydex fund traders have jumped into precious metals to a level that has resulted in negative returns every time since 2000. When the entire market is short the dollar/long equities... bad things occur. The market is a cruel master.
Finally... this note from Matt Badiali: South Africa doesn't have as much coal as advertised. The government's official line is 53 billion tons of coal reserves. However, a recent report puts the real reserves at only 15 billion tons. That puts its reserve life at 66 years... rather than the 200 years the government claims. South Africa is the fifth-largest coal producer in the world. It's the third-largest coal exporter in the world. If South Africa can't produce enough coal to satisfy Indian demand, we could see an even bigger jump in coal prices than we already expect.
In the October issue of Stansberry's Investment Advisory, we detailed our bullish coal thesis. For more information on SIA and to access that report, click here.
New highs: Market Vectors Gold (GDX), Keyera Facilities Income Trust (KEY-UN.TO), Silver Wheaton (SLW), Silver Standard Resources (SSRI), Coca-Cola (KO), Arch Coal (ACI), Puda Coal (PUDA), CARBO Ceramics (CRR), Barrick Gold (ABX), McDonald's (MCD).
In the mailbox... a subscribers argues we need more government and regulations. Surely that will prevent the next crisis.... Send your notes here: feedback@stansberryresearch.com.
"Your editorials are hard to read, when you name call. I love president Obama and he it is unacceptably ignorant to call him 'komrad.' He has rescued us from 8 years of idiot Bush and wild economics like komrad Stansberry preaches. We have to regulate people like you or throw you in prison, where you belong.
"All country's with anywhere the means of ours take better care of their citizens than we do. Health care reform is a priority because 60,000 people a year die in this country because they can't afford basic care. They can't afford it because we are given a choice, pay the profits of health care industry or die. What sort of choice is that in a democracy?
"The savings and loan disaster was soon forgotten and regulations relaxed again on greedy capitalists. We went headlong into another crisis. Regulations to not cost money, they keep greed in check. Anyway, Mr. Stansberry, I agree with alot of what you say, except you obvious egocentric bull*&^%." – Paid-up subscriber Charles Mcdonald
Porter comment: It's fascinating to me that folks like Mr. Charles, who believe the government should do a better job of regulating capitalists, never mention the fact that it was the government's mortgage banks (Fannie and Freddie), the government-sanctioned ratings agencies (Moody's, S&P, and Fitch), the government-regulated banks (Citigroup, Wachovia, Merrill Lynch, etc.) and a government mandate – to increase the rate of home ownership – that created this crisis. The real capitalists, the hedge funds, largely avoided losses. Many of them made large profits from the collapse of the mortgage market. And none of them were bailed out with taxpayer dollars.
"Awesome video! I was laughing my a** off – especially at the girl. Now I know how Red Eye produces those robot videos. p.s. I'm making a ton in gold stocks. I must hate my country." – Paid-up subscriber Todd Gunerman
Porter comment: Clearly, you're a terrorist.
"If you want to exercise your Second Amendment rights, don't move to Long Island in the People's Republic of New York. I live alone and have been thinking it might be a good idea to have a pistol handy in case intruders break into my home. I figure that most likely I'll go through my entire life without ever needing a gun, but like emergency food it's one of those things where if you need it at all, you need it bad, and right now! But here are the rules for a law abiding citizen with no criminal record to buy a gun in Nassau county, New York:
1. You must be fingerprinted.
2. You must find four character witnesses who can vouch that you are an upstanding citizen. They must live in the same county you do, and can't be relatives, nor can they be related to each other. If you're an introvert and work in a different county and that's where all your friends and associates are, tough sh**.
3. Each character witness must fill out a two-page form, which must be notarized.
4. Finally, you must wait six months for your gun license to be approved. Yes, they tell you it will take six months – one day to check out the forms and 182 days to discourage you from applying.
"Imagine if they had the same rules for obtaining another instrument of deadly force – an automobile. Everybody would be bicycling to work. My sister lives in a state that is still a part of the United States of America – New Hampshire. Here are the rules for buying and owning a gun in New Hampshire:
1. You must not have been convicted of a felony.
2. If you satisfy rule (1), go to the gun store and buy a gun.
"Guess which state has the higher rate of murder? If you correctly guessed New York, you understand reality better than any gun grabbing liberal. Each year the murder rate per 100,000 people is 3 to 4 times higher in the state of New York than it is in New Hampshire." – Paid-up subscriber Bob
Porter comment: Any thinking person would prefer to live in a state that requires gun ownership (like Switzerland) than in a state that forbids it. You can cite all the statistics you want, but the point is so obvious, only the willfully naïve would even argue the point.
Here's a challenge to anyone who thinks private citizens should NOT have the right to own firearms. Put a sign in front of your home advertising the fact that no weapons are allowed on the premises: "We have NO GUNS in this house."
"Apparently Jim Cramer announced on his show that he thinks 20% of one's investments should be in gold. Surely that must be a signal to sell!?" – Anonymous
Porter comment: Yes, I completely agree. I happen to think Cramer is a very good analyst, but he's certainly mainstream. And when the public gets this interested in gold, it's probably a bad time to buy it – fundamentals not withstanding.
Regards,
Porter Stansberry
Baltimore, Maryland
November 12, 2010