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Market Trends – September 09

General Market

A) Millions on the Verge of Exhausting Unemployment Benefits

There is a whole new crisis coming: by the end of the year, as many as 1.5 million jobless Americans will have exhausted their unemployment benefits. The National Employment Law Project, a privately funded advocate for the unemployed, released a study over the first weekend of August, which caused quite a stir. According to the group’s research, over 140,000 people have collected the maximum unemployment benefits the government allows. By December, there will be 1.4 million more jobless Americans.

So a swell of long-term-jobless folks suddenly stripped of government support, right as the unemployment rate blows past 10% and toward 11%. It’s already over 15% in Michigan and this could get a little ugly. Thus, Congress is under pressure to extend benefits again. Emergency legislation has already bumped unemployment programs to 79 weeks in half the states, about triple the norm and the longest since its 1930 inception (the rest of the states have programs ranging from 46-72 weeks). Word on the street is that Congress will tack on another 13 weeks for states with unemployment rates over 9% at a cost of $70 billion. Adding more numbers to unemployment rate, the private sector shed another 371,000 jobs in July, ADP reports on August 5^th. That is higher than the 350,000 the Street had expected. ADP said the economy lost 473,000 jobs in June, roughly 80,000 more than expected. Then the government reported 467,000 lost jobs, which is also more than expected.

However, the Labor Department announced that America has lost 247,000 jobs in July, on August 7^th. That blows all popular expectations out of the water: ADP’s guess on Wednesday of 371,000 lost jobs didn’t come close, and even the Street’s expectations of 325,000 was beaten handily. At an official 247,000 jobs, it’s the best monthly report since August 2008. According to the government, the unemployment rate actually fell, from 9.5% to 9.4%. The Labor Department revised June and May job losses for the better, taking out roughly 43,000 job losses previously reported. The average hourly workweek inched up from a record low 33 hours in June to 33.1 hours. The number of workers seeking full-time employment but regretfully working part-time fell 2%. In addition, the government is adding new jobs at a slower pace.

B) The Fed has Promised to Stop Manipulating the Bond Market by October

The Fed has promised to stop manipulating the bond market by October. They will “gradually slow” the pace of its official Treasury purchases, but the $300 billion program will now run through October instead of ending in September, as the Fed had previously scheduled. Outside of the Treasury bond announcement, the FOMC statement was about what you’d expect: Interest rates were left at 0% and will remain “exceptionally low” for an “extended period.” While “economic activity is leveling out,” it will “likely remain weak for some time.” And, of course, “inflation will remain subdued for some time.” The Fed’s announcement hit just about every market: bonds, stocks, currencies and commodities.

No surprise that the Fed’s announcement hurt bond prices. Not only did they forecast the end of their official purchases, but that “leveling out” talk also hints of higher interest rates, and thus lower bond prices. The yield on a 10-year jumped as much as 10 basis points; to 3.7%, on the news. But this morning it’s already given it back on the heels of the latest retail and jobless numbers. Stocks rallied in advance of the FOMC meeting in expectation of some kind of good news. Up 1.3% before the announcement, the S&P 500 seemed content with the Fed’s lilywhite forecast and finished up 1.2% on August 13^th.

C) Is Recession Over?

Capacity utilization inched up a few tenths of a percent in July, the Fed proclaimed on August 14^th. American companies utilized 68.5% of their productive potential, up from June’s record low of 68.1%. Over the last 40 years, an uptick in capacity utilization has marked the end of recession as you can see in the graph.

So is this it? Of course, the National Bureau of Economic Research (NBER) will be of no help. Having no interest in real-time forecasting, they won’t officially call an end to this recession until it’s long past. It took until December 2008 to tell us that this whole mess started in December 2007.The reason behind capacity utilization’s meager rise provides the best answer: July’s improvement was driven entirely by auto manufacturers coming back to life. They had to bump up production 20.1% to keep up with the initial response to “cash for clunkers.” But just for kicks, is it safe to claim that recession is over?

57% of economists already believe the recession has ended, according to a Wall Street Journal survey published on second week of August. Another 23% think it’ll be over in the next couple months. Nevertheless, rests of the world are claiming that recession is over. Hong Kong announced on August 14^th that its economy has stopped contracting. Just like France and Germany on August 13^th, Hong Kong unveiled surprise GDP growth in the second quarter. The Hong Kong economy popped up 3.3% from the first quarter to the second, double Bloomberg’s estimate and its first GDP growth in a year. “The worst is over for the global economy,” Li Ka-shing (Hong Kong’s Warren Buffett) declared, with this important caveat: “It’s too optimistic to say the global economy has reached a turning point. The degree of decline has shrunk, but that doesn’t mean it has stopped shrinking.” On August 17^th, Japan has joined the ranks of recession-emerging nations. The Japanese government claimed the country’s GDP grew 3.7% in the second quarter. That puts an end to a five-quarter losing streak and the longest period of Japanese GDP contraction since World War II. As with Germany, France and Hong Kong during second week of August, there’s little expectation for Japan to maintain this growth in the coming quarters.

D) China, FDIC, U.S. consumers trigger global sell-off

Global stock sell-off that was noted in the market on August 17^th really started on Friday, when the U.S. suffered its worst bank failure of 2009. Alabama-based Colonial Bank gasped its last breath late Friday (August 14^th). With roughly $25 billion in assets, it was the biggest bank failure since Washington Mutual back in September. Like WaMu, the FDIC brokered most of Colonial’s burden onto another bank’s balance sheet. BB&T picked up the lion’s share. And just like the WaMu/JP Morgan deal, the FDIC greased the gears by including some kind of backstop provision. In this case, BB&T and the FDIC will enter a loss sharing agreement on $15 billion in shaky Colonial assets. Colonial’s failure took a $2.8 billion chunk out of the FDIC’s deposit insurance fund. With just $13 billion left, at best, the fund is at its lowest level since 1993. Along with four other banks that failed over the weekend as well, the FDIC has closed 77 banks this year. One more and we’ve tripled last year’s count.

It seems that FDIC has been tardy in resolving banks, which will result in higher costs to the FDIC in the long run. In addition, with these ‘loss sharing’ deals (Colonial/BB&T), the FDIC is putting off the recognition of losses over a period of years, and its estimates of ultimate losses will likely be low, whether they’re ultimately absorbed by the deposit insurance fund or acquiring banks like BB&T.

Already anxious over Friday’s (August 14^th) lousy U.S. consumer confidence number and Colonial’s failure, Chinese traders slammed the bid today on rumors that the Chinese government is going to tighten lending standards. No official word yet from Beijing, but rumor alone was enough to knock the Shanghai Composite down almost 6%. The Chinese benchmark is down 12% so far this month. Thus, the foundation of the U.S. bear market rally is quickly eroding: The consumer is pulling back again, the banking crisis is alive and well, and China, the world’s great hope for growth, is slowing down. Add all that up and the S&P 500 opened down almost 2% on August 17^th morning.

E) Stocks Stand Still in August

After a remarkable 51% rise, the S&P 500 has spent all of August wondering what to do next. There have been some sell-offs and rebounds, but essentially, stocks have taken the month off as you can see in the graph.

Where is the market heading? Financial Analyst and advisor Dan Amoss answers, “Consider the sentiment toward the overall market, aside from the investor sentiment polls, you can tell how bullish investors are by the multiples they are willing to pay for stocks. And right now, after the sharpest five-month rally since the 1930s, the market is trading at valuations that require a strong economic recovery and a return to credit bubble conditions. The rally was powered entirely by P/E multiple expansion, not earnings growth. That sort of rally would be justifiable if corporate revenues and earnings were about to soar, but they’re not. Most earnings surprises were due to cost cutting, rather than top-line growth, which is like burning your furniture to stay warm. The market is not even that cheap when you consider how artificially inflated earnings were at the 2007 peak. Financial earnings made up 18% of the S&P 500’s earnings in 2007 and much more if you add the ‘earnings’ from the finance divisions of industrial conglomerates like GE and GM. Any claims that the S&P 500 is cheap because 2007 somehow represents ‘normalized earnings power’ are bogus. The corporate profit margins and earnings won’t return to that level for many years. The talking heads are getting more creative in their rationale for owning stocks right now. Most money managers seem to be thinking: ‘I don’t believe in this rally, but I’ll ride it until it looks like it’s over, and then I’ll sell.’ This is the type of dangerous crowd psychology that consumes most people during bubbles. When enough investors share this Ponzi sentiment, and nobody’s investing on the basis of sober, rational fundamental analysis, the result is sometimes a crash.”

Somewhat supporting study was conducted by Morgan Stanley who recently evaluated the performance of 19 bear markets in different countries around the world. It’s a comprehensive list that includes the bear market in Switzerland during the 1960s, Japan in the 1990s and Australia in the 1980s, among others. What they found is that the median fall from a market’s peak is 56% and lasts 29 months. The S&P fell 58% over 18 months from its peak in October 2007. U.S. markets have rebounded roughly 51% in five months from March lows, but the median bear market rebound is 70% over 17 months. This suggests the market rally still has some legs.

F) Prime mortgage record high foreclosures vs. NAR says the worst is over

The Fed seems fully committed to keeping this rebound alive. The Fed announced on August 21^st that its balance sheet expanded by $46 billion. But just last week, in a quiet press release, the central bank showed its holdings of mortgage-backed securities rose to $609 billion, from $542 billion a week before. U.S. bond buying picked up too, up $8 billion, to $736 billion. US debt is still on the rise.

Focusing more on US real estate market, a record 4 million American mortgages were delinquent in the second quarter, a 44% rise from the same time last year. That means over 9% of all mortgages in the U.S. are, at best, 30 days late on a payment, says the Mortgage Bankers Association’s National Delinquency Survey, released on August 20^th. That rate doesn’t include loans already in foreclosure. Roughly 4% of all American mortgages (also a US record) are in that mess. Thus, 13.16% of all mortgages are either past due or in foreclosure.

In addition, as we mention before in this report, “There was a major drop in foreclosures on subprime ARM loans,” said the MBA statement. “The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase.” One in every three foreclosure starts in the second quarter was on a prime fixed-rate mortgage.

However, “The housing market has decisively turned for the better,” National Association of Realtors chief economist Lawrence Yun declared on August 21^st. This morning’s NAR report showed a 7.2% rise in July existing home sales. That’s the highest month-over-month move in 10 years, and at an annual clip of 5.24 million, the largest home sales rate in two years.

However, if studied little more in detailed, the fine print does not look that positive:

Sales were driven by a crash in prices. The median fell 15% from last year, to $178,400

Distressed sales accounted for 31% of July’s number

The inventory of empty homes actually rose 7.3% in July, to 4.09 million. That’s a 9.4-month supply

We believe that real estate market in general, even though, there are emerging markets throughout the US, may have some more bumps ahead.

G) Banks Fail, One Big Enough for History Books & FDIC

Guaranty Financial of Texas went belly up late Friday (August 14^th) and secured a spot in the history books. With $13 billion in assets, the bank is the third largest to fail this year and tied for the 11th biggest bank failure in U.S. history. Even more interestingly, the FDIC brokered Guaranty’s assets to Banco Bilbao Vizcaya Argentaria, a bank from northern Spain. This event is surprised on two interesting points: 1) A bank from Spain, strapped with double-digit unemployment and a wretched housing bust, wants to bring their euros to the US and 2) BBVA already has a huge presence in Texas. With this acquisition, they will be the fourth largest banking chain in the Texas State. That could be an interesting trend to watch.

Three other banks failed alongside Guaranty: CaptialSouth, First Coweta and ebank. That brings the yearly total to 81 by August 24^th. This should put the FDIC’s deposit insurance fund on its last legs. At the beginning of 2008, the FDIC’s bank failure war chest had over $52 billion. At the end of the March 2009, the last time the FDIC has given us a look into the DIF, they had $13 billion left. 60 banks have failed since, including Guaranty and Colonial, which by themselves took out half of that remaining $13 billion. Only the FDIC can say with accuracy if there is any money left, but this chart gives you a pretty good idea of how the trend is shaping up. This chart compares the FDIC’s Deposit Insurance Funds and the ratio of DIF cash to FDIC insured deposits. The DIF does have a source of income; it taxes member banks a significant insurance fee. But we have to think that the DIF is still in bad shape, perhaps even empty and that the FDIC will soon be hitting up someone to refill their fund.

With failures in California, Minnesota and Maryland by August 31^st, the FDIC has bumped the yearly total of failed banks to 84. The three shuttered banks had about $1.9 billion in assets, which ended up putting a $446 million additional dent in the FDIC’s deposit insurance fund. More than one in four banks announced an unprofitable quarter, referring to the FDIC’s latest quarterly report, Nonperforming loans now make up 2.77% of the entire banking industry’s assets. This is up from 1.4% in June 2008 and 0.47% in June 2006. As these loans get ‘worked out’ in today’s credit environment, the market will start to realize how severe net charge-offs will be.

The FDIC published updated figures for the combined noncurrent loans and loan loss allowance at all FDIC-insured institutions. Here is an updated version of the chart (the moves from December 2008 to June 2009 are highlighted in the dotted lines at the far right of this chart):

You can see how problem loans are increasing at a much faster rate than the rate at which the banking industry is adding to its loss allowance. This means that published capital ratios are misleadingly high. The FDIC has put the taxpayer on the hook for another $80 billion in potential future losses, the Wall Street Journal reports on August 31^st. That sum is the totality of the FDIC’s “loss share” agreements, in which the FDIC promises to take a huge amount of possible future losses if another bank agrees to take on a failed financial’s assets. The FDIC currently predicts the $80 billion in backstops will end up costing the insurer “just” $14 billion. $4 billion over the present balance of its deposit insurance fund.

The Fed has made $14 billion in paper profits from emergency loan programs, the bank quietly announced on August 31^st. Since the start of their unusual programs about two years ago, small interest rates and fees on loans worth hundreds of billions of dollars have actually netted the private/public bank an embarrassment of riches.

Stocks and Commodities Market

“I’m prepared to declare that the recession is really, most probably over,” said Newsweek’s business guru, Daniel Gross. Yet a few paragraphs later, he concluded, “Without the tail wind of cheap money and a housing boom, it’s difficult to see — as it always is at the beginning of expansions — what is going to produce large-scale jobs growth.”

Emerging stock markets are back to pre-credit crisis highs. On August 3^rd early morning, the MSCI Emerging Markets Index had hit 855, the highest level since Sept. 12 2008, the Friday before Lehman bit the dust. That’s still well off its all-time high of 1,338, but the index’s 44% return so far this year puts the American bear market rally to shame. The S&P 500 opened up about 0.5% on the very same morning. Stocks are on the rise thanks to momentum from July’s nearly 9% rise. The ISM, expectations for August 3^rd’s auto sales numbers and some big earnings beats in Europe. In particular, HSBC and Barclays both reported surprise second-quarter profits on August 3^rd morning. Those unexpected revenues came from the investment-banking units in both companies, but that’s the kind of detail they can worry about next quarter. After roaring ahead on August 3^rd to a 1.5% gain, the S&P slow downed on the next day. The index closed over 1,000 on August 3^rd for the first time since November, but the S&P opened down 0.5% on August 4^th morning: a good old-fashioned profit taking.

The stock market continued to climb: August 7^th better-than-expected jobs report bumped the major indexes up about 1.3%, to their highest levels since October. The Dow and S&P 500 finished up over 2% for the week. The stock market had an interesting rally during August, which in the end, ended about break-even. However, on August 31^st morning, Chinese traders dumped shares, after a popular magazine rumored that the booming Chinese loan market is cooling off and affected the world significantly. Caijing magazine guessed that the Chinese loaned about $29 billion in August, a 43% crash from July. While that number isn’t official, traders around the red nation raced for the exits. The Shanghai Composite closed down 6.7%, its worst day in over a year. 16% of the stocks on the Shanghai Composite fell 10%, the daily limit down. Thus, as charted above, Chinese stocks are in a textbook bear market. In fact, down 23% since its 2009 peak earlier this month, the Shanghai Composite will be the worst performing major national index in the world for the month of August. Even though market is still up around 50% for the year, with the Shanghai Composite still priced 29 times earnings, it’s hard to be too enthusiastic. According to Bloomberg, the MSCI Emerging Markets Index is going for 19 times earnings. China frazzled the U.S. market too. The S&P 500 opened down 1% on August 31^st.

Commodities were flying off the virtual shelves from August 3^rd. Another positive manufacturing report from China and the American stock rally offer strength to the “global rebound” argument. Thus, oil had been up almost $2, to $71 a barrel. Copper’s up 10 cents (3.8%), to $2.70 a pound. Gold had a nice bump too, up $25 from Friday’s low (July 31^st), to roughly $960 an ounce. The Reuters/Jefferies CRB Index of the 19 most popular commodities shot up 3.9% on August 3^rd, its best day since March. With a score of 266, it’s at the highest point since November. What’s more, the CRB just got a technical tail wind as you can see in the graph.

In addition, if the greenback has any bearing on the price of commodities, which it certainly does, the dollar index makes the CRB look a bit cheap as well. The last time the dollar index was at today’s (August 3^rd) value was back in late September: when the CRB was just under 350. Chris Mayer, a financial analyst and advisor, comments, “People will blame the higher oil price on speculators, but something interesting is happening in the markets for minor metals like molybdenum. Prices are rising, too. The silvery metal, used to strengthen steel, is now $15 a pound. It nearly double the $8 and change it fetched in April. This is significant, because there is no futures exchange for moly. It trades on a physical spot market. Speculators play a very small role here. The buyers of the metal use the metal. So there is a demand story shaping up here, too, mostly focusing on a fragile recovery of some sort and mostly centered on China and the emerging markets. The market is looking ahead. Every rally, like every bottle of beer, has a finite life span. There will be lots of bumps along the way, but the prices of many commodities, such as oil, iron ore and moly, will tack higher, in my view.”

U.S. farmland has fallen in value for the first time in 22 years, the USDA said on August 5^th. Farmland averaged $2,100 an acre at the end of 2008, they claim, down 3.2% from 2007. That’s the first drop since 1987. But given the 19% drop in urban home prices over the same period, farms still seem like a fine store of wealth. Chris Mayer interprets, “U.S. farmland values got ahead of themselves, but if I owned farmland, I wouldn’t worry. In addition, American farmland is very expensive, deservedly so, in most cases. There are cheaper options overseas. North of the border, you can buy Saskatchewan farmland, which is still among the best bargains in the world. I think farmland will be one of the best performing asset classes over the next 10 years. Maybe not be the U.S. variety, but there are pockets of cheap farmland. Put that together with a rising demand for food and a falling supply of arable land and you’ve got a winner.”

Back to common commodities, Dollar weakness has given commodities a bump on the second week of August. On August 12^th, oil is up a buck and change, to $70 a barrel. At $948 an ounce, the recent gold sell-off seems to have come to an end as well. Commodities were under lots of pressure on August 17^th, thanks mostly to Chinese investor anxiety. Oil’s down about $5 from Friday’s (August 14^th) high, to $65 a barrel. Gold had fallen over $20 since Friday and goes for $932 an ounce on August 17^th. On August 24^th, oil was on the rise, along with stocks. Light sweet crude was just below $75 a barrel, a 10-month high. Gold is holding steady after Friday’s (August 14^th) rise. It jumped $15 at the end of the week, to $955 an ounce, and it’s stayed there since.

China’s sell-off that mentioned above has hit just about every asset class on August 31st, especially commodities. Commodity traders of the world have pinned hopes on China’s rise, and every time they falter, oil and copper hit the bid. Light, sweet crude is down over 3%, to $69 a barrel. Copper shed about 3% as well. Gold took a little hit on the very morning. Traders raced out of stocks and into the dollar. Thus, the spot price shed about $10 at the New York open, and rest just below $950 an ounce.

US Housing Market

According to the National Association of Realtors, pending home sales rose 3.6% in June. That’s the fifth straight month of improvement and the best streak since 2003. Pending home sales are up 6.7% since June of last year. This latest pending home sales number has affected the stock market greatly.

Nonetheless, the mortgage industry seems to struggle. The FDIC warned banks on August 4^th that they should batten down for more losses on home equity loans. Banks “should consider their historical loss experience on the group, adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans,” reads the FDIC letter. In addition, according to zillow.com, 93 million homes, condos and co-ops have mortgages that exceed their appraisal value. Home equity loans on those places are likely worth not much (and banks cannot call those assets).

Jumbo mortgages, home loans exceeding $417,000, now have the fastest rising default rates of any mortgage class. According to recent data from First American CoreLogic, 7.4% of these larger-than-life mortgages are currently in some form of default, nearly three times the rate at the start of 2008. As you can see, when stocks tanked in late 2008, the market for super-sized mortgage loans followed suit as you can see in the graph.

The Obama administration has done plenty to help out their beloved middle-class homeowner with various techniques such as the $8,000 first-time homebuyer credit, artificially low FHA mortgage rates, and several mortgage modification programs. But those programs don’t apply to jumbo loans. Even Fannie and Freddie, masters of mortgage speculation, will no longer stand behind jumbo mortgages. To make the matter worse, the market is blowing jumbo loans a stiff head wind. Mortgage rates are roughly 100 points higher for jumbos and inventory level is pretty remarkable. With an accelerating rate of default, government’s cold shoulder, higher than normal lending rates, and a huge, growing glut of supply, economy could lead to an ugly situation.

Another bad news in the mortgage industry was announced by one of the world’s biggest banks: 48% of U.S. mortgages will be underwater by 2011. But that’s the word from Deutsche Bank this week, which claims the number of U.S. mortgages worth more than the actual value of homes is going to double in the next couple of years. The bank is especially worried for prime and jumbo borrowers. 41% of prime borrowers will be underwater by 2011, says the DB forecast, up from 16% at the start of this year. Jumbos will be even worse, with a 46% underwater rate. “The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding,” said the bank. They’re expecting home prices to fall another 14% by 2011, for a total crash of 41%.

One more bad news was released on August 13^th, which was noted to public, not only by NVI, but also from various sources: U.S. foreclosures rose to another record high in June, said RealtyTrac. One in 355 households, or about 360,000 homes, were in some form of foreclosure during the month. As we mentioned in this report, roughly one quarter of all mortgages are worth more than the present value of the homes they cover. That’s not good for the average home price, down 15% last quarter to $174,100 (existing single-family home).

In addition to these bad news, there are some issues that US RE market to pay attention to: the “cure rate” on ailing mortgages is plummeting. According to a Fitch study released on August 25^th, in between 2000-2006, an average 45% of prime mortgage holders who fell behind on a monthly payment were able to catch back up the very next month. In July 2009, that “cure rate” was 6%. We reiterate, that was for the best, prime-level borrowers. These rates went from an average 30% to 4%. Sub-primes shrank from 19% to 5%. “Cure rates have really collapsed,” commented Roelof Slump, Fitch’s managing director. Not only does this give us pause in celebrating a housing comeback, but it reinforces a trend we’ve been pounding the table about over the last month or so: This isn’t about subprime anymore. The NAR boasted a 7.2% leap in existing home sales for July last week, the biggest month-to-month gain since they started keeping track. But with the overwhelming majority coming from foreclosures, distressed sales and the lowest of the low end… what does it really say about the true state of U.S. housing? (The chart shows the US sales year over year by home price.

Here is some good news: The rate of U.S. home price decline definitely stopped accelerating in the second quarter. That’s the word from the June edition of the S&P/Case-Shiller home price index, which was released this morning. National home prices registered a 14.9% decline from the second quarter of 2008 to the same time in 2009. While that’s hardly worth celebrating, it’s way better than the record 19.1% year-over-year fall in the first quarter. As the chart shows, it ain’t as bad as it used to be. But at the same time, home prices are still at early 2003 levels. You could call this a housing rebound, but it’s more like a deceleration yet. It’s an impressive turnaround. This is a sudden upward swing. We think it might mark a change in trend, but we are not sure whether the market has reached its bottom. Yet, it is safe to believe that it is just a suggestive of a turning point. We’ve seen other corrections like this reverse.

The Dollar Index

The dollar index found a new 2009 low on August 3^rd. The American stock rally and better-than-expected manufacturing data from China, Europe and the U.S. pushed the dollar index as low as 77.4. You’ll have to go back to late September 2008 to find the index that beaten down.

The dollar index arrested its slide on August 4^th morning, but still remained around 77.5. After falling to a 2009 low on August 3^rd, the dollar index has been trading flat as a pancake: around at 77.7, just 2/10ths of a point above its yearly low.

The dollar is falling again on August 12^th, thanks to a rally in stocks. The dollar index is down to 78.9 as we write, from its early morning high of 79.3. That’s puts the euro at $1.42, the pound at $1.65 and one dollar will exchange for 96 yen. After selling off over the last 48 hours (August 12 ~ 13), the dollar was holding steady on August 14^th. The dollar index fell nearly a full point from Wednesday’s high, to 78.4. By August 26^th, due to weakening stock market, the dollar index was up roughly half a point, to 78.8.

The World

A) Manufacturing Sector & Other

The Chinese manufacturing sector grew for the fifth month in a row in July, the Chinese government announced today. Their purchasing managers index rose to 53.3 last month, from 53.2 in June. Like the ISM, a score above 50 indicates expansion. The American manufacturing sector is still contracting, but just barely. The ISM manufacturing index rose from 44.8 to 48.9 in July, says the ISM on August 3^rd. That’s the best score since September and just 1.1 points away from crossing the contraction/expansion threshold. Still, that’s after almost an entire year of manufacturing contraction.

Additionally, the U.S. service sector shrank for the 10th consecutive month in July, says the ISM with August 5^th’s other major data point. Their non-manufacturing index fell to 46.4 in July, from 47 in June, suggesting that not only did the service economy contract (scoring below 50), but it shrank at a faster pace. The Street was hoping for a bump up to 48.

B) China Goes from Boom to Bubble & Other Regions

Chinese property sales are up over 60% so far this year, the nation’s National Bureau of Statistics proclaimed on August 10^th. That puts the housing bubble here to shame:

New loan issuance has tripled in the first half of 2009, to $1.1 trillion. That’s more than half of the entire Chinese GDP over the same period.

95% of those loans went to state-owned enterprises or provincial entities.

The Shanghai Composite is up 79% year to date, the best major market performance in the world.

Stocks on the Shanghai Composite trade for 35.4 times earnings, double that of the MSCI Emerging Markets index.

M2 money supply rose over 28.5% in the first half of the year.

The seven largest bond sales in the world this year were domestic transactions in China.

Nearly everything is up dramatically in China in 2009, except exports. Strangely, we don’t hear a lot of concern that the backbone of their economy has contracted 23% since this time last year.

The Chinese government realizes that its stimulus spending and pressure on banks to expand lending is inflating a massive bubble in the Chinese stock and property markets. The problem with unsustainable economy activity must eventually end. But for now, the Chinese have much more room to borrow and inflate than the United States. Eventually, the market will cut them off. The end will not be pretty, and at some point in the future, shorting Chinese stocks may be one of the best short-selling opportunities in history. In the meantime, it makes no sense to bet against China. The Communist government has proven very efficient at stealing the resources of its people (via inflation and taxation) and channeling them into whatever infrastructure project they seem necessary.

While China bubbles up, its BRIC-brother Russia is melting down. Russian GDP contracted a record 10.9% annualized pace in the second quarter, the Russian government announced this on August 10^th morning. The world just doesn’t want oil and natural gas like it used to, and that’s really the only game in Mother Russia. “We can’t develop like this any longer,” President Dmitry Medvedev said on that very morning, “It’s a dead end. And the crisis has placed us in a situation where we will have to make decisions on changing the structure of the economy.”

If the BRIC nations are giving you pause, check out MENA: the Middle East and North Africa, or MENA. MENA is one of the fastest-growing regions in the world. Over the last 50 years, MENA’s population is up more than fourfold. In addition, the population is still young, with the majority of the population under 25 years old. Over the next 30 years, MENA’s population will grow more than 60%, to nearly 700 million people. Trade there is expanding just as quickly. The most interesting thing about this growth is that it is happening in a part of the world where it is most difficult to grow food. Water is scarce. MENA consumes far more water than it gets via rainfall. In some places, the disparity is dramatic. In Kuwait, for instance, annual water consumption is 22 times annual rainfall. No wonder the whole area is a net importer of food. The Middle East is actually the world’s largest regional importer of food. Egypt, for instance, actually imports more wheat than China. The GCC countries, the gulf coast countries, will import 60% of their food by 2010 and it’s likely to get worse. Saudi Arabia aims to phase out wheat production by 2016 to conserve water.

C) Despite its Recent Rally, in General, Gold is the Place to Invest

Over the third weekend, the Financial Times had a piece that highlights things the Chinese like to buy. This is important because the Chinese are becoming increasingly affluent in large numbers. Total consumer spending was $1.7 trillion in 2007, compared to $12 trillion in the U.S. But that number is growing rapidly. The FT focused on the new rich. China now boasts more millionaires than the U.K. The rapid growth of this group has companies all over the world spending more money and time figuring out ways to get in their pockets. Outside of ordinary things like flashy cars and booze and quirky things like ivory and dried seahorses, one thing was mentioned in the FT piece that caught our eye: The Chinese love gold. “‘China loves gold in all its forms,’ the FT reports, ‘as a reserve currency, jewelry, an investment.’ The Chinese central bank doubled its holdings of gold this year, but it’s more widespread than that. The rising middle class in China also buys a lot of gold. Since 2007, Chinese consumers have been the second largest purchasers of gold jewelry in the world, behind only India. The FT points out those gold sales were up 28% year over year in May. Total gold demand for the year was up 21%, to 400 million tonnes. There are not too many sales of any kind going up that much in this financial crisis, but there it is. The financial crisis and weak stock market have helped gold as people look for a place to park some money. In general, the market thinks gold will remain a good place to be for some time yet. Many are reporting falling cash costs, yet the price of gold is staying up here in the $900s and is likely headed much higher. That means gold stocks are reporting good increases in cash flow, among the few sectors to do so.

The Issues We Need to Think About:

A) Alan Knuckman says invest in Natural Gas

Resource trader Alan Knuckman says, “A neglected sector that has gotten my attention is natural gas. The last few months have shown resurgence in crude with the global economy stabilizing and demand picking up. Crude has more than doubled from the lows, with natural gas lagging far behind. The risk on natural gas is on the upside. In other words, I don’t want to risk missing a big upturn. Prices have already fallen from $12 down to under $4, which is a $40,000 move per futures contract. The upside potential far outweighs the chance of the downtrend continuing much lower. Gas cannot go to zero. It will always have some value, and many fundamentals can change the present landscape of low, low prices. Thankfully, very few ‘sheeple’ are grazing on the green, green grass from natural gas demand. Significant supplies are used to produce the fertilizer necessary to feed the world. Natural gas also provides much of the electricity to cool our cities in the dog days of summer. Plus, the hurricane season is always a wild card that can add risk premium. Any weather disruption can spark an explosion in prices. Katrina and Rita sent prices to all-time highs just a few short years ago. You don’t go shopping for an umbrella after the rain starts. Think of your reaction to possible oil plays back in February when no bottom was in sight. That’s how natural gas feels now. Being ahead of the energy curve is the place you want to be. When things don’t develop as planned, the losses at lower levels are manageable. Probability is on our side that eventually natural gas prices will move up.”

B) Telecommunication Service Sector is for Income Investment

Income analyst Jim Nelson opinions, “It’s been a rough year for dividends, but if you know where to look, your income will be just fine. As you can see, the biggest loser on the list is financials, which shouldn’t be a surprise. The segment’s dividend yield fell 300 basis points (right-hand column) from last year to now. The sector that pays the most is doing so under the radar: telecommunication services. This is a favorite of ours. That 14 basis point increase is primarily due to AT&T and Verizon. Both are paying out around 6%. These dividends aren’t nearly as safe as we’d like, though. Instead of gunning for the U.S. telecom industry, we like to play that game in emerging markets. We already have a Pacific Rim telecom in the Lifetime Income Report portfolio, and we’ll be adding another this week. Even after that, we’ll continue to keep our eyes peeled and noses to the ground in case something else pops up in that industry. Going back to that table, you can see the next two best-paying sectors are utilities and consumer staples.”

C) Judge Orders Immediate Improved Transparency on FEDs

A U.S. district judge has ordered the Fed to identify the beneficiaries of 11 different shadow loan programs. Ben Bernanke and his brood lost their lawsuit with Bloomberg on August 24^th, which claimed that the central bank was violating the Freedom of Information Act by not disclosing the targets of their multibillion-dollar lending programs. Until now, the Fed has refused to name names or disclose the origins and varieties of collateral offered under its several multibillion-dollar lending programs. Doing so, they claim, might unsettle shareholders and depositors. No more, says Judge Loretta Preska of the Manhattan District Court: She ruled that the Fed “essentially speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed. Conjecture, without evidence of imminent harm, simply fails to meet the board’s burden” of proof. Of course, there’s no telling what will really come of this ruling, but we have to think it’s a step in the right direction. We’ll let you know how it unfolds.

Market Trends – August 09

General Market

A) Bad signs for the economy’s two most important measures

First, the Labor Department issued a worse-than-expected jobs report this morning (July 2^nd, 2009). The U.S. economy shed 467,000 jobs in June. As this chart shows, the Street was betting on the current trend to stay intact. Job losses have decreased every month since the January peak.

B-list data points from July 2^nd jobs report were equally lousy: The average hourly workweek fell to 33 hours, but hourly wages stayed the same. Those out of work for six months or more now exceed a record 4.4 million. And continuing claims for unemployment benefits remained at 6.7 million, just below an all-time high. By the government’s count, a record 14.7 million people are now unemployed. That makes for a 9.5% unemployment rate, a 26-year high.

Second, on the housing front, mortgage applications have fallen to a seven-month low. According to the Mortgage Bankers Association, requests for new home loans fell 19% last week while re-financing plunged 30%, both to levels unseen since November. While mortgage rates are well off March’s 4.6% record low (30-year fixed), they’re still at a reasonable 5.3%, a full 100bps below the average rate this time last year.

And since it worked so well the first time around: The Obama administration announced they will expand the “make home affordable” program to an even wider range of deadbeat borrowers. Previously, homeowners with mortgages worth more than 105% of their home’s value did not qualify for President Obama’s manipulated re-financing rates. That limit has been bumped up to 125%, which is incredible. Even more incredible thing is that one in five mortgage borrowers are “underwater,” meaning the value of their loan is worth more than the price of their home. That’s nearly 20 million homeowners.

Housing and jobs are the two cornerstones of American middle-class wealth and if they can’t hold the weight of a building economy, there is little chance of a broad recovery in the United States.

In addition, the American service industry contracted again in June, the ISM reports today. Their monthly gauge of the service sector scored 47 last month, 3 points below a Growth Reading of 50. At least that’s an improvement from May’s score of 44. In fact, June was the third straight monthly increase.

The FDIC closed down seven banks on July 2^nd, a single-day record for the credit crisis. That brings the total to 52 for the year. Considering the five bank failures the week before, it’s clear the pace of bank busts is accelerating.

B) State of emergency: How California could be the next bailout target

Let’s take a quick look at the world’s tenth largest economy, California. As the market expected, Fitch Ratings chopped California’s credit rating to BBB on July 7^th, based on the state’s continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis (BBB is just two levels above “junk bond” status). Still unable to resolve its $26 billion budget shortfall, The Golden State started issuing IOUs to its creditors since late June for just the second time since the Great Depression. Fitch’s downgrade will make closing that budget gap even more challenging.

Dan Amoss, a CFA, writes in his Strategic Short Report, “State governments will have a negative impact on GDP in coming quarters. In the next few payroll reports, we’ll start to see these budget crises lead to larger job losses in the government sector. These budget crises were seeded when state governments started spending on the naive assumption that the real estate bubble and windfalls from capital gains taxes would never end. They hired new employees in droves over the past decade on the assumption that tax ‘revenue’ was sustainable. According to Michael Mandel of BusinessWeek, the public sector of the U.S. economy created 2.4 million jobs over the past decade, twice as many as the private sector. California is preparing to pay its bills with IOUs. Eventually, some government jobs will have to go.”

U.S. taxpayers will likely extend a lifeline to California’s bankrupt state government before the end of summer. At a May 21 hearing in Congress, Rep. John Culberson of Texas asked Treasury Secretary Geithner if he would rule out bailing out California or any other states with our tax dollars. Geithner replied, “We will have to do exceptional things, as we have done already, to fix this mess. That’s not putting on the table or taking off the table any specific thing like that.” In other words, a bailout will likely arrive if California’s budget is in danger of a chaotic collapse, but it will have to come on tough terms. The Treasury will probably provide a bridge loan on the condition that California’s government will quickly pay back the money with fiscal austerity measures. Then the question is why the tough terms? Because after the recent moonshot in 10-Year Treasury yields, even Secretary Geithner is learning that the market will impose limits on the federal government’s deficit spending.

California can’t even afford a proper send-off for the King of Pop. Thousands upon thousands rushed into the Staples Center in Los Angeles on July 7^th for a memorial to Michael Jackson. Between keeping extra cops and medics on hand, to traffic control, to post-event cleanup, the city of Los Angeles spent around $2 million on the memorial. Money, of course, it doesn’t have: “I did reach out,” acting LA Mayor Jan Perry said. “I said, ‘Is there any way to direct me to people who can assist, in Michael’s memory, in deferring the cost of this event? I’m still waiting for a callback.”

Since the U.S. as a whole is just barely better off than the Golden State, we’re hearing more and more calls for another stimulus package.

Exhibit A: “We should be planning on a contingency basis for a second round of stimulus,” said Laura D’Andrea Tyson, one of President Obama’s economic advisers. Tyson claimed the $787 billion stimulus passed back in February was “a bit too small,” and that “the economy is worse than we forecast on which the stimulus program was based.”

Exhibit B: When pressed on CNBC of a second stimulus, leader of the president’s Council of Economic Advisers Christina Romer said quite confidently, “We’ll do whatever it takes.”

C) Commodities World is Changing

According to Frank Holmes of U.S. Global Investors, the trend of the commodities market has changed. Take a look at how historical patterns have shifted. The graph below shows the five-, 15- and 30-year patterns for copper prices. Holmes explains, “The 30-year pattern shows what used to be a rule of thumb when I first got into this business, “buy in November and sell in March.” This was because of seasonal stockpiling during winter months leading into major building and construction projects in the spring and summer months. In contrast, the 15-year pattern is dramatically different. This pattern shows copper prices rising from January-May and then trading pretty much sideways for the rest of the year, with modest peaks and valleys along the way. A similar pattern is drawn to represent the past five years.”

The main reason for this change in trend shift seems to be China. According to research from Dundee Wealth Economics, China’s copper consumption grew from about 1.8 million metric tons in 2000 to nearly 5 million metric tons in 2008. This pushed China’s share of global consumption from 13% in 2000 to 28.5% last year. In the first quarter of 2009, Dundee estimates, China accounted for 38% of the world’s copper usage. Copper isn’t the only metal where China is king. China also leads global consumption growth for aluminum, zinc, lead and nickel from 2000-2008.

We thought Asia faced some serious macro challenges at the beginning of this year, and we see no reason to change our mind yet. China, undoubtedly, has extraordinary potential, and we would not for a moment disregard the desire of Chinese leaders to achieve the status of the next global leader. The fact of the matter is that until China is prepared to accept currency appreciation, and thus prepared to reorient its growth strategy away from export-led development without simply putting up redundant capacity or building up speculative inventory stocks, its goal is likely to remain elusive. Asia’s production structure needs to recalibrate for a slower Western consumer growth profile, and that inevitably must involve steps that scrap excess capacity and allow new domestic demand sources to flourish.

D) Americans saving, cutting down debt VS China’s Credit Bubble

US consumer credit fell for the fourth straight month in May, the Federal Reserve reported on July 8^th. Credit inched down at an annual rate of 1.5% during the month, a $3.2 billion drop to a total consumer debt load of $2.52 trillion. Coupled with the previous three months, we’re now experiencing the biggest and longest consumer deleveraging since 1991. We even have a somewhat respectable savings rate, 6.9%, the highest since 1993.

While we welcome this deleveraging, it still doesn’t seem legit. With unemployment at a 26 year high and the sudden disappearance of easy-money credit, we wonder if this balance sheet restoration is a matter of choice or if the lowly American consumer is just playing the hand he’s been dealt. The U.S. household sector is currently saving more and deleveraging, while lenders both here and abroad remain wary of lending, except, apparently, in the case of bank loan officers for high rollers in China. To be clear, the household and business sector debt reduction is still in its early stages and has been dwarfed by the massive deleveraging of the financial sector itself as the so-called ‘shadow banking system’ has either collapsed or moved onto the Fed’s balance sheet.

While U.S. credit tightens, new loans in China more than tripled in the first half of 2009. The People’s Bank of China reported overnight that lending reached $1.07 trillion by the end of the first half. That’s more than three times bigger than the same period in 2008, lending doubled from May to June alone. Looks like, the credit bubble has found a new home. Chinese auto sales are soaring too, up 36% from this time last year. The Chinese snapped up 1.14 million cars, trucks and busses in June and 6.1 million in the first half, says the China Association of Auto Manufacturers. Both of those numbers easily top U.S. auto sales.

E) The Great Shifts of 2009

Wal-Mart is no longer No. 1. That title now goes to Royal Dutch Shell. The American consumer is out, and a global oil conglomerate is in. There’s a clear sea change in American business. AIG, Lehman and Bear Stearns fell off the list from 2008-2009. Nike, Google and Amazon moved up. The world is increasingly less Amero-centric. An American company is not No. 1 for the first time in over a decade. In the whole list for 2009, 140 companies are American, the lowest number on record. The world is increasingly more Sino-centric. Look at China National Petroleum and Sinopec. Both Chinese companies are by far the biggest movers up from 2008-2009. Sinopec, an oil and gas company also marks China’s first foray into Fortunes’ top 10. China now has 37 companies in the list of 500, its largest presence ever.

Oil is still where it’s at. In spite of all the price drama over the last year, seven of the top 10 firms are oil companies. In the face of the worst global economic environment of our lifetimes, the world’s biggest companies are still making lots of money. The 2008 top 25 pulled in $4.88 trillion in revenue. This year, they made $5.38 trillion.

The world’s producer of everything, GE, was one of very few companies to retain the same position from 2008-2009. And despite the infamous GE Capital, the finance arm that apparently threatened to torpedo the whole company, GE ended up increasing revenues by nearly $7 billion.

F) Summery of Second Quarter of 2009

Jeremy Grantham, a financial analyst, begins, “We recommend taking some risk units off the table. A year ago, equities globally … and everything else, for that matter, were very overpriced, particularly if they were risky. A quarter ago, in mid-March, prices everywhere were cheap. Now they have all or almost all converged for a few unusual moments at fair value. It’s difficult to be inspired at fair value. Given our view that we are in for seven lean years in which the market will be looking for an excuse to be cheap, we recommend taking some risk units off the table, including becoming underweight in equities, between 1,000 and 1,100 on the S&P, if it gets there this year. Around 880, you should continue to move slowly to fair value, twiddle your thumbs and wait to see what happens.”

The stock market finished the best July since 1989. The S&P 500 finished the month up around 8%, its best month since April and best July in 20 years. After yesterday’s 1% rally, the index is up to 987. Baring catastrophe today, the S&P will register its fifth consecutive monthly gain.

With data like this, it seems the credit crisis is over.

Speaking of credit crisis, banking lending rates reached a historic low on July 29^th. At a low 0.48%, three-month Libor is at its lowest rate since at least 1986, when the British Bankers’ Association started keeping track. Compared to its post-Lehman Brothers peak of 4.8%, banks can now lend to each other at practically no cost. Credit, it would seem, is extremely liquid.

The Libor/OIS spread is the complicated ratio of interbank lending rates to overnight index swaps. It peaked at 3.6% basis points in October. Alan Greenspan said credit would be in a “normal” state when the spread hit 0.25%. On July 29^th morning, it shrank to 0.29%. Interbank credit is flowing, but that’s no longer the problem. It was once about what banks didn’t have; credit. Nevertheless, currently it is all about what they have got; bad assets. Too bad there’s no three-month swap rate for those.

Back to economy, the U.S. economy shrank at 1% annualized rate in the second quarter, the Commerce Department estimated on July 29^th. Since that’s better than the 1.5% contraction the Street had predicted, we see headlines of “The Pain Is Easing,” and “Recession Easing” left and right. Those data are true, the latest GDP number is better than that of previous quarters, but here are some of the stats that we should pay our attention to as well:

The U.S. economy has now contracted four quarters in a row, the worst streak since the Great Depression.

GDP has contracted 3.9% in the last year, the worst fall since at least 1947, when the Commerce Department started keeping track.

First quarter GDP was revised down heavily, from a 5.5% to 6.4%; the biggest quarterly GDP drop in almost 30 years.

The Commerce Department revised 2008 down as well, from a 0.4% annual contraction to a 1% decline.

Consumer spending, 70% of U.S. GDP, contracted 1.2%. The retrenchment was largely replaced by government spending, up 10.9%.

Employment compensation rose by just 1.8% over the last 12 months, the slowest rate on books that go back to 1982.

But as you’d expect, the market has clung to the expectations-beating, lower-than-usual “headline GDP,” thus, stocks are currently holding onto July 28^th gains and hovering around break-even.

Stocks and Commodities Market

The American stock market reacted harshly to this July 2^nd’s jobs report, given the Street missed the number by nearly 100,000 jobs. The Dow and S&P 500 opened down over 2%.

There was a scare at the start of the year: banks were in trouble, the housing market was crashing and unemployment was rising. The S&P fell at a rate unseen in a long, long time. But The U.S. consumer, China and oil companies promised to lead us out of this mess. And of course, the current administration’s new multibillion stimulus plan will kick in any second.

After bottoming in early March, stocks soared well off their lows. With the S&P 500 at break-even for the year, stocks now face an inflection point. We need not remind you of what happened in the second half of 2008. But it’s not worth worrying about, it’ll be different this time!

Stocks took quite a tumble on Thursday (July 2^nd). The worse-than-expected jobs report gave traders more than enough reason to be short into the three-day weekend. The S&P 500 fell nearly 3%. Since reaching its 2009 high in early June, the S&P is down 5%. Major indexes were in trouble again on July 6^th. The Dow and S&P opened down 0.75%, mostly thanks to sour moods left over from Thursday. And just as in 2008, the smart money says there is more pain ahead: “You may have green shoots, whatever you want to call them,” said market sage and author of The Black Swan, Nassim Taleb. “You may have temporary relief, but you are still in a world that’s breaking. We’re in the middle of a crash. So if I’m going to forecast something, it is that it’s going to get worse, not better.” “The monkey on our back is debt.”

Just like in 2008, the logical move is to sell dollars and buy useful assets, like gold. But just like last year, the current trade du jour is buy greenbacks, sell everything else. After July 2^nd’s stock sell-off, the dollar index broke out of its recent range. It had been hovering just around

80 and by July 6^th goes for 80.7.

The stock market registered another dull day of trading on July 9th. The Dow finished flat, while the S&P 500 inched up 0.3%. With second-quarter earnings season now in full swing, we fear for the major indexes. It is one thing to have “less awful” numbers in the first quarter, but it is doubtful that many companies will be able to produce the “green shoots” results the market now craves.

Back in I.O.U.S.A., $73 billion in American debt was auctioned off on the second week of July with relative ease. On July 10^th, $11 billion auction of 30-year bonds capped off a busy week for the U.S. treasury. Wednesday’s (July 8^th) $19 billion auction of 10-year notes was the biggest since March. Incredibly, that 10-year auction drew the largest bid-to-cover ratio since 1995. The 10-year currently yields 3.4%, just off a seven week low. Nevertheless the success in selling debts, the U.S. is still on track to issue an incredible $2 trillion in notes and bonds this year.

On July 2^nd, the oil patch, light sweet crude finally fell out of its recent range. The front-month contract was down two bucks and changed to $66 a barrel. As we advice at last months report, it would have been good if you have taken some oil profits off the table. With crude down to $64 a barrel by July 7^th, a $9 fall since this time last week, dreams of $100 barrel profits and new drilling projects are being dashed left and right. Gold is still consolidating. An ounce goes for $930 as of July 2^nd, 2009.

From a technical standpoint, gold looks set for some short-term pain. Just like stocks, the gold chart is taking a page from 2008. When it hit the fan last year, gold failed to deliver the righteous moonshot many had forecast. It certainly was a better place to be than stocks, but gold still suffered. After sticking to a tight range the last few weeks from July 6^th, gold fell along with stocks. The spot price shed $10, to $925 an ounce.

NVI see everything coming up roses for gold and we are not the only one: For the first time in a couple of decades, some of America’s most successful, big-name investors are buying gold. David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time. John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis, plunked down $1.3 billion for an 11% stake in AngloGold. He’s also got a big position in Kinross Gold. Peter Munk, the 81-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold’s broadening appeal: “I have had more phone calls in the past six months than ever before, from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions. I am not saying George Soros, but people of that caliber have told me they are buying gold. You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world’s greatest investors may be the leading indicator for a quick 116% climb, to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed.”

Commodities registered another small gain on the very last day of July as stocks rise and the dollar falls. Gold added about $6, to $941 an ounce. Oil is up almost a buck, to $67 a barrel.

The dollar has resumed its losing ways. Thanks to two days of rising stocks, the dollar index is down almost a full point from Wednesday’s high at 78.6.

US Housing Market

In general, U.S. home prices will likely continue falling all through 2010, says a report from mortgage insurer PMI Group. According to PMI Group, home prices in 30 of the 50 biggest metropolitan areas of the U.S. have at least a 75% chance of falling through 2010 and into 2011. While we won’t dive too deep into the forecast, the fundamentals make sense: “home prices could get another shot by a demand shock of high unemployment and a supply shock of distressed foreclosure sales,” said LaVaughn Henry, senior economist at PMI.

More bad news in the housing industry: The number of U.S. consumer loans in default has hit a record high, reports the American Bankers Association. The ABA just polished off its first-quarter delinquency report and revealed some disturbing results: Of all the consumer loans in America, 3.23% are more than 30 days in arrears. That’s the highest level since at least 1970, when the ABA started keeping track. Of course, it’s no shocker that things got tough in the first quarter. But how can we explain the most recent three-month stint? “The No. 1 driver of delinquencies is job loss,” explains ABA’s chief economist, James Chessen. “When people lose their jobs, they can’t pay their bills. Delinquencies won’t improve until companies start hiring again and we see a significant economic turnaround.” So practically no one expects the unemployment rate to stop its accent until at least 2010. And just as many are willing to admit there are boatloads of souring loans still on bank balance sheets.

However, here’s a headline we can’t resist: “Home Prices Rose in May,” trumpets The New York Times on July 28^th. We understand they’ve got papers to sell and a hell of a mortgage. But in reality, the U.S. housing market is only decaying at a slower pace. Today’s S&P/Case-Shiller home price index reading is par for the course for the last quarter. Home prices and sales are still falling, just no longer accelerating into the abyss.

May registered a 16.8% annual decline in S&P’s 10-City Composite, with its 20-City just a bit worse. Even though that’s still a far cry from home price appreciation, May marks the fourth month in a row in annual return improvement.

To put it in perspective, this is the first time we have seen broad increases in home prices in 34 months. This could be an indication that home price declines are finally stabilizing. While many indicators are showing signs of life in the U.S. housing market, on a year-over-year basis, home prices are still down about 17% on average across all metro areas.

The World

A) World Unemployment

The unemployment scene in Europe is turning ugly as well as in the US. The unemployment rate in the 16-nation eurozone hit 9.5% in May, the EU statistics office announced early this morning. That’s a 10-year high. If you’re looking for work over there, steer clear of Spain. Spaniards rank at the top of the EU’s jobless list, with an unemployment rate of 18.7%. Job seekers are better served in the Netherlands, where only 3.2% are unemployed.  The European Central Bank chose to keep lending rates at 1% on July 2^nd, 2009, a record low.

B) China’s call for an alternative global reserve currency

China wants to add a new global reserve currency debate to next G-8 meeting. Unnamed Chinese officials asked the organizers of the G-8 gathering to include such a discussion on July 1^st. Last year, we heard little hints here and there of China’s dollar unease. Now they are practically shouting it from the rooftop. This could get interesting soon.

In a similar vein, the IMF announced today it will issue more bonds denominated in Special Drawing Rights, a fancy phrase for a basket of global currencies. After much demand from BRIC nations, the IMF said it will print bonds worth $150 billion, each denominated in a basket consisting of the dollar, euro, pound and yen. China, Brazil and Russia have already promised to buy $70 billion worth of the bonds, a convenient way to diversify out of the dollar and gain some say in the governance of the IMF’s war chest.

China’s call for an alternative global reserve currency put the dollar index down almost a full point. But traders refuse to leave their recent range, after falling as low as 79.5 on July 1^st, 2009, the dollar index was already back up to 80.1 on very next day.

“The dollar system or the system based on the dollar and euro have shown that they are flawed,” Russian President Medvedev told the international press on July 6^th, yet another call from a BRIC nation to ditch the dollar. “In the long term, we must also think about a single unit of payment such as the International Monetary Fund’s Special Drawing Rights. We cannot be hostages to the economic situation of a single country, as is happening today with the United States.”

“Of the major world currencies, I have to say that Australia’s dollar is my favorite,” says foreign exchange trader Bill Jenkins. “It has an edge because of its commodity-related economies and currencies. Now, Canada has the same edge. In fact, you may hear the Canadian and Australian dollars called the CommDolls (commodity dollars) for short. But Canada is inextricably tied to its neighbor to the south (the US), and that’s more than just a little problematic. Australia, on the other hand, is not tied to the United States. Instead, it’s better placed to trade with another resource-hungry nation, China. As China attempts to lift itself up by its own bootstraps, Australia comes into the picture. It has been widely understood that Australia is a little China. Not in culture, custom or language, but in economics. A significant part of Australia’s commodities flow into China, and the more the Chinese move ahead, the better it is for Australia. Also, let’s consider that Australia’s central bank is still holding its interest rates at 3%. In a fairly stable country, with a fairly stable currency, that is one heck of an attractive rate. Why, it is downright appealing! Indeed, Australia may now become the benefiting member of the next carry trade. After all, if can you borrow money at 0.25% and invest it at 3%, you stand to make a decent haul. And as risk appetite re-enters the market, you can bet your bottom dollar that Australia will likely be a real beneficiary.”

C) Could Canadians be Next?

While certainly better off than the U.S., Canada could face a consumer debt crisis of its own, reports the Bank of Canada. In its biannual Financial System Review, the BoC said on July 7^th that “There has been a further deterioration in the financial position of the Canadian household sector.” The average ratio of debt to income has hit a record level for Canadians. Household debt there is averages roughly 140% of disposable income. Here in I.O.U.S.A., it’s closer to 170%. Suffice to say neither ratio is desirable.

If you think Canada escaped the downward trend in U.S. banking, think again. While the country may not have plunged headfirst into subprime mortgages, it did dip heavily into risky derivatives. The leverage it took on generated impressive returns on equity in good times, but that same leverage is set to wipe out equity today. Canada has just entered what will ultimately be an enormous credit loss cycle, and by the time it’s over, the Canadian banks could easily lose their pristine reputations. Until the middle of 2008, Canada’s economy was booming. Its mining, energy and manufacturing sectors are world-class, and every other sector was pulled along for the ride.

But the wheels fell off last fall. According to Statistics Canada, the unemployment rate rose to 8.4% in May, the highest in 11 years. Ontario, with its heavy manufacturing base and ties to the ‘Detroit Three’ auto companies, is especially hard hit; Ontario lost 234,000 jobs, or 14% of its entire manufacturing work force, since last October. Ontario will lose even more jobs this summer as GM and Chrysler dramatically cut auto production. Alberta has slowed dramatically too. Just a year ago in Alberta, every skilled construction worker was working overtime on oil sands projects. Now many projects are postponed and workers are getting laid off. The unemployment rate in Alberta nearly doubled from May 2008 to May 2009, to 6.6%, and is heading higher.

For Canada, this credit cycle will probably be worse than the one in the late 1980s. According to RBC Capital Markets, annualized loan loss provisions for the entire Canadian banking system peaked at 2.88% of all loans in 1988. As of April 2009, this figure was just 0.77%. Over the next year or two, loan loss provisions should easily triple or quadruple, which would cut deeply into profits and capital.

D) Iran, the Rising Market and Asia II

China has taken yet another World’s No.1 title from the U.S. In 2000, China’s exports to the Arab world came to just $6 billion, but last year, China’s exports to the Arab world climbed to $48 billion, which nearly passed America’s $50 billion in exports to same region. Earlier this year, China finally passed the U.S. to become the Arab world’s largest trading partner. This is a historic shift. What we’re seeing here is the New Silk Road in action. Today’s traders are following in the footsteps of their ancestors. The bookends of the new Silk Road are China and the Middle East, especially the Arab world. The Eastern bookend gets all the press, but what many people fail to appreciate about the rise of China is how it also sired the rise of the Arab world.

I believe the New Silk Road gives us a framework for looking at markets and sniffing out opportunities in energy, water, food and more. Arab world has become Sino-centric: Dubai, for example, houses the DragonMart. It is the largest building to sell exclusively Chinese-made goods outside of China. It measures nearly 1.6 million square feet! And China seems to go out of its way to make Arabs feel at home in China, even using state money to build mosques. A side note: the Chinese will issue visas for visiting Egyptians in 24 hours. It takes 18 days for an Egyptian to get one for America.

E) Not All is Well With China

But lest you think all is well and good in the Far East, China announced on July 10^th its exports fell another 21% in June. The year-over-year decline was an improvement from May’s record 26% fall, but still, the pillar of the Chinese economy is as wobbly as ever.

What’s more, a Chinese bond auction failed for the third time this week yesterday. The Chinese Ministry of Finance was only able to dish out $3.7 billion of the $5.1 billion in bonds they aimed to sell. Just like the U.S., Chinese investors are losing their appetite for government debt thanks to massive government spending — in China’s case, a $585 billion stimulus package.

This week marks the first unsuccessful Chinese bond auctions in nearly six years.

Due to recent failures in their ventures, slowly but surely Chinese are starting to concern about their assets: “We sincerely hope the U.S. fiscal deficit will be reduced, year after year,” China’s Assistant Finance Minister Zhu Guangyao said overnight after talks with Treasury Secretary Geithner on July 28^th. He continues, “The Chinese government is a responsible government, and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets.” The Chinese now own over $801 billion in U.S. debt, nearly double their holdings at the start of 2007 and by far the world’s largest stash of American paper.

“We are committed,” responded Tim Geithner, “to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013.” However, We have no idea what he might mean by that. The CBO still projects a $1.8 trillion budget deficit this year, $1.4 trillion next year, $984 billion in 2011 and $633 billion by the end of 2012. That makes the Bush administration look like penny pinchers, and is certainly not even in the realm of “sustainable.” The U.S. government issued another $42 billion in 2-year notes today, the first of this week’s record $115 billion debt issuance.

The Issues We Need to Think About:

A) Assets in Roller-coaster Ride

“If asset prices accurately reflect all the available information,” writes financial analyst Rob Parenteau, “about future cash flows and the appropriate discount rates on those cash flows, as is required under the efficient market view, then we have to ask ourselves, what has the roller-coaster ride of the past decade and a half been all about? Compare the difference between the ratio of household net worth to disposable income before and after 1995 in the chart below.

“If you lived through this roller-coaster ride as an investor — especially as an investor approaching retirement — the experience is seared into your mind, and it has probably left a few scars on your heart as well. So we have to ask ourselves, what has changed so dramatically in the ability of capital equipment to generate profits or houses to generate rental income to homeowners over the past decade and a half? Alternatively, what has changed so dramatically in the long-run yield on Treasury bonds, considered the default risk-free rate, and therefore a key component of the discount rate on future cash flows?

“The answer, my friend, is indeed blowing in the wind, because the answer is basically as empty as air. What changed was the approach toward a decidedly asymmetric directive (no intentional popping allowed, just mopping up the mess afterward), and the remarkable skewing of the incentive structure facing investment professionals — incentives that basically encouraged the pursuit of asset bubbles regardless of the state of the fundamental factors like reasonable estimates of future cash flows and reasonable discount rates on those cash flows. As evident in the opening chart, there was no Great Moderation in asset markets — only a greater corruption of asset-pricing mechanisms. In retrospect, it is truly remarkable that the financial system held together as long as it did through the last years of Dr. Richenbächer’s illustrious career.”

B) Despite the recession, a raging bull market: Diplomatic Excursions

We’ve found a raging bull market despite the current recession: Congressional travel expenses. Lawmaker spending on overseas diplomatic excursions has nearly tripled since 2001. According to a study from The Wall Street Journal, hundreds of lawmakers (and their spouses and entourages) traveled overseas last year at a record taxpayer cost of $13 million. And that doesn’t include off-budget costs like spending in war zones or borrowing government planes to jet set abroad.

Some of last year’s most diplomatically vital trips include: Five representatives checked out the Galapagos Islands to “learn about global warming.” Six senators attended the Paris Air Show. Eight lawmakers enjoyed a delightful eight-day Italian excursion. And perhaps taking the cake, the House Homeland Security Committee’s jaunt to Brazil, Argentina, Peru and Panama, pertaining to the defense of U.S. borders, we must assume.

While the official numbers are not out yet, the WSJ claims expenses this year appear just as outrageous. There are over 20 government employees whose sole job function is to plan congressional outings.

C) Capital Controls of the US Government

Lawmakers are looking to make it harder for traders to buy and sell the Middle East’s largest export. The Commodity Futures Trading Commission said late July 6^th that it’s mulling limits on position sizes in commodity contracts, namely, for crude oil. No doubt the move is aimed directly at Wall Street, which played a significant role in driving oil to $145 this time last year and back down to $33 in January.

“The CFTC is barking up the wrong tree,” opines Dan Denning, a financial analyst, “if it wants to blame high energy prices entirely on speculators. One factor in oil’s rise is clearly investment demand from traders and institutions that foresee the decline of the U.S. dollar. Another factor subject to much debate is Peak Oil itself (that global oil production is peaking). For now, we’d say this is another sign of increasing government control of the markets. Some people think this is good and long overdue. Some people don’t. Either way, it looks like the world we’re headed to. And it looks to us like a sure sign that the U.S. government wants to have a lot more control of what you do with your money (capital controls). We reckon the oil trading will just move to London.”

City of Boston Reports

City Of Boston Redevelopment Intro

Reports by Boston Redevelopment Authority

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Boston Economy 2008

The New Boston Chart Book

New Housing Partnership

BRA affordable housing chart

Dorm Beds in Boston

RE Trends – July 09

General Real Estate Market

A) Pending Home Sales Up for Three Months in a Row

Record low mortgage interest rates boosted pending home sales for the third consecutive month, with some benefit now from the first-time buyer tax credit, according to the National Association of Realtors® (NAR). The Pending Home Sales Index[1], a forward-looking indicator based on contracts signed in April, rose 6.7 percent to 90.3 from a reading of 84.6 in March, and is 3.2 percent above April 2008 when it was 87.5. The Pending Home Sales Index in the Northeast shot up 32.6 percent to 78.9 in April and is 0.8 percent above a year ago. In the Midwest the index rose 9.8 percent to 90.4 and is 11.1 percent above April 2008. The index in the South slipped 0.2 percent to 93.0 in April but is 3.5 percent higher than a year ago. In the West the index rose 1.8 percent to 94.8 but is 2.9 percent below April 2008.

It seems that buyers are responding to very favorable market conditions. Housing affordability conditions have been at historic highs and with the $8,000 first-time buyer tax credit is beginning to impact the market. Since first-time buyers must finalize their purchase by November 30 to get the credit, it is expected to have greater activity in the months ahead, and that should spark more sales by repeat buyers. To add more information, NAR President Charles McMillan said, “there are numerous buyer assistance programs around the country and some states are offering bridge loans that allow first-time buyers to use the tax credit for down-payment and closing costs, but there are many other local government and nonprofit programs available to buyers, depending on location.” In addition, on last week of May, HUD announced that qualifying buyers can use the tax credit for closing costs on FHA loans, to buy down the interest rate or make a larger down-payment.

NAR’s Housing Affordability Index[2] is in record territory. The affordability index rose to 174.8 in April from an upwardly revised 171.9 in March, and was the second highest monthly reading on record after peaking at 176.9 in January of this year. The HAI is a broad measure of housing affordability using consistent values and assumptions over time, which examines the relationship between home prices, mortgage interest rates and family income; tracking began in 1970. A median-income family, earning $60,900, could afford a home costing $296,800 in April with a 20 percent down-payment, assuming 25 percent of gross income is devoted to mortgage principal and interest. Affordability conditions for first-time buyers with the same income and small down-payments are roughly 80 percent of that amount. The affordable price was well above the median existing single-family home price in April, which was $169,800.

However, NAR claims that the reporting sample for pending home sales is smaller than that of existing-home sales, so it is subject to greater variability. In addition, the relationship between contracts on pending home sales and closings on existing-home sales is taking longer than in the past for several reasons. This is mainly because the mortgage processing time has increased, it is taking many months to close on those homes requiring short sales with lender approval, and some sales are falling through at the last moment due to buyer’s inability to get financed. The total number of existing-home sales is expected to improve but with dramatic local market variation in the timing of recovery. The market has already bottomed in some areas, but this is an unusual housing cycle with some areas improving rapidly while others languish or decline. Thus, it is important to analyze local markets by townships or cities.

B) May Existing-Home Sales Continue Rising Trend

Sales of existing homes showed another gain in May, benefiting from favorable affordability conditions and a first-time buyer tax credit, according to the National Association of Realtors® (NAR). May’s increase was the first back-to-back monthly gain since September 2005. Existing-home sales, including single family, townhomes, condominiums and co-ops, rose 2.4 percent to a seasonally adjusted annual rate[3] of 4.77 million units in May from a downwardly revised level of 4.66 million units in April, but remained 3.6 percent below the 4.95 million-unit pace in May 2008. Total housing inventory at the end of May fell 3.5 percent to 3.80 million existing homes available for sale, which represents a 9.6-month supply[4] at the current sales pace, down from a 10.1-month supply in April. In addition, according to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage edged up to 4.86 percent in May from a record low 4.81 percent in April; the rate was 6.04 percent in May 2008. Last week, Freddie Mac reported the 30-year fixed at 5.38 percent; data collection began in 1971.

This is the time of year when we see large increases in the number of repeat buyers, who are benefitting from sales to entry-level buyers. Investors appear less active, but are more prevalent in areas with large price corrections. An NAR practitioner survey in May showed first-time buyers accounted for 29 percent of transactions, and that the number of buyers looking at homes is nearly 10 percentage points higher than a year ago.

Historically low mortgage interest rates clearly drew buyers into the market, and housing remains very affordable even with a recent uptick in rates. First-time buyers also are being drawn off the sidelines by the $8,000 tax credit, which is helping to absorb inventory. However, the increase in sales is less than expected of the Wall Street’s or NAR’s because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan. Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales. In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.

NAR President Charles McMillan on June 23, 2009, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said appraisals and the tax credit are key issues. His opinions were not far from us: “To maximize the potential for a housing recovery and subsequent economic recovery, we need realistic appraisals that are based on proper comparisons and done by a local specialist. In addition, the first-time buyer tax credit should be expanded to all buyers of primary homes regardless of income. Extending the credit into 2010 would allow more time for the market to catch up with underlying demand, in part because many families with children, who normally time their purchase based on school year considerations, do not have enough time to move before the start of school in late August. Freeing a pent-up demand in housing will absorb inventory at a faster pace, strengthen communities and stabilize home prices earlier.”

The national median existing-home price[5] for all housing types was $173,000 in May, down 16.8 percent from a year earlier. Distressed properties, which declined to 33 percent of all sales in May from 45 percent in April, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes. Single-family home sales rose 1.9 percent to a seasonally adjusted annual rate of 4.25 million in May from a pace of 4.17 million in April, but are 3.0 percent below the 4.38 million-unit level in May 2008. The median existing single-family home price was $172,900 in May, down 16.1 percent from a year ago. Existing condominium and co-op sales increased 6.1 percent to a seasonally adjusted annual rate of 520,000 units in May from 490,000 in April, but are 8.9 percent below the 571,000-unit level in May 2008. The median existing condo price[6] was $173,800 in May, down 21.9 percent from a year earlier.

Regionally, existing-home sales in the Northeast rose 3.9 percent to an annual level of 800,000 in May, but are 10.1 percent below a year ago. The median price in the Northeast was $243,600, which is 12.5 percent below May 2008. Existing-home sales in the Midwest jumped 9.0 percent in May to a pace of 1.09 million but are 4.4 percent below May 2008. The median price in the Midwest was $145,800, which is 10.4 percent lower than a year ago. In the South, existing-home sales were unchanged at an annual pace of 1.74 million in May but are 8.9 percent below a year ago. The median price in the South was $157,400, down 9.9 percent from May 2008. Existing-home sales in the West slipped 0.9 percent to an annual rate of 1.14 million in May, but are 11.8 percent higher than May 2008. The median price in the West was $197,700, down 30.6 percent from a year ago.

The decline in the distressed sales share likely results from an increase of repeat buyers in May. First-time buyers are concentrated in the lower price ranges, which include most of the distressed sales. According to NAR, Existing-home sales for June report will be released July 23 and the next Pending Home Sales Index & Forecast is scheduled for July 1. We will get back to you with these report on August.

C) Region by Region Comparison

The median home price, the point at which half of all homes sold for more and half sold for less, fell in April led by losses in the West and the Midwest, and tempered by gains in the Northeast and South.

The median price for the West fell dramatically in April to $222,600, down from $252,400 in March, continuing to reflect the high volume of foreclosed properties on the market. The new figure is also down 21.8 percent from the previous year.

In the Midwest, the median sales price fell to $138,800 from $141,300 in March. The price is down 11.7 percent in year-over-year comparisons.

The median price in the South grew to $148,000 in April up from $146,900, but it has fallen 12.8 percent in the past year.

In the Northeast, the sales price rose to $237,400, an increase from $231,700 in March. The price is down 9.6 percent from April 2008 though.

Region by Region Median Price Change:

Only Northeast and South shows appreciation.

The Emerging Market Report

A) Washington D.C. good market for Multi-Family Real Estates.

Washington, D.C. is one the most stable market in the United States and has one of the shortest market cycles. Senate terms are six years, the House terms are two years, and every four years, there is a potential change of the President. Thus, there is a constant shifting of residence in this area.

Both M/PF Yield Star and The Urban Land Institute (ULI) ranked Whashington, D.C. as one of their top metros for 2009: the number three slot. Washington, D.C. is one of the strongest of apartment construction centers and it looks likely to remain that way. On going development at fourth quarter of 2008 was approximately 10,400 units. Employment growth is expected to slightly decrease as well as Occupancy rates in 2009; however, rent change is expected remain positive. Overall, multi-family sector will remain healthy.

According to U.S. Bureau of Labor Statistics (BLS) Maryland, Virginia, and the District of Columbia are three of only six states to add more than 10,000 jobs since October 2007. Job growth rate was 40,400, as 1.3 percent gain. During 2008, Washington, D.C. showed some increase in jobless rates. Nevertheless, it has a steady, yet transient, job market that has produced large group of Class A renters.

B) San Antonio, TX Real Estates

San Antonio, Texas is the second-largest city in the state of Texas and the seventh largest city in the US. Located in South Texas, the city is a cultural and geographical gateway into the American Southwest. San Antonio is the seat of Bexar County with a population in excess of 1,300,000. It is the 29^th largest metropolitan area in the US and third in Texas; behind Dallas and Houston. San Antonio is a market that does not make big swings either in a bull or bear market. Because of this, San Antonio market has been a steady performer over the last few years.

San Antonio has a strong military presence. It is home to Fort Sam Houston, Lackland Air Force Base, Randolph Air Force Base, Brooks City Base, Camp Bullis, and Camp Stanley. It is also home to the South Texas Medical Center, the only medical research and care provider in the South Texas region. It is famous for its River Walk, the Alamo, Tejano culture, the McNay Art Museum, the SeaWorld San Antonio, and the Six Flags Fiesta Texas. The city is visited by approximately 26 million tourists per year according to the San Antonio Convention and Visitors Bureau. San Antonio is also a great place for companies to consolidate their administrative offices, the central time zone, low cost of living, bilingual culture, educated work force all are positive criteria for companies to do business.

According to the Transwestern Greater San Antonio Snapshot, the city’s job growth is projected to exceed 2% during 2009. It will be the highest growth rate among any major US metropolitan areas. 17,500 more jobs are expected to be created than lost in the metro by the end of October. The significant growth in the coming years will be north of Loop 1604, probably more northwest than north central. This is due to unresolved highway congestion programs in the Stone Oak area.

Greater San Antonio features a diverse, stable economy anchored by the presence of strong military, medical, and technical agencies. In addition to its growth in medical and professional services sectors, San Antonio is welcoming new businesses in the area. It is made up of 48 percent male and 52 percent females. Construction of new apartments is expected to fall to 2,300 units, the previous year, 3,200 units were constructed in the city. Occupancy for the are is at 91% and is forecasted to remain stable.

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[1] The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing. The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.

[2] The Housing Affordability Index is a relative index where a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced existing single-family home, taking into account the relationship between median home price, average effective interest rate for loans closed on existing homes, and median family income. The higher the index, the better housing affordability is for buyers. The calculation assumes a downpayment of 20 percent and a qualifying ratio of 25 percent of gross income for mortgage principle and interest payments. The index is a general gauge with conditions varying widely around the country. Affordability conditions are lower for first-time buyers with smaller downpayments and less income. Monthly publication of the index began in 1981 with annual data calculated back to 1970.

[3] The annual rate for a particular month represents what the total number of actual sales for a year would be if the relative pace for that month were maintained for 12 consecutive months. Seasonally adjusted annual rates are used in reporting monthly data to factor out seasonal variations in resale activity. For example, home sales volume is normally higher in the summer than in the winter, primarily because of differences in the weather and family buying patterns. However, seasonal factors cannot compensate for abnormal weather patterns. Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings. This differs from the U.S. Census Bureau’s series on new single-family home sales, which are based on contracts or the acceptance of a deposit. Because of these differences, it is not uncommon for each series to move in different directions in the same month. In addition, existing-home sales, which generally account for 85 to 90 percent of total home sales, are based on a much larger sample – more than 40 percent of multiple listing service data each month – and typically are not subject to large prior-month revisions. Single-family data collection began monthly in 1968, while condo data collection began quarterly in 1981; the series were combined in 1999 when monthly collection of condo data began. Prior to this period, single-family homes accounted for more than nine out of 10 purchases. Historic comparisons for total home sales prior to 1999 are based on monthly single-family sales, combined with the corresponding quarterly sales rate for condos.

[4] Total inventory and month’s supply data are available back through 1999, while single-family inventory and month’s supply are available back to 1982.

[5] The only valid comparisons for median prices are with the same period a year earlier due to the seasonality in buying patterns. Month-to-month comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns. Changes in the composition of sales can distort median price data. Year-ago median and mean prices sometimes are revised in an automated process if more data is received than was originally reported.

[6] Because there is a concentration of condos in high-cost metro areas, the national median condo price generally is higher than the median single-family price. In a given market area, condos typically cost less than single-family homes

[1] The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing. The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.

[1] The annual rate for a particular month represents what the total number of actual sales for a year would be if the relative pace for that month were maintained for 12 consecutive months. Seasonally adjusted annual rates are used in reporting monthly data to factor out seasonal variations in resale activity. For example, home sales volume is normally higher in the summer than in the winter, primarily because of differences in the weather and family buying patterns. However, seasonal factors cannot compensate for abnormal weather patterns. Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings. This differs from the U.S. Census Bureau’s series on new single-family home sales, which are based on contracts or the acceptance of a deposit. Because of these differences, it is not uncommon for each series to move in different directions in the same month. In addition, existing-home sales, which generally account for 85 to 90 percent of total home sales, are based on a much larger sample – more than 40 percent of multiple listing service data each month – and typically are not subject to large prior-month revisions. Single-family data collection began monthly in 1968, while condo data collection began quarterly in 1981; the series were combined in 1999 when monthly collection of condo data began. Prior to this period, single-family homes accounted for more than nine out of 10 purchases. Historic comparisons for total home sales prior to 1999 are based on monthly single-family sales, combined with the corresponding quarterly sales rate for condos.

[1] Total inventory and month’s supply data are available back through 1999, while single-family inventory and month’s supply are available back to 1982.

[2] The only valid comparisons for median prices are with the same period a year earlier due to the seasonality in buying patterns. Month-to-month comparisons do not compensate for seasonal changes, especially for the timing of family buying patterns. Changes in the composition of sales can distort median price data. Year-ago median and mean prices sometimes are revised in an automated process if more data is received than was originally reported.

[5] Because there is a concentration of condos in high-cost metro areas, the national median condo price generally is higher than the median single-family price. In a given market area, condos typically cost less than single-family homes.

Market Trends – July.09

General Market

A) Federal Reserve and Other Agencies sees the bright side of the Economy

On 06/24/2009 Mr. Bernanke and his Federal Open Market Committee declared that the pace of economic is slowing, economic activity is likely to remain weak for a time, and inflation will remain subdued for some time, which is same old story from the Federal Reserve. On the very same day Warren Buffett said more interesting things, “I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we’ve had no bounce. The financial system was really where the crisis was last September and October, and that’s been surmounted and that’s enormously important. But in terms of the economy coming back, it takes awhile. There were a lot of excesses to be wrung out and that process is still under way and it looks to me like it will be under way for quite a while. In the [Berkshire Hathaway] annual report, I said the economy would be in a shambles this year and probably well beyond. I’m afraid that’s true. I had a cataract operation on my left eye about a month ago and I thought maybe now I’ll be able to see green shoots. We’re not seeing them. Whether it’s retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we’ve never seen it for a simple thing like electricity. So it hasn’t happened yet. It will happen. I want to emphasize that. But it hasn’t happened yet.” Thus, let’s not get too crazy about the stocks, yet, despite of recent flattering news from the Federal Reserve that recession has bottomed.

Despite all the data out this month, new and existing home sales, GDP, jobless claims, only one has impacted the market: durable goods. Orders for items to last a few years increased from April to May exceeded the Wall Street’s expected growth of 0.4%.[1]

Adding more optimistic mood, the Commerce Department announced on 6/25/2009 that the US economy did not contract as much as reported in the first quarter. Their initial report claimed 6.1% contraction and now claims economy contract just 5.5% in the first quarter of 2009.

In addition, Jorgen Elmeskov, the OECD chief economist, and OECD has drastically revised the growth expectations for the US. Jorgen Elmeskov claims, “Signs have multiplied that U.S. activity could bottom out in the course of the second half of this year.” OECD now forecasts a 2.8% U.S. economic contraction in 2009 and 0.9% growth in 2010, which is a huge revision from their most recent call of a 4% decline this year and zero growth in 2010.

B) The House passes Climate Change Bill

On June 26, 2009, the House passed their climate change bill and the entire energy industry is targeted for reform. Greenhouse gasses must be cut 17% by 2020 and 80% by 2050. Emissions from factories, power plants, refineries and energy distributors will make up most of the cut. A cap-and-trade system will cut these emissions. The government will issue a limited number of 1-ton permits each year, which companies will have to obtain if they wish to emit greenhouse gasses. Each year, the government will issue fewer permits. Thus, companies will have to clean up operations, use more green alternatives or invest money in offset projects, like a paper mill planting more trees. 12% of power from electric utility companies must be from renewable resources by 2020 and new office buildings must be 30% more efficient by 2012. Cap and trade will be the largest tax increase in U.S. history.

The question is with higher energy costs throughout the economy, plus an immense new level of state control over economic activity, can the U.S. make the transition to that mythical carbon-neutral energy economy? Cap and trade will breed more problems, which will lead to more taxes and even more regulations and while we live through the consequences of what’s going to happen, there will be a lot of misallocation of resources throughout the economy.

Stocks and Commodities Market

As far as the stock market goes, since June 22, 2009 swift sell-off, major indexes have gone nowhere. Despite all the data and the latest FOMC meeting, the Dow decreased 0.2% on June 23, and 0.3% on June 24, 2009. Merrill Lynch commodities trader Alan Knuckman writes, “This sideways trade for the last few weeks is typical of summer markets, even in an anything but a typical year for investors. Everyone is so conditioned for strong moves in either direction it has left many unable to handle an undefined trend. The stall has disappointed many market watchers, with some calling for a new downturn. Over my years I have found it better to follow the trend without trying to catch the turn. Don’t be too proud to miss some of it. Most of the money is made in the middle of a trend. Volume seems light and something is needed to spark movement after the large bull run. The S&P 500 channel, with lows last week (3^rd week of June) at the 899 level (as a support level) and highs at 925+, is an area to watch closely for future clues. At the same time, Treasury bond futures weekly highs at 117 and lows at 114 have held traders in check. The breakout for either asset class will light the way down the future path for the markets. For now, let’s wait and see what trend develops.”

Commodities have yielded to selling pressure. Since peaking at $987 in late May, gold has been in a state of steady decline. It found a temporary bottom early fourth week of June at $919 an ounce and has since inched back up to $935. Oil fell from a recent high of $72 a barrel to as low as $66 during the fourth week of June. The front-month contract has recovered to about $68 on June 25, 2009 morning. Oil had a strong climb and pushed up over $70 per barrel just a few weeks ago. Then oil met with market resistance, therefore, the price of oil retreated into the current $60 range. At least for a short term, Oil price could go even lower. Oil could drop back into the $50s, despite its traditional strength during the summer driving season. A pullback like that in oil prices will take the steam out of recent stock market gains for oil producers and oil services. Thus, take your recent energy gains now. Book some profit, and hold onto the cash for later buying opportunities. However, this does not mean that energy sector will not perform well in a long term. Oil is, definitely, headed upward in price. Half of the world’s daily oil use is now going to developing countries. In summary, we might have a pullback in an otherwise long-term, generally rising trend for energy.

For additional perspective, let’s examine the current structure of the American energy supply. Right now, most of the U.S. energy mix comes from burning coal, natural gas and oil. In fact, according to the U.S. Department of Energy, the U.S. gets 87% of its total energy mix from burning fossil fuels. Another 7% of U.S. energy supply comes from nuclear power. The total is 94%. That leaves about 6% of the U.S. energy mix to come from so-called “renewable” and alternative sources. Approximately an half of that 6% is renewable hydropower from unique sources like the Hoover, Grand Coulee and other dams; however, the US is not building any more big dams. Thus, only about 3% of U.S. total energy comes from things that grow, blow or shine. Of that 3%, about half (1.5%) is from “biofuels,” and that’s if you count a company like Weyerhaeuser (WY: NYSE) burning sawdust to run the sawmills. Finally, there’s a very minor part of the total U.S. energy mix, which is about 1.5%, that comes from windmills, solar and geothermal. For as much visibility as these things get in the media and pop culture, their energy output is tiny, slightly above statistical noise in the overall national mix.

Thus, just follow the numbers. The “alternative” energy sources are a miniscule component of the current energy mix. That’s after a few good years of significant investment, with lots of political support and plenty of tax breaks.

US Housing Market

The U.S. housing market is back to underperforming expectations. Latest existing home sales and new home sales numbers failed to meet the  Wall Street’s forecast. The National Association of Realtors reported 2.4% growth in existing home sales on June 23, 2009 to an annual rate of 4.7 million transactions. Even though sales managed to increase in back-to-back months for the first time since 2005, existing home prices are still plummeting, distressed sales are still booming and the market is still saturated with a 9.6-month supply of homes. The stock market no longer satisfied with meager housing growth, the market expected a rate of 4.9 million and thus caused a small sell-off.

According to the Commerce Department report on June 24, 2009, Sales of new houses fell another 0.6%, to a 342,000 annual rate. Comparing to 2008, this is a 32.8% decrease. Wall Street analysts were calling for a 2% rise in new home sales, and like existing home sales, the price of new homes is still falling (down another 3%, to $221,600), and inventory is still at a lofty 10-month supply.

The Dollar Index

The dollar’s still stuck in a range. The dollar index took a quick trip below the infamous 80 score on June 24, 2009 after the FOMC’s announcement, but has since climbed back up to 80.6, which is not far from where it’s been for the last two weeks. On June 25, 2009, IMF chief economist Olivier Blanchard stated, “For the U.S., it is absolutely no question that a sustained recovery has to come from a large increase in exports, which may not be very easy to do. This may require fairly substantial adjustments in the dollar.”

The latest report titled The Long Term Budget Outlook from the Congressional Budget Office (CBO) predicts that, under the most likely scenario, our national debt will exceed 100% of the US GDP by 2023 and 200% by the late 2030s. In formulating their projections, the CBO used two scenarios. The first, the “extended baseline scenario,” assumes things will remain about the same over the next decade: all scheduled changes under current law will occur and all budget projections will be met. The second, their “alternative fiscal scenario,” accounts for budget changes widely expected to occur, like preserving Bush tax cuts for the middle class, reigning in the alternative minimum tax and failure to drastically cut Medicare costs.

Both scenarios paint a dark picture for our fiscal future. No CBO report has ever predicted this much debt, accumulated at such a rate. The CBO is assuming, like the rest of the government, that the worst of the recession is largely behind us, unless the US do something about it. According to the CBO, even under the less severe scenario, “an immediate and permanent reduction in spending or an immediate and permanent increase in revenues equal to 3.2% of GDP would be needed to create a sustainable fiscal path for the next three-quarters of a century.” This means that the US government will need to cut spending or raise taxes by about $440 billion and maintain those adjustments every year for a long, long time. Under the CBO’s worse, more likely scenario, it’s closer to $740 billion.

At least the general Americans are doing the right thing: Americans are saving at the highest rate in 15 years. According to this morning’s personal income and spending report from the Commerce Department, the consumer savings rate is up to 6.9%, its best since 1993. Americans have stashed away an estimated $768 billion, an all-time high.

The World

A) Follow the Needs of Chinese

As an investor, buy what the Chinese MUST buy because they cannot produce enough of for itself. The very best places seems to be in potash, soybeans, iron ore and oil. In these commodities, China’s share of world production is low. For potash, China represents less than 5% of global production, as shown by the vertical axis. It is also not self-sufficient. As the horizontal axis shows, China’s production of potash is little more than 20% of its domestic demand. The Chinese use 12-15 million tonnes of potash every year, but produce only 3 million tonnes.

Therefore, China relies on imports of potash to obtain most of its supply. But Chinese farmers could use a lot more of this unique fertilizer. In fact, China’s potash “application rates” are half what they are in the West. Quite simply, the Chinese need to use more potash to boost their crop yields to where the U.S. and Europe are. Potash is an important nutrient because it controls the plants’ water intake, reduces water loss, increases root growth and improves drought resistance. Clearly, crop yields are higher and crop quality is better with the application of potash. Yet last year, China’s consumption of potash fell. It will probably decline slightly again this year. That’s incompatible with the Chinese Government’s goals and the need of increasing crop yields and quality. Potash prices soared in 2008 and Chinese farmers pushed back by buying less. The price of potash is cheaper now, but not by all that much. In any event, the Chinese farmers can afford it, as the economic return from using potash is compelling. This two-year decline in potash consumption is unprecedented. And its effects on crop yields and production will not be good. Most of the potash suppliers that deal in the Chinese markets believe that Chinese demand will pick up later this year as the Chinese burn through their existing inventories of potash and look forward to the 2010 planting season. The Chinese will be hard- pressed to match the record production of 2008 without potash. The quirky thing about potash is that it tends to stay in the soil and you can skip a year, maybe even two, but no more than that.

As for soybeans, China was once the world’s largest exporter. In 1995, it flipped to a net importer and has been the largest importer of soybeans in the world since 2000. Much of its supply is in the hands of companies such as Archer Daniels Midland, Bunge and Cargill.

In general, this phenomenon illustrates China’s growing demand for food, and its growing dependence on foreign suppliers. This is why we see China in recent months making deals for food. It made a $500 million deal for poultry and pigs from the U.S. China attempted, but failed, to buy farmland in Mozambique and the Philippines. You may have also seen reports on Chinese deals in Africa. In Zambia, Chinese farmers already produce about a quarter of the eggs sold in Lusaka, the capital, for export to China. As China maneuvers to secure its future food supply, one can easily see that the economic axis of the world is shifting from West to East. Understanding the dynamics of this shift will create some wonderful investment opportunities in the years ahead.

In addition, China is also developing a taste for the good life. Protein consumption always increases as a population’s wealth increases. That’s because wealthy populations tend to eat more meat than poor ones, while also eating more fresh fruits and veggies. The diet becomes more diverse, less centered on consuming base grains. The demand for grains doesn’t diminish, though, because the need to produce meat increases the demand for grains exponentially. Generally, five to ten pounds of grain goes into every pound of beef that lands on a dinner plate.

China’s population is also increasing, which is further boosting demand for grains. However, it holds only 10% of the world’s arable land, but 20% of the population. And its arable land resource is in decline. There were about 121 million hectares in service at the end of 2008. That’s down from 133 million hectares as recently as 1988. Increasingly, because of water shortages, desertification, development, urban migration, pollution and a host of other reasons, China is growing less of its own food and relying more on foreign suppliers.

As a side note: Potash cannot be used directly to grow fruits and veggies. These crops such as, tomatoes, avocados, melons, and etc., are sensitive to chloride and salt and thus, potash should be modified and remove the chlorine. These potash-based fertilizers, potassium sulphate (SOP) and potassium nitrate (NOP), are ideal for fruits and veggies. As it turns out, you also need SOP and NOP to grow tobacco. Tobacco is fussy about what fertilizer it will take without messing up its taste or combustibility. It also needs a lot of potash. Yet again, chlorine is a detriment. Chlorine makes the leaves taste sour and can destroy the commercial value of a crop. As with fruits and veggies, you need SOP and NOP.

Selling SOP and NOP to China’s tobacco farmers is also a good business. For one thing, China has the largest population of smokers on the planet, some 350 million. Since potash represents less than 1% of the cost of making cigarettes, the tobacco growers are less price sensitive. What they really want is a quality product consistently delivered.

B) The 2009 World Wealth Report, by Merrill Lynch and Capgemini.

The number of global millionaires fell at a record rate in 2008, led by North Americans. The credit crisis wiped out 15% of the world’s millionaire population, now at just 8.6 million “high net worth individuals (HNWI),” as Merrill Lynch puts it. The total worth of the world’s wealthy fell about $7 trillion last year, to $32.8 trillion. North America was the greatest victim of 2008, shedding 600,000 millionaires and roughly $2.8 trillion in HNWI wealth. North Americans are still at the top, but the reports illustrates that will change. They use some rosy projections for global economic and market recovery for the next few years. Expecting the coffers of HNWI to grow at an annualized rate of 8.1% over the next four years and simple ratios alone make an Asian takeover seem inevitable: One out of every 195 North Americans are millionaires. Only one in about 1,700 Asians can say the same.

C) Iran, the Rising Market and Asia

The population of Iran is 66 million. That makes it the 19th most populous country on the planet, even more populous than France, the U.K., Italy and South Korea. Iran is in the top 10 in terms of contributing to population growth. Economically, Iran is an important link in the New Silk Road, that growing trade relationship between Asia and the Middle East. Iran is a big market for Asian exports. Iran has plenty of oil and gas, which it exports to pay for Asian imports of cars, clothes and other goods. Increasingly, Iran is turning to Asia for these goods, rather than Europe.

Iran is the third largest supplier of crude oil to China. It makes up 12% of China’s total annual oil consumption. No surprise that China will help Iran finance its $3.2 billion expansion of its mammoth South Pars natural gas field.

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[1] Data from St. Louis Fed.

REITs Facing Challenge

REITs Facing Challenge 1

REITs, as the name suggests, invest in real estate of various types. But what the name does not suggest is that REITs usually utilize leverage in their pursuit of investment returns. Leverage, as many investors learned during the last 12 months, is fun on the way up, but potentially fatal on the way down (unless you happen to be one of America’s 19 largest financial institutions). At the moment, the REIT industry finds itself squarely in the middle of the “way down” phase – both because asset values are plummeting and because interest rates are climbing. Just yesterday, the yield on 10-year Treasury notes kissed 4%, which means that the 10-year yield has nearly doubled since the start of this year!

When long-term interest rates rise this dramatically and rapidly, many different industries suffer. But few industries suffer as much as the commercial real estate industry. Even in the best of times, rising interest rates increases the cost of capital, while also undermining the value of commercial real estate assets. In the worst of times – or even in less-good times – rising rates can produce catastrophic consequences.

Today’s commercial real estate market was distressed, even before rates starting rising. The problem, in a nutshell, was excess capacity. During the last several years, America constructed shopping malls and office buildings to satisfy the excess, phony demand that easy credit produced. But now that home equity loans and other readily available forms of credit have disappeared, so has the phony demand. The unfortunate result: a glut of shopping malls, office buildings and hotel/motel properties.

“Vacancies are definitely rising across the commercial real estate market,” observed hedge fund manager, Jason Stock, at last month’s Value Investing Congress in Pasadena, California. “You’ve got office vacancies well over 15%. We think those are going to approach 25% before this is over.”

Stock and his partner, Will Waller, oversee the M3 Fund, a hedge fund that invests solely in the banking sector. Stock and Waller claim they are finding a number of attractive stocks to buy. Nevertheless, they remain very anxious about the health of the overall banking sector. In particular, they fear that commercial loan defaults will skyrocket from current levels, causing a large number of banks to fail during the next two years.

“So far this year there’s been just over 30 bank failures,” Stock reported in early May. “We expect they’ll be roughly 150 bank failures by the end of the year. And we would actually expect that number should be significantly higher.

REITs Facing Challenge 2

I’m confident that the trend for REITs will be down through the end of 2009. That’s why I suggest buying the UltaShort Real Estate ProShares ETF (NYSE: SRS. Current price $18.52) as a way to profit from weakness in the REIT sector. But fasten your seatbelt! SRS will be volatile!

REITs may appear cheap, but they are very dangerous to hold right now. A basic tenet of corporate finance is that a company or a sector is only creating value for shareholders if its return on invested capital (ROIC) exceeds its weighted average cost of capital (WACC). If its WACC exceeds its ROIC, it is destroying value. This describes the situation facing the REIT sector for the next few years.

Most REITs cannot float unsecured debt at anything less than 10% or 12%, so their cost of capital is high and rising. At the same time, due to the glut of supply in commercial real estate supply, and waning demand from stressed tenants, the returns on incremental investment in new capacity are very low — possibly negative.

Summing it all up: REITs will be destroying shareholder value until supply and demand for commercial real estate reaches equilibrium. The free market is screaming as loudly as it can that millions of square feet of capacity need to be absorbed or eliminated over the next several years in order for the surviving REITs to have a chance at generating respectable returns on capital.

This process has barely even begun, after the biggest lending binge in the history of commercial real estate. It will last a long time. The lending binge ensured that a large swathe of REITs will not make it to see the next commercial real estate up-cycle, which is still several years away at minimum. The title to many properties will go back to creditors in bankruptcy, and auctions will bring down asset values across the sector until they are cheap enough to earn respectable returns in a weak rental environment.

Another example of stress surfaced earlier this week. The auction to settle credit default swaps related to the General Growth Properties bankruptcy indicates serious pain to come for mall REIT owners: GGP’s senior loans effectively liquidated for 44 cents on the dollar! This means that lenders are demanding extreme discounts and high yields to hold debts secured by mall collateral. This isn’t good news for peers like Kimco (NYSE: KIM) and Simon Property Group (NYSE: SPG).

Another argument I’ve seen lately is that REITs will be a good inflation hedge if you buy them at these prices. This is an overly simplistic view of Fed-created inflation and its ultimate symptoms.

Fed Chairman Bernanke can debase the dollar all he wants, but most of the new dollars will act to push up the prices of goods and services in sectors with relatively tight capacity. Mostly, this translates into lower living standards for the average American — an echo of the 1970s, only without the real estate appreciation.

The Fed’s inflation will find its way into tangible assets like gold and silver, oil and gas, uranium ore, farmland, potash mines, and any other commodity China needs to import. Conversely, the fed’s inflation will NOT find its way into the pricing of American shopping malls, which arre in a condition of extreme oversupply.

Over time, the capacity to supply light, sweet oil to the global economy will be far tighter than the capacity to supply American retailers with real estate in malls. Demand for oil will be far more resilient than the U.S.-centric consensus expects, while demand for discretionary items — like “Color Fiend Neon Green Hair Spray” at Hot Topic (this product actually exists) — will fluctuate up and down, but generally head lower. Rising prices for several necessary goods and services will crowd out discretionary spending in many family budgets.

Inflation does not re-inflate old bubbles — especially in the case of residential and commercial real estate. It will only slow the previously violent deleveraging process.

On a related note, it was a breath of fresh air to hear Howard Davidowitz of Davidowitz & Associates interviewed on Bloomberg Radio recently. (You can find a link to download an mp3 of the 17-minute interview here). Davidowitz has decades of in-the-trenches experience in retail consulting and analysis. Rarely do you find an industry analyst express an informed opinion so forcefully in the mainstream financial media. I highly recommend listening to the interview for an overview of how the retail and commercial real estate business will evolve in the coming quarters.

US Real Estate Trends 1

Home Sales Pace

Existing U.S. home sales rose in April, according to data from the National Association of Realtors. Sales were up 2.9 percent to a seasonally adjusted annual rate of 4.68 million units during the month, up from the upwardly revised 4.55 million units in March. Total sales were still down from a year earlier however, when the annual pace reached 4.85 million units. The national median home price in April fell, though, to $170,200 from $175, 200 in March. The current price is down 15.4 percent from the same time last year.

(The NAR defines existing homes as all previously-owned single-family homes, townhouses, condominiums, and co-ops. The group seasonally adjusts the sales numbers to factor in things like inclement weather, school sessions, winter holidays, etc to smooth out the trends. The NAR also describes its sales data based on an annual pace. The monthly figure represents the total number of housing units that sold in one year if the current rate were to continue unchanged.)

Sales Pace by Region

Sales rose in all areas but the Midwest in April. The Northeast led the rise with an 11.6 percent increase in the annual pace of its sales. The rate quickened to 770,000 units. Sales are still down 10.5 percent from April 2008.

The West saw a 3.5 percent increase in sales in the latest month, with the rate climbing to 1.17 million. Sales are also up a whopping 19.4 percent from last year. Sales in the South inched up by 1.8 percent to an annual rate of 1.74 million, but in a year-over-year comparison, they were down 8.9 percent. The Midwest experienced a 2.0 percent drop in sales as the pace slipped to 1.00 million units, accounting for a 9.9 percent decrease from the previous year.

Home Prices

The median home price, the point at which half of all homes sold for more and half sold for less, fell in April led by losses in the West and the Midwest, and tempered by gains in the Northeast and South. The median price for the West fell dramatically in April to $222,600, down from $252,400 in March, continuing to reflect the high volume of foreclosed properties on the market. The new figure is also down 21.8 percent from the previous year.

In the Midwest, the median sales price fell to $138,800 from $141,300 in March. The price is down 11.7 percent in year-over-year comparisons. The median price in the South grew to $148,000 in April up from $146,900, but it has fallen 12.8 percent in the past year. In the Northeast, the sales price rose to $237,400, an increase from $231,700 in March. The price is down 9.6 percent from April 2008 though.

Inventory

As sales grew in April, so did the number of homes for sale. Market inventory rose to 3.97 million units, an 8.8 percent increase from 3.737 million in March. At the current sales pace, the current total inventory represents a 10.2-month supply of homes. In March, there was only a 9.6-month supply.

US & Worldwide Trends 2

Americans are spending less this year than they did in 2008. Believe it or not, that’s a first since World War II. What’s more, the US is saving at a historic clip, the personal savings rate (updated Friday) jumped from near 0% last year to 5.7%, a 14-year high and the fastest growth rate since at least 1950, when the government started keeping track.

The U.S. Treasury will attempt to sell $35 billion in 3-year notes today, $19 billion in 10-years on Wednesday and $11 billion in 30-year bonds on Thursday. The later two auctions are the first long-term efforts since the bond crisis began in earnest, thus success is critical to Uncle Sam’s agenda. Yields are already perking up, a sign things might not go so smoothly. A 10-year currently yields 3.83%, barely off Friday’s seven-month high of 3.88%.

“It is obvious,” writes Bill Gross, “that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board — which they are not. Someone else has got to write checks for up to $1.5 trillion additional Treasury notes and bonds. The concern is that this can be accomplished in only two ways — both of which have serious consequences for U.S. and global financial markets. The first and most recent development is the steepening of the U.S. Treasury yield curve and the rise of intermediate and long-term bond yields. While the Treasury can easily afford the higher interest expense in the short term, the pressure it puts on mortgage and corporate rates represents a serious threat to the fragile ‘green shoots’ recovery now under way.

Secondly, the buyer of last resort in recent months has become the Federal Reserve, with its publicly announced and near-daily purchases of Treasuries and agencies at a $400 billion annual rate. That in combination with a buy ticket for over $1 trillion of agency mortgages has been the primary reason why capital markets — both corporate bonds and stocks — are behaving so well. But the Fed must tread carefully here. These purchases result in an expansion of the Fed’s balance sheet, which ultimately could have inflationary implications. In turn, nervous holders of dollar obligations are beginning to look for diversification in other currencies, selling Treasury bonds in the process.”

“Bond investors should, therefore, confine maturities to the front end of yield curves, where continuing low yields and downside price protection is more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same. All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago.”

However; The dollar is now firmly on the rise. The dollar index had already managed to stop the bleeding by the end of last week, and Friday’s not-as-terrible jobs report ignited a rally. Thus, the dollar index is up a point and a half from Friday’s low, to 81 on the dot.

That puts the pound down to $1.58, 4 cents worse than Friday’s price. The euro is in even worse shape, as Ireland lost another notch on its credit rating this morning. Now a nasty AA, the Emerald Isle helped pull the euro down to $1.38, 4 cents from Friday.

The greenback’s rise is putting a damper on dollar-denominated commodities. Oil’s down $2 from its brief 2009 high of $70 a barrel. Gold is hurting, down $20 Friday and another $15 this Monday morning, to $945.

Stocks are in trouble today, too. Energy and commodity stocks have been market leaders over the last week or so. Thus, the fall in commodity prices is now driving stocks down. The Dow opened down over 100 points. It’s becoming increasingly clear that in order to sustain the recent rally, the market will have to be more convinced that employment will start rising, rather than just shrinking at a slower rate.”

If you have just a few seconds today, check out natural gas, gold stocks and coal.

“Natural gas is more than a place to hide,” begins our value investing maestro, Chris Mayer. “It is, simply put, super cheap. As most other commodities — including oil — have rallied, natural gas remains stuck in a bog. In fact, the ratio of the price of crude oil to the price of natural gas topped 18-to-1 recently, which we have not seen since 1990, according to Barron’s. The price of natural gas fell because there was too much of it. We are in a recession, after all. Industrial demand for natural gas has fallen through the floor and into the basement. But mindless zombies or congressional leaders (I repeat myself…) do not run this industry.”

“Producers are cutting back. And the decline rates on those gushing shale gas plays are 60-75%, which means that if these producers don’t drill, the flow of gas from their wells will fall by that much in the first year. And they aren’t drilling not as much. The rig count has collapsed. It has fallen much faster than in the 1981/82 collapse, the worst since the Great Depression and one that still makes old natural gas men cringe to this day.”

Another point: The marginal cost to produce natural gas for the vast majority of the industry is probably somewhere around $6-8. This next chart gives you a good snapshot of what the U.S. gas situation looks like. “Right now, the spot price of natural gas is under $4 and sits right on the industry’s cash costs and well below marginal costs. In short, natural gas supply is going to start to dry up here really soon. Grab your natural gas ideas before the rush.”

Natural gas, The Reuters-Jefferies CRB Index, fell 2% yesterday, its worst day since June 3. Today, the index’s components are staging a small recovery. Oil, for example, is back up a buck and change, to $72 a barrel, just off its 2009 high, where gasoline prices are up for the 50th day in a row. The national average is $2.67 for a gallon of the cheap stuff today, a seven-month high. That’s up about 60% from the start of the year — according to AAA, the fastest rise ever. As if California needed anything more to worry about, the average gas price there hit $3 a gallon today. Gold’s up today too, from a low of $925 an ounce yesterday to $940.

The world’s fastest growing, BRIC nations (Brazil, Russia, India and China) are meeting in Moscow, their first exclusive gathering ever. Russian Prez Dmitry Medvedev said this morning, “No currency system can be successful if we have financial instruments denominated in just one currency. We must strengthen the international financial system not only by making the dollar strong, but also by creating other reserve currencies.”

The four BRIC nations hold 40% of the world’s currency reserves… mainstream America can’t dismiss calls like these for long. The dollar has given back nearly all of yesterday’s rally. After soaring a full point yesterday, the dollar index is down by nearly the same today, to 80.5. Commodity weakness/dollar strength caused a 2.4% drop for the S&P 500 yesterday, led down by recently popular energy and materials stocks. Since commodities are back in the black, and dollar selling has resumed. The latest leg of the bear market is limping along today. Stocks opened flat at the opening bell.

Now is the perfect time to invest in a small-cap coal company. Despite coal’s impact on the environment, new proposals to curb coal’s carbon footprint appear extremely lenient. So while new mileage laws are set to clamp down on American autos, coal will essentially get a free pass, all thanks to a proposed ‘cap and trade’ system. Proposed legislation addressing carbon emissions isn’t exactly a carbon tax. Instead, the president and his allies in Congress have come up with a cap-and-trade system. Essentially, carbon emitters would have to buy permits that correspond to the amount of carbon dioxide they pump into the atmosphere. By the time the cap-and-trade proposal was watered down to potentially win enough votes, supporters were left with a bill that offered almost all of the carbon permits for free, with only 15% being auctioned. And the auctioning won’t even kick in for more than two decades. While stricter mileage requirements will keep automakers in line, coal (and other traditional, dirtier energy sources) will essentially be allowed to thrive unchecked for years to come.

US & Worldwide Trends 1

THE US Workplace

The U.S. economy shed “only” 345,000 jobs in May, the Labor Department said last Friday morning. The Street forecasted that today’s employment gauge would beat expectations, but this number smashed the Street’s guess of 520,000. Last month’s loss is the smallest since last September.

May’s number establishes a trend for 2009, too. While the US economy has shed 2.9 million jobs in 2009, the pace of job loss is clearly slowing. U.S. index futures jumped on the news and the Dow and S&P 500 opened up 1%.

But the details of today’s jobs report aren’t quite as rosy as the headline number. The unemployment rate rose to 9.4%, notably higher than the expected 9.2%. In other words, the unemployed are not being rehired. While the rate of firings cooled off, the number of unemployed is just getting longer and longer. 9.4% is the highest rate since 1983.

More disturbing details are that over 6 million people have lost their job since the recession officially began in December 2007 and the “long-term unemployed,” those out of work for six months or more, are now exceed a record 4 million. Many of these “long-term unemployed” people are not counted toward the official unemployment rate. In addition, 9.1 million people are working part time because they can’t find a full-time, who are also not counted as officially unemployed.

We don’t mean to rain on this parade. 345,000 lost jobs is certainly better than the half a million firings that have sadly become a monthly routine. But it sure is not a good number. To maintain some sense of perspective, this time last year, the US reported a “horrid” job loss of 49,000 for the month of May, a number nasty enough to push the Dow down over 3%.

Dollar & Commodities

The dollar got a healthy bump last Friday after the jobs report. The dollar index hopped almost a full point within minutes of the announcement, to a two-week high of 80.3. In real-world terms, that’s a 2 cent slash on the euro, now at $1.40. The jobs report took another 2 cents from the pound, which has been suffering all week from political and fiscal instability. It’s down to $1.59. At 97, the yen is a bit weaker too.

Crude oil is up. Less lost jobs likely means more burnt oil. Thus, the front-month contract rose as high as $70 a barrel this morning. As the dollar and U.S. outlook perks up, gold is on its way down. The spot price fell $20 this morning, to $960 an ounce.

Gold investors take note that Northwestern Mutual, the third largest life insurer in the U.S., is using gold to secure its long-term fiscal position. According to Bloomberg, the company has already bought about $400 million worth of the shiny stuff.

“Gold just seems to make sense; it’s a store of value,” said CEO Ed Zore. “The downside risk is limited, but the upside is large. We have stocks in our portfolio that lost 95%. But gold “is not going down to $90.”

In addition, Jeff Clark from Whiskey & Gunpowder claims that silver or silver stocks can’t go temporarily lower from here, but rather that the demand for silver as a store of value metal will be growing. Whether we’re served debilitating deflation or insidious inflation, holding gold (and silver), along with an appropriate allocation of precious metals stocks, offers us both a fort for protection and a canon for profit. Buying physical gold and silver as safe-harbor assets is for many investors a no-brainer at this point.

CHINA vs. Rio Tinto

Elsewhere in the world of commodities, we note that China’s biggest investment ever in a Western company collapsed this morning. Rio Tinto, the British/Aussie mining giant, bailed on its deal with Chinalco, China’s state-owned aluminum biz. Instead of solving its fiscal woes by getting into bed with China, Rio Tinto said it would rather turn to BHP Billiton, its biggest rival. Rio will raise about $20 billion through new stock issuance and a joint venture with BHP. China will have to settle for its 9% stake in Rio.

Budget Crisis

Back in the U.S., at least 31 states have overestimated 2009 personal income tax revenue, said a report from the National Conference of State Legislatures yesterday. 25 states have botched projections for all three tax revenue sources: corporate, sales and personal income. So when the collective $102 billion state budget gap comes due next month (the end of the fiscal year for most states), there’s strong evidence suggesting that most states will come up even shorter than they expected.

“The U.S. Highway Trust Fund,” reports Frank Holmes, “will need an additional $7 billion by August to finance projects already promised to states and keep the fund from going bankrupt.

“The HTF is the primary source of funding for road and bridge projects across the United States. It is funded through gasoline taxes and special taxes, mostly on heavy-use vehicles like trucks. This means that HTF relies on highway use for its funding. Traffic volume, however, has been generally trending downward since before the credit crisis began, according to federal statistics.

“This isn’t the first time the HTF has been on the edge of solvency. Just last September, Congress approved a special $8 billion rescue to keep it from going broke. And more bailouts are possible. The federal gas tax has been 18.4 cents per gallon since 1993, but chances are slim that it would be raised anytime soon, given the struggling economy.