Market Review: Road Trips and Market Signs

Your editors recently took a road trip from Baltimore to Los Angeles. During the four-day journey, many things struck us: how flat and windy Oklahoma is…how you can find just about anything you would ever need at a truck stop – who needs Target when you can stop at a "Flying J’s"?…and that you can learn a lot about our country by just reading the signs.

When you are trapped in a Volkswagen Jetta for 12 hours at a time, driving through the mountains, without having seen another car on the road for at least two hours, you tend to pay a lot of attention to the scenery. And much of that scenery is made up of billboards advertising everything from authentic Native American artifacts, to the country’s largest "adult superstore."

There were two giant advertisements – in Missouri, we believe – that really stood out in our minds. The first billboard had a picture of a gentleman who had a huge, silly grin plastered on his face, and a credit card proudly gripped in his hand. The caption read (we swear), "It’s like FREE money!" And then, less than a mile down the road was a billboard featuring a family standing in front of a house with a foreclosure sign on it. The ad advised those in that situation to dial 1-800-BANKRUPT.

Yes, the signs were overdramatic and a bit silly, but we felt that they were quite telling about the general sentiment in the U.S. economy these days. So many Americans have gotten in over their heads, using easy credit to bury themselves in debt, and then taking more money out of their home/ATM. Now with interest rates on the rise and the housing market cooling, the current economic downswing is going to be a slap in the face for a large portion of our country.

Although home prices are setting a fifth-straight record in 2005, analysts warn that the booming housing sector will face a slowdown in the upcoming months – buckling under the weight of rising rates.

Chief economist at Freddie Mac, Frank Nothaft admits, "Low rates helped the housing market set records for home sales and new construction for the past three years. Looking ahead, as mortgage rates rise, housing activity will ease somewhat."

The quarterly UCLA Anderson Forecast was released this week, and predicted that the cool down in the housing sector will likely be spread out over the next few years, with as many as 500,000 construction jobs and 300,000 financial sector jobs lost.

Still need more proof that the housing decline is underway? Applications for home mortgages have been trending down since September, new home sales have declined – and foreclosures are up.

Throughout the nation, home foreclosures are up; in Massachusetts foreclosures have risen 35%, and in Colorado, 2005 was a record-breaking year for people having to give up their homes. So, as it turns out, the billboard of the family who had been kicked out of their home isn’t that farfetched.

The housing decline is already in motion, dragging the national economy down with it. All we can say, dear reader, is keep your eyes and ears open. Pay attention to the road signs.

Kate Incontrera
The Daily Reckoning

December 11, 2005

P.S. Strategic Investment’s Dan Denning points out, "The subprime borrowers who thought that interest rates would never go up are suddenly seeing their adjustable house payment go up – at the very same time their house goes down in value. The payments are going to become harder and harder to make, until they finally load up the furniture, hand the keys to the lender and drive away.

"These giant lenders are in no position to weather even a small downturn. But the downturn has already started, and it’s NOT going to be small."

Dan outlines what steps to take to protect yourself from this financial catastrophe in his new special report – and for a limited time, you can get not only Strategic Investment, but a lifetime of our trading services, newsletters, and other independent research for a 96% discount.

— Daily Reckoning Book Of The Week —

Empire of Debt: The Rise of an Epic Financial Crisis – Now a NY Times Bestseller!
by Bill Bonner and Addison Wiggin

"Watching the news is a bit like watching a bad opera," say bestselling authors Bill Bonner and Addison Wiggin. "You can tell from all the shrieking that something very important is supposed to be happening, but you don’t quite know what it is. What you’re missing is the plot."

After a generation of being spoon-fed reality by media, it’s understandable that Americans are confused about the state of their nation. In their newly released book, Empire of Debt, Bonner and Wiggin wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions.

Americans are rapidly facing a choice: recognize these dangerous delusions and take steps to avoid their collapse. Or remain ignorant of them and risk losing all of their wealth when the house of cards comes crashing down.

THIS WEEK in THE DAILY RECKONING: The gold standard was recently accused of bringing about the collapse of the economy during the Great Depression…but, in "The Gold Standard Gets No Respect" Chris Mayer sets the record straight. You can find that essay, along with any you may have missed this week, below…

Something Wicked This Way Comes   12/09/05
by Bill Bonner

"The force of a correction is equal and opposite to the deception and delusion that preceded it. Alan Greenspan, George W. Bush, and all the great nabobs of positivism assure us that there is nothing to fear."

The Gold Standard Gets No Respect    12/08/05
by Chris Mayer

"The gold standard is nothing more than a straitjacket. To those who see gold’s charms, that is precisely its chief merit. You see, the gold standard checks the creation of new money."

Capitalism and Cow Worship    12/07/05
by Sala Kannan

"Consumerism is big business in India. There will be 628 million middle-class Indians by 2015. And already, their net income has doubled over the last 10 years. Obviously, every multinational company now wants to sell in India."

Same As It Ever Was     12/06/05
by John Mauldin

"Bonner sees the United States as an empire. That in and of itself is not exactly a new thought. Many hold that line of thinking, and do so proudly."

If Only King Midas Would Return   12/05/05
by The Mogambo Guru

"’Global gold production is set to decline dramatically over the next four years and this is set to generate a scramble for gold ounces.’"

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FLOTSAM AND JETSAM: Will natural gas play the role of the Grinch that stole Christmas? What effect will the Refco implosion have on the commodities markets? Justice Litle has all the answers to these questions, below…

Global Briefing: News That Shapes the Natural Resource World
by Justice Litle

Asia continues to boom with stronger growth than expected

The great challenge for Asia is managing the painful switch from an export focus to more of an internal demand focus as the U.S. consumer slows. Evidence suggests that countries like China, South Korea and Japan are making the transition more quickly than expected. Chinese factories geared to export markets are finding it easier to replace their overseas customers with local ones, South Korea’s economy has been growing at the fastest rate in two years, a Japanese revival continues to lift the spirits of the Nikkei and emerging markets in general are witnessing a boom in advertising spending.

Iran shocks West with open talk of Israel destruction

Iran’s fiery President Mahmoud Ahmadinejad contributed to the increasing complexity of geopolitical calculus on Oct. 26 by declaring that Israel should be "wiped off the map." Such comments come at a time when the West is increasingly nervous over Iran’s budding nuclear program and potential partners such as India walk a fine line between cultivating Iranian oil and gas relationships and keeping peace with U.S. hawks. Iran’s rhetoric also increases the odds of a military counterstrike from Israel, similar to Israel’s pre-emptive bombing of Saddam Hussein’s Osirak nuclear facility in 1981.

China and Japan in exploration tiff

China has escalated tensions with Japan by pushing the envelope in a territorial conflict over natural gas reserves. Many energy reserves in the area, previously left undeveloped because the territorial disputes were not worth the trouble, are now deemed too valuable to ignore. China has accessed a disputed area, the Tianwaitian natural gas field, but done so in a way that keeps the bulk of visible operations in official Chinese waters adjacent to the field. This clever stance makes the Japanese uncomfortable; they know the rules are being bent, if not broken, yet Japanese Prime Minister Junichiro Koizumi has no easy way to respond without escalating a potential conflict.

Will natural gas play the Grinch?

Natural gas prices have fallen significantly in recent weeks, thanks to favorably mild weather and a steady progress in getting gulf production back online. But the breather may not last: Natural gas supply levels are notoriously volatile, and a harsh cold snap could quickly send the market back to new highs. Fund managers are casting a worried eye on the retail sector, trying to game the potential damage if homeowners are faced with an extra $100 tacked on the monthly heating bills this winter. The jury might be out until mid-December or so; meanwhile, retailers should be hoping to skip the white Christmas this year.

Did Refco fallout hit the commodity markets?

The big futures news this past month was the implosion of Refco, one of the biggest players in the commodity futures business, due to the accounting improprieties of CEO Phillip Bennett. One of the highest-profile casualties was investor Jim Rogers of Hot Commodities and Investment Biker fame. Rogers is currently attempting to recover $362 million in assets for his two commodity funds, the Rogers Raw Materials Fund and the Rogers International Raw Materials Fund. This raises an interesting question: How hard were the physical commodity markets hit? A number of players may have dumped their positions in an effort to steer clear of the Refco disaster.

Record profits encourage populist talk of windfall profits tax

With oil majors reporting eye-popping profits in the latest round of earnings, Republicans and Democrats alike have been stumbling over themselves to tap into a mood of public ire regarding high energy prices. (As many as two out of three Americans believe that high energy prices are due to the "greed" of big oil companies.) Political talk of a "windfall profits tax" demonstrates a lack of understanding at the most basic level of supply and demand. Politicians who flirt with the idea of such a tax do so knowing the outcome would lead to less energy flexibility, not more, as any financial penalties would reduce the incentive for oil companies to pursue new reserves.

Justice Litle is an editor of Outstanding Investments. He has worked with soybean farmers, cattle ranchers, energy consultants, currency hedgers, scrap metal dealers and everything in between, including multiple hedge funds. Mr. Litle also acted as head trader for a private equity partnership, and made contributions to Trend Following: How Great Traders Make Millions in Up or Down Markets, a popular trading book by Mike Covel (FT/Prentice Hall)

Justice Litle is also a member of an elite group that meets occasionally to debate and discuss the new trends in the financial world and investment ideas – among other things. This monthly gathering includes the cream of the crop of financial minds – and for a limited time, you can attend the Agora Financial Reserve meetings.