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US MARKETS

            Our choice for the top of the real estate market was June 2005, some 16 months ago. Since then the housing market has stalled out on a price basis and some of the hot areas have begun to fall in price. As inventories have climbed, homebuilders’ expectations have fallen. Sentiment is at the same level as it was in 1991, which was about three-quarters of the way through the last real estate correction. Builder’s incentives, in order to sell their housing inventory, are now ranging from 8% to 15%. As you know during these past 16 months we have recommended short positions in a number of building stocks that are currently down 45% to 50% from where we recommended that they be shorted. These were the same stocks that showed market leadership over the past few years. The social consequences of the collapse of the real estate bubble will affect us all. Some 40% or more of economic growth has occurred in real estate and construction over the past several years. We believe construction could fall 50% during the correction directly destroying 1.8 million jobs and affecting an equal amount or more of supporting employment. It is great going up and painful coming down. The social consequences will be difficult as well especially for the lower rungs of the employment ladder. All those jobs our President tells us Americans don’t want to take. What does an illiterate illegal alien do to find further employment? The social manifestations have yet to be considered by Americans who are still in denial that the real estate bubble is over.

            The first real big markets to crack have been NYC, Boston and San Diego. Officially prices are off 3.5% to 10%, but that doesn’t really tell the story. First there are the incentives, which are running from 3% to 12%, most noticeably in new homes. Then there are the homes that haven’t sold from the record inventory that has already been marked down 10% to 15%, and that no one has cared to look at for six months or more. Some realtors are running open houses on weekday evenings because the weekend traffic is so poor. A standoff exists, some sellers have lowered prices and some haven’t. The latter are living in a real estate world of two years ago that no longer exists. The buyers are in no hurry and many can’t qualify as lending rules begin to tighten. What both sides do not know is a recession has already begun and the economy is stagnating, while inflation roars ahead at over 10%, wages have fallen hopelessly behind, although this year and next year wages will catch up, and as a result inflation will worsen.

            In some cities prices have held well because they are lower than those in other major cities, but signs of slowdown are appearing there as well as prices remain firm to slightly higher as volume of sales falls. The inventory for sale builds as less and less buyers appear. The same formula experienced by already falling markets. It is only a matter of time before all markets are affected. This time around the concept of a market of homes just won’t work. 1989 to 1993 was a difficult real estate correction. In those olden days more than a generation ago, people had to put down 20% on the value of a house and had to have excellent credit. Today’s market is very different with exotic loans and two-thirds of the homes being purchased going to people who wouldn’t have remotely qualified in the early 1990s.

            As we look forward Wall Street, our government, the Fed and corporate America would have us believe that energy prices will stay at today’s lower levels as well as mortgage rates, which will supposedly halt the housing decline and increase consumer spending. Both interest rates and energy prices are being temporarily manipulated for short-term political purposes. Thus, our negative outlook for consumer spending and recession haven’t changed one bit. Housing is going to have a very hard landing and all those cash outs and home equity loans will come to an end. The only avenue left is for the Fed to supply unlimited credit so Americans can keep the game afloat for a while longer. The psychology of ever-rising real estate prices is over. Just look at the following facts produced by Comstock Partners. Both Comstock and our predecessor publication “The Gary Allen Report” picked the top of the real estate market in September of 1988. We were the only entities to do so.

     32.6% of new mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000.

     43% of first-time homebuyers in 2005 put no money down.

    15.2% of 2005 homebuyers owe at least 10% more than their home is worth.

    10% of all homeowners have no equity in their homes.

    $2.7 trillion in loans will adjust to higher rates in 2006 and 2007.

     70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.

    Homeowners face higher payments as mortgages are reset.  Generally, monthly payments rise between $200 and $500 depending on the size of the mortgage.

    According to Reality Trac, August foreclosures were up 23% over July and 53% over a year ago.

    The number of homes for sale is at record highs, and inventories are 59% higher than a year earlier.

     New home sales are down 22% and existing home sales down 11%.

     The NASB housing market index has recorded an all-time decline.

     The housing affordability index is at a 15-year low.

     The house price-to-income (rents) ratio is off the charts. According to HSBC, in 18 states accounting for over 40% of national home values, the price-to-income ratio is 3.6 standard deviations above the mean.

      The OFHEO index of house prices deflated by the consumption price deflator has soared to a record high of 350 from 250 in 2001.  From 1976 to 1996 it never was above 220.

      According to the NAR the year-to year prices of existing homes are now flat.  A short time ago they were rising at a yearly rate of 16%.

      Nationally, home prices have not declined on a year-to-year basis since 1933.  Recently, however, prices have been dropping in the North East, West and Mid-West. 

      Sales incentives are now estimated at 3% to 7% of selling prices.

Although new housing starts directly account for only 5% of GDP, the indirect effects are far greater.  Some studies show that the housing industry and all its related activities have accounted for 30% to 40% of the entire employment growth in the current cyclical expansion.  In addition it has been well demonstrated that mortgage equity extractions have been a cash cow providing homeowners with hundreds of billions of dollars that have gone into consumer spending.  With housing already in a hard landing, it will be extremely difficult to avoid a hard landing in the economy as well.   In our view the stock market is in the same kind of denial it was in 2000 when the vast majority of strategists and economists already knew the dot-com bubble had burst, but mistakenly thought it would have little impact on the rest of the economy or on stocks.

The success of America has come from a number of areas in our culture and economy, but none is more important than our educational system.

The success in part was due to the GI Bill followed by a brood access to a first-rate college education regardless of ability to pay. The subsidization of public universities kept tuition low and by providing federal tuition aid to poor and working-class students, our country vaulted tens of millions of people into the middle-class while building the best-educated workforce in the world.

Since then Republicans have cut college aid, and soaring tuition at state colleges have made it difficult for young people to educate themselves at a time when a college degree is mandatory to enter the middle-class.

The cuts have taken place over the past several years, so the fact that we rank 16^th among 27 nations who complete college degrees is not really due to access. The problem is due to poor teaching, poor curriculum, poor students, lack of parent’s support and teaching by federal mandate to the lowest common denominator. Less than one-third of high-school students when tested appear to be able to finish college. The ACT tests showed only 25% would make it thru.

There is no question college is very unaffordable. In terms of affordability, 43 states were given F’s. Our government has not sustained its commitment to those who are poor. If our government does not assist we will soon be a second world country...

GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS

            Gold fell $60 the week before last and $23.70 this past week, which is totally illogical when there are stunningly bullish fundamentals on both the financial and geopolitical fronts.

            The situation is the worst geopolitically it has been since WWII. The occupations of Afghanistan and Iraq are disasters, Israel just invaded Lebanon and there is war pending with Iran. While these things are going on the people in those regions are buying gold for safety, lots of it, not selling. Doesn’t anyone on Wall Street understand that gold is the ultimate safe haven, not a fiat currency? Our latest correction comes as the Fed backpedals on inflation by pausing on interest rates while still issuing mega insertions of credit. A slowing economy does not guarantee lower inflation. We still have more than a year of inflation in the pipeline even if money and credit issuance dropped to 3% tomorrow. The CPI figure may look good going into the election, but that will be as far as it goes. Oil will move back up after the election if for no other reason than it is being manipulated. In addition, all major central banks are raising interest rates narrowing the positive yield the dollar has had until recently. The dollar has been a weak currency and with static interest rates it will get weaker. Who wants to take an unattractive yield in a falling currency, no one?

            Gold and silver should be trading at much higher levels, but due to government intervention they remain under pressure. Now that Henry Paulson is Treasury Secretary you can expect pressure will continue. It will be interesting to see the central bank comments as to why more than100 tons of gold under quota was not sold under the Central Bank’s Gold Sales Agreement. There is no carryover on that allotment. We believe the central banks do not want to be sellers of what gold they have left, and we have been saying that for a year. There are only six days left to sell. If sales remain at current levels of 370 tons it will be very bullish for gold as it will highlight the growing inability of central banks to affect the market with physical gold. Who is left to meet the shortfall between production and demand?

            The Fed and administration claims that inflation is no problem, and, of course, it is untrue. You can expect very doctored figures on the PPI and CPI releases. They will occur just prior to election.

            The only way the Fed can bailout the economy temporarily is to issue more money and credit. That will force the dollar lower and there is no guarantee that consumers and business will use the credit offered to them. Stagflation has already begun and the results will be even more powerful than in the 1970s. Stagflation is good for gold, but this time it will be much more high powered. We have been at this for 47 years, and we have seen major anti-gold propaganda. It will get worse as gold and silver rise higher. You can bet on that. You as investors in gold and silver related assets are going to have to be strong, very strong.

            Mining costs are rising, production is falling and central banks are running out of gold. Money and credit continues to explode worldwide as monetary rules. Hang on it is going to be a wild ride...

-- Posted Thursday, 21 September 2006 | Digg This Article