MID WEEK ISSUE
HAPPY VALENTINE’S DAY
WEDNESDAY, FEBRUARY 14, 2007
THE INTERNATIONAL FORECASTER
P. O. Box 510518, Punta Gorda, FL 33951-0518
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman
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US MARKETS
Our first warning on exotic mortgages came in 2002 as Adjustable Rate Mortgages became very popular. We had seen them used in California in the mid-1970s, but they were an oddity and probably made up less than 2% of mortgage loans.
Only the year before in 2001, the stock market had a serious correction and the Fed had to find a way along with government to get the economy moving again. The real estate market was chosen to fulfill that mission. That is when the subprime mortgage came into popularity in order to get the market going from the bottom up. This began a massive injection of liquidity into the worst possible financial risks - the beginning of rampant speculation, and fraud. As this got underway the mortgage lenders, bankers, the Fed, Fannie Mae and Freddie Mac and our government either got in on the party or looked the other way. No one cared about the consequences. The result is subprime lenders are going bankrupt or being absorbed by other stronger financial institutions, we are sure with the help of the Fed.
We have now entered the bubble blow off phase. Almost $3 trillion in these weak mortgages have to have new mortgages over the next 2-1/2 years as house prices decline. The lenders who made the loans have long ago sold them for securitization to satisfy the insatiable demand for higher-yielding structural products. This bubble, this monster created by our bankers, fed liquidity into Wall Street and into world markets. They were also aided by the carry trade, which was encouraged by the Bank of Japan at the instigation of our Fed. This massive sea of liquidity in part flowed into Treasury and Agency debt, which keep our financial system from collapsing, at least up until now. This essentially free money distorted not only the real estate market, but also the securities markets as well creating speculation worldwide. The mistakes of 2006, after four years of massive excesses, were the worst yet. Refinancing of ARMs began and foreclosures and defaults spun out of control. Never have borrowers, who should have never had loans in the first place, been treated so generously. They were invited to refinance and take a second, doubling or tripling their house payments. When they couldn’t pay many had their payments tacked on to the back of their loans so they wouldn’t be in default. Those whose new mortgages were reset were gobbled up by players looking for higher yields and within months many of these loans were delinquent.
2006 was the apex of unlimited finance – the year that finally began an end to the madness. Speculators generally headed for the hills, although there are still many trapped who will absorb stiff losses. As speculation eased, interest rates rose, and the lenders cut back as sales fell some 50%. All these fools believed the Fed would loosen again. Last June, 85% thought interest rates would have to go lower. As we wrote they couldn’t go lower. If they did the dollar would collapse. Here we are nine months later and interest rates are unchanged and the earliest rates could expect to be changed would be in June and now Fed members are talking about higher rates as we predicted last June because Europe is not on the same page we are. They do not target interest rates. They properly target money and credit, and in order to head off further inflation they are raising rates. To stay competitive, we have to raise rates as well.
Unlimited finance, at least for the real estate industry, is coming to an end. The failure and massive losses by lenders has begun the tightening of credit requirements and that means some borrowers won’t be able to re-qualify for new loans. There is going to be a subprime purge that will envelop the real estate market. The best the market can hope for is a 20% correction over the next two years. The subprime crisis will escalate. The small lenders are already in trouble as 22 have folded in just December and January. The message is finally being picked up by Wall Street, which should send housing stocks down to test their lows in the near future. There will be heightened concern for the financial ramifications of imploding subprime lenders, which will generate more pressure on lenders and more pressure on house prices. The psychology will degenerate further. The next phase will be a subprime liquidity squeeze accompanied by higher mortgage rates that will certainly exacerbate the problem. This will happen in the absence of any negative credit or liquidity event. Contagion could though become a big problem. One or two failures in the derivatives market could cripple the ABS and credit derivatives market. Any general tightening in the CDO market would likely cause liquidity problems, especially among the highly leveraged. Already markets face heightened uncertainly, although you wouldn’t know it by Wall Street’s outward attitude, one of arrogant, criminal, indifference.
Wall Street and banking are hoping the Fed, due to credit conditions, will ease. We do not think that will happen unless the Fed wants to allow the dollar to collapse. The Fed is well aware they cannot lower rates, nor can they stop the massive increase in money and credit. The two ifs in that domain are will there be an event that will shatter the calm complacence, or will the speculators withdraw from the field leaving all that liquidity to sit and waste? Will bondholders walk away and buy gold because the net real return isn’t worthwhile? The subprime BBB- rated bonds are already under serious pressure as quality deteriorates.
Major mortgage fraud is showing up all over the country. Massachusetts is implementing new laws and harsher penalties.
In Phoenix, state legislation is pending on mortgage fraud defining it as a crime punishable by up to ten years in prison. The new mortgage fraud taskforce has been deluged with calls from people reporting cash-back deals and other frauds such as inflated appraisals. Real estate agents and mortgage brokers are withholding the cash-back agreements from the contract. Un-saleable homes become saleable at prices higher than the previous prices. That is a danger signal. Lenders are funding loans for more than they are worth so the buyer gets paid to buy, the lender gets the business and house prices are artificially inflated. Thus, these sub-rose deals mean all buyers in the area pay too much based on the comparative sale.
Quoting DR Horton CEO Don Tomnitz, “We’re in the early stages of the current housing slowdown. Most of these downturns are longer and deeper, and right now we do not see anything on the horizon that would change that opinion. We continue to see a very challenging industry environment for fiscal 2007.” He said their lot position is down 25% and construction is down 35% from the high in June 2006. Orders are down about 25% and the value of homes on order declined 28%, as the company used incentives to lure buyers.
The slowdown is spreading to suppliers. Stock Building Supply, one of the nation’s largest building material suppliers, is cutting 1,500 jobs of 2,000 eventual cuts. Twenty-two branches are being closed cutting another 500. The small suppliers have been laying off for six months or more. That is why many illegals are going back to their home countries. No more work available in construction-related industries. The cost of higher house payments and a return to $65 oil prices, and little refinancing of homes will really cut into consumption and we will see a slower economy.
In Bonita Springs luxury builder WCI fourth quarter orders were for 621 homes; 434 actually closed at $760,000, while recording 187 defaults. All of southern Florida is massively overpriced.
Bank United FSB saw non-performing assets more than double to $45.1 million in December, quadrupled yoy. Their option-ARM loans amounted to 59% of its total portfolio, up from 51% yoy.
In Bradenton, Florida Coast Bank officials are investigating 482 homes in jeopardy because the builder cannot finish construction. That could be a $50 million loss.
In Charlotte County, Florida liens are being hung everywhere.
These stories abound all over the country. In this research report we have another 23 pages of the same thing, that is serious real estate problems. Do not believe the media, problems in real estate will prevail for 2-1/2 more years.
The stock market is preparing to decline. Over a span of 135 years when the S&P 500 traded above 18 times on record earnings and considering there has not been a low in a year or more, the result will be all those gains will be erased. That to us means 7,268 on the Dow. Interest rates, wages and unit labor costs are rising faster than inflation and profits will ease this year. At current levels there is no investment merit to the stock market at these valuations, thus, it is time to exit.
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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
Shorts in the gold market are facing losses, particularly the Comex commercials. Their recent shorts increase has prompted the commercials to attack again attempting to force gold prices below support levels. Last week they added again by 11,053 or 8% from 135,611 to 146,664. Commercial shorts were the largest since 5/23/06, when they were 149,0003 when gold was $671.20 having over the two prior weeks fallen from $730. The commercials are making their big play and attempting a replay of last May. The momentum created by the physical buyers has been predominant. We think they can continue to control the game, we’ll see. Over the past month commercial short positions are up a huge 79.6% as gold has risen $40.33 or 6.6%. That is 202 tons of gold added to the market by the shorts, or a commitment of $4.2 billion by the shorts. We believe a major attack will come on Monday and Tuesday in an attempt to break support. If they are unsuccessful $730 will be tested. If the commercials are successful $650-$652 will be tested. We see no major correction this time around.
GLD net holdings rose 2.95 to 461.58 tons in the past week. It was up 8.3 tons the prior week. That is a total or positive addition of 11.28 tons.
SLV jumped 168.94 tons from 3,719.16 to 3,888.9 tons or 125,030,899 ounces worth $1.73 billion. Silver on the cash market gained $0.45 on the week. Over two weeks 277.39 tons were added or $123.6 million worth.
Both gold and silver are attempting breakaways to the upside and by the time you get this issue on Wednesday you will know who prevailed in this short-term conflict.
It doesn’t matter who wins this squirmish. We are in a secular gold and silver perfect storm and nothing – not even the powers behind government – can stop the rampage into precious metals. The pros and some countries are dumping dollars and some of the proceeds are going into gold and silver. It doesn’t take much buying to start a conflagration. We have a long way to go and you cannot win unless you are in the game.
Note that short-term lease rates for silver have been rock bottom for a long time and are at the same level the one-year gold lease rates were prior to a major gold manipulation. The one-month is at .02% (pretty close to zero), and the two month is only .07%. If you look at the silver lease rates chart, the shorter term rates have been dragging along the bottom of the chart since the July, 2006 rally, and have not gone up since. This could explain some of the volatility in the silver market and some of the modus operandi for silver manipulations.
Monday trading in gold three hours before the opening saw it off $3.20, silver off $0.08 and copper down $0.01. Two hours into the Comex session gold was off $3.90, silver $0.18 and copper was off $0.09. Oil had fallen $1.18 and the gold and silver producer stocks were all trading higher. Four hours into the trading day gold was off $4.90, silver $0.25 and copper $0.03.
As we suspected gold ended off $4.50 on the day at $662.20 and silver fell $0.19 to $13.64. The April gold contract fell $5.00 to $667.30, silver was off $0.20 to $13.71 and copper fell $0.04 to $2.48. On Friday, gold open interest increased 9,927 contracts to 380,394 passing the former high of 373,000 set in 2006. Monday was a major market manipulation day. Oil got blasted for $2.08 closing at $57.81, gas off $0.06 at $1.55, natural gas off $0.60 at $7.23, the euro off .0041 at $1.2960, the pound off an astounding .00353 to $1.9471 and the Canadian dollar off .29 to 85.06. Yields rose as bonds fell; the 2’s were 4.93% and the 10’s were 4.80%. As you saw elsewhere in this column silver lease rates fell to .02% and silver was hammered. Silver open interest rose 872 contracts to 120,803, which is 22,000 less than last year’s high. The cabal held up the market again as the Dow fell 28 to 12,553, S&P fell 43 Dow points and Nasdaq fell 60 Dow points. The elitists have everything so wired they manipulate the markets with abandon. Their corruption is exposed and there are never criminal charges. A fine is paid and they go right back to their criminality. They own the SEC so all they do is cooperate and pay up. The SEC only preys upon the small brokers and brokerage houses and newsletter writers – all of whom do not have the finances to fight the elitists. There are now so many insider conspiracies, cases of corporate fraud and manipulation that the public is desensitized. No one questions the evil and our travesty of justice. We wonder what a public in a depression will do to these criminals? A perfect example is Bank of America, which entered a leniency agreement with the Department of Justice related to an investigation into the municipal derivatives industry. The Bank coped a plea agreement so the Department of Justice didn’t bring any criminal antitrust prosecutions against the company in the matter in return for its cooperation. Thus, no one goes to jail and the shareholders get to pay for the criminal activity of management. So what if they are cooperating. They broke the law and will never see one day in jail. This is how our government, Wall Street and corporate America has operated for years. It has only been in the last six years that these sweetheart deals have been exposed and that is because of the Internet and radio talk shows.
Lies are legion, no one tells the truth. At the recent G-7 meeting we were told that financial techniques, including credit derivatives and hedge funds have contributed significantly to the efficiency of the financial system. These people must think we are totally dumb. Derivatives and hedge funds are all highly leveraged and act like gambling casinos. Sooner or later they will bring down the financial system and you can take that to the bank.
On Monday, the XAU lost 1.59 to 139.18 and the HUI sank 3.17 to 336.89.
Again South African gold output fell 12.4% in volume terms while overall mineral production increased 10.5% in December yoy.
Oppenheimer’s gold fund has just released an amended prospectus stating they have entered an agreement with JP Morgan Chase to make “loans of portfolio securities” of up to 25% of the funds assets. This is so Morgan can better manipulate gold markets by shorting shares. Sell all Oppenheimer funds.
There are lots of reasons to buy gold. Several new ETF’s will soon be launched in India. The Euro Next trading platform is opening futures and commodity trading in several sectors, including precious metals. Several central banks are accumulating gold and more will continue to do so. StreetTracks, GLD, is approaching $10 billion and the SLV is roaring as well. Technically gold is very strong irrespective of the latest gold suppression cartel’s onslaught. $1,000 here we come. You have to own it to profit by it.
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SUBSCRIPTION and RENEWAL INFORMATION: 1-YEAR $129.95 U.S. Funds.
Make check payable to ROBERT CHAPMAN (NOT International Forecaster), and mail to P.O. Box 510518, Punta Gorda, FL 33951-0518. Please include name, address, telephone number and e-mail address. We accept Visa and MasterCard charges. Provide us with your card number and expiration date. We will charge your card US$129.95 for a one-year subscription.
Foreigners please use foreign U.S. dollar denominated checks or Money Orders.
Note: We publish twice a month by surface mail or twice a week by E-mail. international_forecaster@yahoo.com
