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By William Patalon III, MBA
Money Morning/The Money Map Report
The worldwide credit crunch isn't over after all.
Just days after U.S. stocks soared to record highs – and Wall Street upgraded the embattled homebuilding sector – worldwide groups are issuing warnings that there's likely more pain to come. Investors even bid up the shares of Citigroup Inc. and UBS AG earlier this week – even though the two banking giants on Monday said they would write be writing down $9.3 billion in bad debts between them.
But we said that all this optimism – bordering on euphoria – was premature. And, unfortunately for key economies worldwide, we were correct. [For our free investment analysis, "Avoid the 'Resurgent' Homebuilding Sector and Go Global For Profits," please click here.]
Now the key is to find a way to profit, while also avoiding the growing risks complacent investors face from an insidiously expanding international credit crisis.
Let me explain.
Housing and Mortgage Crisis Not Over Yet
When the Dow Jones Industrial Average soared to its all-time record close of 14,087.55 on Monday, it was because investors thought the worst of the subprime mortgage mess and housing slump were behind us, and because the lousy earnings reports at Citigroup and UBS [Generally regarded as the most-conservatively run bank in Europe] allowed investors to define the scope of the credit problems financial institutions faced.
Unfortunately, investors were wrong on all counts.
Just since Monday, additional reports have pointed to a continued slide in the U.S. housing market, which will translate into still more defaults, and still more job losses in the "real" economy. That's going to impact the ultimate key to U.S. economic growth – consumer spending. Depending on what other mini 'boomlets' are under way in the economy, at any given time, consumer spending provides 60% to 75% of the fuel for the economy.
Lately, housing has fueled some of that spending. Rising home prices that translated into growing "equity" enabled many consumers to treat their houses like an
ATM machine, extracting cash for big-ticket purposes, further fueling growth. Or, even worse, consumers have regarded their homes as their retirement "savings," meaning they could spend all of their paychecks today, thus also artificially boosting consumer spending.
That's changing here in the U.S. market already. And it's going to get worse.
Over the next few months, more than 2 million homeowners with subprime adjustable rate mortgages, or ARMs, are looking at resets – and at much-higher interest rates – a reality that's likely to deepen and lengthen an already-dismal housing downturn.
More than $50 billion in ARM loans will reset this month alone, a record for a single month, says Economy.com, an econometric firm based in West Chester, Pa.
Even the near-term numbers don't look that good: On Tuesday of this week, the National Association of Realtors reported that that the pending home sales index fell 6.5% in August after dropping a revised 10.7% in July. The index – a forward-looking gauge of home sales – is at its lowest point since it was created in 2001. [For our full report on this story, please click here].
And when it comes to housing and mortgages, the U.S market is not the only problem area. Mark our words – you heard it here, first – all this negative analysis will soon be true in the United Kingdom, too, where a white-hot housing market looks like an "I Love Lucy" rerun of what happened here in the U.S. market.
Just yesterday in the United Kingdom, in fact, a survey by that nation's biggest lender said that prices fell 0.6% in September, dragging down the annual rate of price inflation from 11.4% in August, to 10.7% in September.
And that research by Halifax, the No. 1 U.K. mortgage lender, agrees with other market surveys, including reports from rival lender Nationwide, and one from the Royal Institution of Chartered Surveyors, BBC News reported yesterday.
Earlier in the month, the Bank of England said that the number of new mortgage approvals plunged 9% in August from the same month in 2006.
"Evidence is mounting that the housing market is now cooling markedly in the face of financial market turmoil, and the increasing affordability pressure on house buyers," said Howard Archer of Global Insight. "Mortgage rates are rising further as a consequence of the liquidity crunch pushing up money market rates, while the Northern Rock [British banking] crisis may hit confidence and increase consumers' wariness about buying a house."
In late September, the Organization of Economic Cooperation Development (OECD) – which represents the world's 33 most-advanced industrial nations – warned that the United Kingdom might need to cut interest rates to keep economic growth from declining sharply. The reason: The global credit crunch and that country's domestic housing slump were the two key culprits cited.
Nor is Britain the only other problem area besides the United States.
In Australia, the credit crisis is affecting non-bank lenders so much that financial advisors and debt-recovery specialists are urging home borrowers to consider refinancing their mortgages with major banks. Non-banking financial-service firms have raised their rates to avoid the credit crisis fallout, the Australia Herald Sun reported in its edition today (Friday).
Other Problems Abound
Housing isn't the only problem facing investors. Here in the United States, the dollar has weakened to near-historic lows against other major currencies, and the expectation of additional interest-rate reductions by central bank policymakers will likely lead to an even weaker dollar. That's great for exporters – such as Boeing Co. (BA), the No. 1 U.S. exporter – but is highly inflationary for consumers, and for companies that depend on raw materials, sub-assemblies or ingredients sourced from, and purchased from abroad.
The U.S. jobs report due out today is expected to pave the way for another interest-rate reduction by U.S. Federal Reserve policymakers [For our report on the expectations for today's U.S. payroll report, please click here.]
All these issues rule out most banks and financial institutions in the United States and other key financial markets. Definitely avoid the homebuilding sector, even though Citigroup's equity-research unit upgraded many of the shares earlier this week.
Then there's China, perhaps the world's most alluring profit opportunity for the long haul. But stock prices have been on a near-vertical ascent of late, meaning the chances of a near-term correction are fairly substantial. Look to buy in after a dip makes valuations more reasonable.
Story continues below…
The Plays to Make Now
There are four ways to beat the credit crunch and profit from the still-positive global growth trends that remain in place. Our strategy calls for you to:
- Invest in agricultural commodities.
- Invest in gold.
- Invest in Japanese small-cap stocks, which are domestically focused and which therefore will benefit from that country's highly liquid economy.
- Benefit from Asian growth, and from the promising Korean economy, with a strong telecommunications play from that country.
No matter what the mortgage market looks like, how many cars General Motors Corp. (GM) sells or doesn't sell, or what the price of a gallon of gasoline is at the pump, people will always need to eat. Indeed, as wages rise in such places as China, India, Latin America and emerging Eastern Europe, people will be able to afford more and better food. And that bodes well for agricultural commodities.
And a great way to play commodities is via an exchange traded fund, or ETF. One that we like is the Deutsche Bank's PowerShares Agriculture Fund (DBA) is intended to reflect the performance of four commodities in the agriculture sector – soybeans (31.13%), wheat (28.87%), corn (23.43%) and sugar (16.58%). These include some of the key commodity plays that investment guru Jim Rogers advocates as great long-term investments. And we agree. [To see what famed author and investor Jim Rogers has to say about wheat – and other agricultural commodities – please click here.]
Commodities are also a good play when financial markets are unpredictable and when inflation is expected to remain in the picture. And the best of those commodities are precious metals, such as gold.
If you think the central banks will continue to print money to solve the credit crunch – they already are, and will continue to do so – you really need an inflation hedge, which means the StreetTracks Gold ETF (GLD). Gold is currently trading in the range of $740 an ounce, and some analysts, including our own Director of Global Investing Research, Martin Hutchinson, think that a price of $1,000 an ounce is indeed likely in the next 6 months
Despite our near-term concerns about China, Asia is still a highly promising market. [In fact, if you aren't yet a Money Morning subscriber, sign up now and receive – free of charge – our 6,000-word research report, "The Three Best Investments in Asia Today," by]
Two of our four plays benefit from Asia's rapid growth, but in very different ways.
First, invest in the streetTracks SmallCap Japan ETF (JSC). It focuses on smaller Japanese firms, which are more-domestically focused. That means the companies will benefit from Japan's highly liquid economy, and are also somewhat insulated from the worldwide credit foolishness we're trying to help you avoid.
Second, invest in SK Telecom (SKM), Korea's largest cell-phone company, which has international operations in China, Vietnam and the United States, although the U.S. market is only a small part of its operations. With 18 million subscribers, this $15 billion growth company has a 52% share of the South Korean wireless phone market.
With these four picks, you'll be able to boast how you beat the global credit crunch, and profited some hefty profits in the process. And these days, how many investors can truthfully say that?
Money Morning staffers Martin Hutchinson and Mike Caggeso contributed to this report.
Related News and Story Links:
- Money Morning Investment Analysis:
Avoid the 'Resurgent' Homebuilding Sector and Go Global for Profits.
- Money Morning News Analysis:
Citigroup and UBS Brace For Losses, but Dow Jones Sets Record Above 14,000.
- Australia Herald Sun Newspaper:
Pressure building on non-bank lenders.
- The Economist:
Bad News Bulls.
The Luck of the Buck.
- The Economist:
To Infinity and Beyond: Contrary to Popular Belief, Stocks do not Always Go Up.
- The Economist:
Rush Hour: In China, Share Prices Have Taken on a Life of Their Own.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.