August 2011 Archives - 10/10 - Money Morning - Only the News You Can Profit From
Don't Expect to See a Housing Market Rebound Anytime Soon
Dragged down by such anchors as a bulging pipeline of foreclosures and a dearth of buyers, it will be many more months – if not years – before a housing market rebound takes hold.
Symptoms of the limping U.S. economy, primarily an unemployment rate above 9% and weak consumer confidence, along with much stricter lending rules, have helped keep buyers scarce.
Meanwhile, the massive number of foreclosed properties on the market – more than a quarter of U.S. residential sales – keeps pushing prices down. That, in turn, has driven more homeowners into negative equity, further scaring prospective buyers and making new homes much more expensive by comparison.
Report after report tells the story of a market mired in a five-year slump that just can't seem to find any traction.
"Year-over-year, prices continue to deteriorate, although there has been a seasonal uptick over recent months," Stuart Gabriel, director ofUCLA's Ziman Center for Real Estate, told the Los Angeles Times. "This reflects a market that continues to be in search of a bottom."
The benchmark Standard & Poor's /Case-Shiller Index illustrates the market's persistent malaise. The May measure of home prices in 20 metropolitan areas rose a lackluster 1% from April – and was down 4.5% from a year ago.
Even the meager 1% monthly increase resulted from a seasonal caveat – prices usually rise in the spring. Analysts foresee little improvement in the months ahead.
"Things do not look very favorable on the housing front since the employment situation has taken a turn for the worse in May and June," Chris G. Christopher Jr., an economist with consulting firm IHS Global Insight, wrote in a research note. "The unemployment rate now stands at 9.2%, and consumer confidence is at depressed levels. Going forward, the Case-Shiller indexes are likely to post increases during the home-buying season, and then turn down again."
Similarly, the annual sales rate of new homes fell 1% from May to June, but was up 1.6% year-over-year. And the actual number – 312,000 – disappointed economists who had expected a rate of 320,000.
To really put those numbers in perspective, consider that at the peak of the housing bubble, July of 2005, the annual sales rate was a robust 1.3 million.
- Brent Cook: $1,600 Gold=Big Money for Mid-Caps
For Rational Investors, Market Uncertainty Equals Profits
There's no question that the Washington fiasco, more commonly referred to as the debt-ceiling crisis, has injected a huge amount of uncertainty to financial markets.
That's bad news for the U.S. economy – which Friday's lousy second-quarter gross-domestic-product (GDP) report demonstrates was already suffering from bad fiscal policy, bad monetary policy and a gross excess of new regulations. This deal didn't really solve any long-term problems, won't head off a federal credit-rating downgrade and all in all only adds to the market uncertainty.
But here's the good news. Uncertainty breeds opportunity – especially for savvy, rational investors.
And with the dark clouds of uncertainty that continue to build over the U.S. economy, we can turn this situation to our advantage in a big way.
Let's take a closer look so that I can show you what I mean …
When Investors Are Certain … But Not Rational
There's an irony about investing that's not lost on savvy, rational investors – even at the retail level: If a market lacks uncertainty, it's awful tough for us to analyze and then invest with confidence.
Just consider the capital markets of the late 1990s. Back then, stocks seemed to be on a steady upward march, posting double-digit gains each year.
The fact that the investing masses believed there was a complete lack of market uncertainty made it very difficult for "rational investors" to invest. Those "rational" players understood that the markets were getting frothy, or speculative – in fact, the warning signs were there as early as the middle of 1996 (six months before U.S. Federal Reserve Chairman Alan Greenspan denounced "irrational exuberance").
The whole tech sector really demonstrated the pervasive belief that stock prices could only go up. After its August 1995 initial public stock offering (IPO), Internet-browser pioneer Netscape Communications Corp. saw its shares double on its first day of trading. And I'm sure we all remember how tech companies in general – and particularly companies with "dot-com" in their title – saw their valuations soar well beyond any rational expectations.
For rational investors, that apparent market "certainty" made it almost impossible to invest with any degree of confidence – short or long.
The market was clearly too high, especially in the tech sector, so buying made no sense. It was impossible-to-gauge euphoric speculation that was driving stock prices – not easy-to-quantify fundamentals. If you bought, you were just hoping that the "Greater Fool Theory" would bail you out with a sale to someone else at a higher price.
Selling the market "short" wasn't the answer, either. Expecting an irrational trend to correct itself is a sucker's bet. And a bullish trend like this one that doesn't correct for five years is an expensive misstep – one that will send stock-market bears straight to the poorhouse.
There was very little un-certainty in the market – the United States was the best economy in the best of all possible worlds and the federal budget was swinging into surplus.
In fact, the only uncertainty to be found was situated far away from U.S. shores. I'm talking, of course, about the Asian economies going into crisis in the summer of 1997 and Russia defaulting in August 1998.
Now there was some market uncertainty that would have let you make some real money.
Short-Term Drop in Gold Prices Overrun by Profit Potential
Money Morning Contributing Editor Peter Krauth yesterday (Monday) warned readers that a debt-ceiling deal could spark a short-term drop in gold prices, creating a key chance to stock up on the yellow metal.
As you may have noticed, he was dead on – but what he didn't foresee was that gold prices would bounce back as quickly as they did.
Krauth expected a rebound, no doubt. But when investors delved into the details of the feeble agreement conjured up by President Barack Obama and Congressional leaders, gold resumed its upward trajectory at a rate that eclipsed what even Krauth, a noted gold bull, had anticipated.
Gold futures slipped as much as 1.5% yesterday morning as news broke that a deal to raise the debt ceiling by up to $2.4 trillion was taking shape. But gold for December delivery bounced back enough to close the day down just 0.55% at $1,622.30 an ounce.
Gold prices climbed over the past few weeks as investors turned to the metal as a safer investment than stocks and U.S. Treasuries. Gold is up 14% this year, far outpacing the 2.33% gain in the Standard & Poor's 500 Index. The yellow metal hit an all-time high of $1,637.50 on Friday.
The drop in gold prices was short-lived because investors' concerns about the global economy outweigh the limited progress Congress has made reining in U.S. debt. While the weekend's debt compromise may prevent a U.S. debt default, it likely won't be enough to preserve the United States' top-tier AAA credit rating.
"Washington raising the debt ceiling is leading to still more borrowing and spending, and an ever-expanding money supply," said Krauth. "Over the long haul – as we've told you again and again here in Money Morning – this ever-growing debt load will be highly bullish for gold prices."
The growing federal debt will also continue to erode the U.S. dollar's value, pushing investors away from paper currency and into hard assets.
"On Aug. 1, the U.S. dollar officially lost its place as the world's safe currency as a store of value," Tom Winnifrith, a fund manager at t1ps Investment Management, told The Wall Street Journal. "In the absence of an alternative, the only currency whose value is not being systematically destroyed by politicians remains gold, and if you think recent increases in the gold price were startling, you ain't seen nothing yet."
Coin Seigniorage: One Solution to Debt Ceiling
Global Economic Intersection article of the week
The debt limit crisis is upon us. Treasury Secretary Geithner says the U.S. Government will not be able to meet all its obligations on August 3, unless the debt ceiling is increased by Congress. The Secretary says he is out of moves to extend this date. I don't think that's true. I think he can use proof platinum coin seigniorage to supply all the money needed to spend Congressional Appropriations. I do not know if the Administration knows about this idea yet. It may, and it may simply have been unwilling to mention it for its own reasons. But just in case it doesn't know, and also for the sake of the rest of us, I'm making another attempt to state the case for using coin seigniorage, so that as many people as possible know that the President has an alternative to the "shock doctrine", make a deal approach to cutting essential spending and services including the social safety net, in return for getting $2.6 Trillion more in debt issuance authority.
The Secret Way to Profit from the U.S. Debt to China
Perhaps the biggest reason our country is facing a contentious debt-ceiling debate is because of the massive U.S. debt to China.
It's easy to forget that China is the world's largest buyer of U.S. Treasuries and it has as much to lose in this high-stakes game of chicken as does the United States.
Indeed, China's rapid growth over the past decade has resulted in a new paradigm.
Go back 10 years, and nobody worried about the U.S. debt to China. No one ever talked about the Chinese yuan replacing the dollar as the world's reserve currency. Or wondered whether the U.S. would ever owe China more than it could possibly pay.
And why would we ever worry about China?
At the time, the U.S. was the biggest economy in the world, with the most powerful markets and currency. When we walked into a G-7 meeting, we were used to getting exactly what we wanted. We said "jump" and the rest of the world said "how high?"
Back then, China wasn't even invited to those meetings.
But as you know, things have changed – even if the average American politician and citizen doesn't want to admit it.
We can no longer burst into a G-20 meeting and simply demand what we want. We must contend with the demands of China – the freshly minted economic superpower that happens to be our largest creditor.
Who's the Boss?
China has grown to be the second largest economy in the world now. And how did they grow rich?
Simple: They've saved while we spent. They invested while we went into debt. They went without while we lived beyond our means. We expanded and issued bonds to pay for our debt. China bought up those bonds and earned huge sums of interest off of us.
Sturm, Ruger & Co. Inc. (NYSE: RGR) Hitting the Bull's-Eye
Sturm, Ruger & Co. Inc. (NYSE: RGR) designs and manufactures firearms in the United States. Ruger, as it's known in the industry, produces retail firearms.
Ruger sales represent an investment in personal security, entertainment, and an investment in the capacity to bring home meat from hunting.
That makes the company a great "tell" on the psychology of Main Street.
Ruger has just released second-quarter earnings, and it is no surprise that the stock is regularly setting 52-week highs. The company is hitting the bull's-eye with its top-line internal growth and bottom-line results.
So it's time to buy Sturm, Ruger & Co. Inc. (**) – as fear and uncertainty continue to roil the economy and stock market.
A quick look at the company reveals that Sturm, Ruger & Co. Inc.:
- Has no debt.
- Is regularly raising its dividend.
- Is actively buying back shares, with more purchases to come.
- Has a large short position to be squeezed.
- And offers a viable takeover target.
How the Debt-Ceiling Debacle Will Spark a Short-Term Drop in Gold Prices
I'm an avowed gold bull, and I truly believe that gold investors will end up benefiting from the biggest bull market of our time.
But we have to be honest: Investor psychology plays a crucial role in shorter-term investment results. And recent trading patterns clearly demonstrate that most of the recent increase in the price of gold is due to the debt-ceiling debate in Washington, as well as the European sovereign-debt crisis that continues to lurk in the background.
The bottom line: The debt-ceiling debacle could cause a short-term drop in gold prices.
Congressional leaders as of early Sunday afternoon had yet to reach a debt-ceiling deal, but said they were close to an agreement that they hoped would prevent default.
As of late Thursday, gold was trading within 1% of the all-time high of $1,628.05 reached on Wednesday, and was poised to record its first monthly increase in three – all because of the debt-ceiling deadlock and the fear that a U.S. government default would level the global financial markets. Spot gold has surged 7.6% in July.
If you think about it, a number of things just don't add up. For instance:
- The 30-year U.S. Treasury bond is yielding just 4.31% – meaning the rate is virtually unchanged since the start of the year. But with Standard & Poor's saying there's a 50% chance it will downgrade the United States' top-tier AAA credit rating – something once considered bulletproof – you'd expect that yield to be surging as "rational" investors dump U.S. debt. Right?
- In fact, a quick glance at yields on the one-month, one-year, two-year, five-year, 10-year, 20-year – and every maturity in between – shows that yields are down from the start of the year, meaning investors are still buying U.S. Treasuries, despite record deficits and the fast-approaching debt-ceiling deadline. If there's a risk of a downgrade and a default, shouldn't those same "rational" investors be avoiding all new purchases, even as they dump current holdings?
So what will we see if tomorrow's (Tuesday's) deadline comes and goes, and no deal is reached down on Capitol Hill?