SATURDAY, JULY 7, 2007

THE INTERNATIONAL FORECASTER

07_07_1_IF

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

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Late payments on home equity loans have climbed to a 1-1/2 year high in the first quarter, while delinquencies on credit card bills fell. Those late payments on house equity loans rose to 2.15%, up sharply from 1.92% yoy. A composite of other types of consumer loans, including autos and boats, home improvement and for certain home equity loans, increased to 2.42% from the fourth quarter’s 2.23%.

We are starting to see stories in the mainline media questioning the opinions of the experts that, things may be far worse in the housing industry than the public has been led to believe.

At issue is what goes into sales price data and what does not. They are catching on. The media is asking questions about buyer incentives by sellers to lure buyers. That includes cash rebates, pools, garages, upgraded kitchens, etc. The conclusion is that prices do not reflect real value, and more prices are falling than are being reported.

The same goes for how the mortgage application indexes do not account for the implosion of lenders. That will have the effect of masking a slowdown in demand, which is why the housing market could be in for rough sailing for much longer than most anyone anticipates.

No one really realizes just how serious the housing debacle really is. The ramifications will have far reaching affects. A salient example is the 92 major subprime lenders that have already gone under.

Whether those incentives include plasma televisions or other goodies, the bottom line is we are not seeing real values. We are seeing subsidized home sales. As an example, at Lennar, one of the top builders, incentives averaged $43,700 a home in the fiscal second quarter, up from $24,700 yoy. This mode of operation is spreading to existing home sales and the foreclosure market. As we have said over and over again these are false prices created by subsidies. The sales prices are in reality down 15% to 25%, but it does not show up in the actual sales data. Sometime ago Freddie Mac demanded that incentives be declared in the sale of mortgages to them. They obviously have the data, but whether they are using it we do not know, nor are they telling us how overpriced the mortgages are that they are buying.

The mortgage applications index is also misleading because what you are seeing is hoards of multiple applications. That is because most applications are being rejected.

When June figures are released we believe you will find May’s application numbers will not reflect equally in sales data. That data will not be robust in the hottest sales month of the year. Sooner or later the truth will be told.

GM posted June sales off 21.3%, as they moved away from rental car sales. Ford fell 8.1%, Chrysler fell 1.4% and Mercedes Benz 5.8%. Toyota’s sales rose 10.2%, Nissan 19.4% and Honda 7.3%.

Chrysler received a speculative-grade credit rating from Moody’s and S&P. Moody’s has the auto division at B3; 6 levels below investment grade and financial services were B1; 2 levels higher. S&P had both at B’s.

Phelps Dodge, the copper giant, needs to hire 600 people by the end of the year and they have exhausted the labor pools in Greenlee & Graham counties in Arizona. A housing crunch isn’t helping matters. A lot of women are being hired as truck drivers, mechanics and electricians. It sounds like WWII all over again. They are offering $4,000, signing bonuses and allowing shifts of on 7 days and off 7 days. The company plans temporary housing, a resident campus, cafeteria, fitness center and Internet Café. Workers pay no rent to live at the campus and meals are free. Three other major copper producers are also competing for help; ASARCO, BHP Billiton and Quadra Mining.

As foreclosures climb, Wall Street’s lenders and investors are claiming a bigger chunk of Main Street. The value of homes held by commercial banks swelled 53% nationwide to $2.3 billion at the end of March, the highest since 1992, from $1.5 billion yoy and those numbers are climbing and will climb for 2-1/2 more years.

These bankers must now decide whether to pay maintenance costs or dump the properties at fire-sale prices. Both options will reduce real estate values. Homes that sit vacant can become neighborhood eyesores, while rock-bottom sales prices drag down values of similar properties in the area. The lenders do not want to own real estate, but at the same time you cannot just unload these properties because they would send home prices into a freefall. As we predicted 2-1/2 years ago, housing is locked in a downward spiral. Before this is all over prices in the former 30 hot areas and other areas will fall 20% to 60%. Lenders are already dumping houses at 50% losses. The share of subprime loans entering foreclosure in the first quarter was 2.43%, the highest in five years, and subprime late payments rose to 13.77%, versus 11.5% yoy.

Bear Stearns leads the default hit parade with JP Morgan Chase, Merrill Lynch and Citigroup in hot pursuit. Countrywide Financial, the largest mortgage lender, has $110.1 million of foreclosed real estate at the end of March, quadruple the $27.4 million it held just three months earlier.

These problems have just begun. Americans are in a heap of trouble in real estate and those problems will spread to many other financial areas.

In Phoenix, in June, home building permits fell 22% and were 36% below the peak in 2005.

Worker confidence fell in June. The Hudson employment index fell to 101.2 from 106.9 in May. That is a large drop. The factors are a weak housing market, high energy prices and inconsistent job growth. Companies hiring fell from 32% to 30% while 19% of workers said they were worried about job security. Workers pessimistic about their own finances saw 43% favorable, down from 45% in May. Forty-one percent said finances were getting worse. This is the first time since last August that workers were more pessimistic than optimistic.

Confidence among workers making more than $75,000 declined. Worker sentiment in Chicago fell dramatically, which has the highest gas prices in the nation.

May factory orders fell 0.5% following a 0.5% gain in April. The experts said orders would rise 1.2%.

The housing market weakened further in May, as contract signings on sales of previously owned homes fell 3.5% to the lowest level since September 2001. Pending sales are down 13.3% yoy and are down 23% from the peak in early 2005. These numbers tell us there is no recovery in sight and our government, Wall Street, the industry, Bernanke and Paulson, as we pointed out previously, are liars. There is no hint of stabilization as the situation continues to deteriorate. As we pointed out mortgage applications are misleading. You have to go with final sales versus inventories versus real prices, not the phony ones we are getting.

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You probably ask yourself how did the fiasco in real estate, MBS and CDOs come about? The Fed was the main problem with outrageously low interest rates and no oversight or guidance over banks and investment banks. The Fed made it all happen. The CDOs in subprime and ALT-A loans didn’t qualify for most institutions, so what the bankers did was cut the risky and AA & A rated securities into a package, a mixture of both.  These MBS, mortgage backed securities, because of the mixed content, allowed credit rating agencies to issue higher than normal credit ratings. This was a mistake and it opened the market up to buyers that normally wouldn’t have been allowed to buy bonds that in part were loaded with some 20% junk. In addition, we find that AA & A rated mortgages are having unforeseen trouble as well, which was not anticipated. No one ever expected a recession. The investment banks’ role was that of a packager and distributor and to become known in the investment industry as “toxic waste.” Even with AA & A ratings, this hybrid junk was not that easy to sell, so firms like Bear Stearns created hedge funds to dump them into. The fund was started with the investment banks funds, say $60 million and then the investment back borrowed $6 billion from other investment banks and other banks to be used to buy CDOs that the original investment bank had created. Then with a hot real estate market investors were invited in to purchase the over $6 billion in CDOs. These efforts were aided and abetted by a cushion of higher house prices, which kept the subprime and ALT-A loans from defaulting as interest in the hedge fund was sold off to investors. If you remember the real estate market was different. It was going to appreciate forever. What is amazing is that bankers would lend the investment bank huge amounts of money to allow the hedge funds to buy this junk, this illiquid toxic waste. When this happened several years ago we called this the daisy chain of disaster.

The hedge fund then marked to model the value of the portfolio because house prices were rising. That allowed for higher management fees. These values, of course, were and are fictitious - a figment of the imagination of the now very wealthy managers, who essentially had a license to steal. Hedge funds are unregulated so whatever the value decreed by management that is what the value was or is. There was little or no market for these securities they were and are essentially illiquid. Thus, any value attached to them is fictitious.

Now what is happening is the subprime and ALT-A loans are non-performing and in addition, because the economy is slowing and free trade and globalization, offshoring and outsourcing, are taking very good jobs to foreign lands, we have many unexpected defaults in better quality mortgages as well.

As the real estate market turned down, slowing over the past two years, lenders started to get nervous and about six moths ago they got real nervous and that is when the pressure began. The upshot is that Merrill Lynch recently tried to sell $850 million worth of CDOs held as collateral for one of Bear Stearns hedge funds. They received a bid for $100 million at $0.38 on the dollar. The lenders now realize they are in serious trouble. We now wonder since that episode two weeks ago if the hedge fund or Bear Stearns is going to mark the portfolio to market. The mark up to model came quickly so Bear Stearns could collect their preposterous fees. Let’s see how quickly they mark down their assets. If they do not it is up to the rating agencies to do so. If they do not step in there is no system or no validity left. Remember, Mr. Paulson, all the neocons, Mr. Greenspan, then Mr. Bernanke, told us over and over that hedge funds did not need regulation. The whole sector is flying blind with these CDOs with no instrumentation. The lender doesn’t actually know for sure that the price is falling any more than he knew it was rising when the price was marked up. In the case of Bear Stearns both funds were leveraged, one five times and one 15 times respectively. In the hedge fund world that is conservative. It’s the smaller fund that Bear rescued. It looks like they are going to let the bigger fund go under. A number of money managers and financial institutions have investments in these funds and some will lose part or all of their investments. Pension funds are involved and all they do is report what they are told from the fund each day regarding value. Of course, we all now know, and we reported this three years ago, that those values are fiction. Just as much as government statistics are fiction. What should happen is that in Bear Stearns case, as in other management cases, they should eat the bad paper and let the investors take the good paper. Then there is the matter of derivative written on all the paper. Those losses to Bear and other writers are already in the billions of dollars, mostly to other hedge funds. We will not go into the arcane use of synthetic derivatives; they are difficult to understand. Just take our word for it that they are just more toxic waste for the funds. As you can see the risks of loss are enormous and the path to understanding is convoluted.

The question is do we have another LTCM, which almost took the financial system down in 1998? Our answer is probably. The magnitude of difference is terrifying. There are six million subprime mortgages usually the result of refinancing. That means the exposure is 7 to 10 times more than LTCM. Then there is the loss in equity of those who owned those lost homes and the equity loss of those who still own homes with falling equity. If you add in the synthetic CDOs you are then approaching a situation 20 times worse than LTCM and probably even more.

These problems won’t be easy to fix and they could well be unfixable. This is a widespread systemic crisis that will affect every cranny of our financial world and every single American in one way or another.

We believe the credit squeeze has begun and will be recognizable in all parts of the financial system in one year to 1-1/2 years. In three years we will be in deep recession, after that depression.

Our solution is gold and silver related assets. For those of you who cannot invest get yourself as much out of debt as you can.

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GOLD, SILVER, PATINUM, PALADIUM AND URANIUM

Tuesday, July 3rd, gold closed down $3.30 to $653.00 and silver fell $0.03 to $12.57. The dollar remains under downward pressure and central banks continue selling. Gold traded $2.00 higher early on but on the Comex opening it was forced lower. Oil was up $0.21 to $71.30, another positive factor for gold because its inflationary. The dollar did eke out a .08 gain to 81.25, but the spell has been broken. We saw yields move back up. The 10-year Treasury notes closed at 5.05%. Gold open interest fell 2,253 contracts to 375,108 as silver open interest fell 14 contracts to 116,691. The Dow finished the abbreviated session up 42 to 13,577. On Monday, July 2nd, Tocom big shorts cut their shorts 2,589 contracts to 126,790. They cut their silver shorts 2,589 to 126,790.

Turkey’s gold bullion imports almost tripled in June as the wedding season held forth. That is a 178% increase yoy.

The stage is set for a bitter wage despite in the South African gold mining- sector after employers tabled an offer of a 6% increase compared to demands of 15% to 20% from the main trade unions. The 6% offer doesn’t even match inflation. We do not see an early settlement. Be prepared for at least a one-month strike.

           Worldwide gold producers are facing mounting costs and they cannot make money at these gold prices. Central banks and Western governments cause all of these problems. They are increasing money, credit and inflation and simultaneously selling gold into the market. This is not a free market. It is a corporatist, fascist market. Yes, investors and companies get hurt financially, but much worse workers worldwide, who work for mining companies, get hurt much worse. You can see how much the rich elitists care for the common man. These Illuminists are not just hypocrites; they are criminals.

Thursday was mixed with the Dow up 7, S&P +13, Nasdaq +12 and FTSE -12 Dow points. The CAC was -18 and DAX -36. The yen was +19, the euro _.0030 and the pound was -.0013. The 2-year Treasury yield was 4.92% and the 10’s were 5.07%. Oil was +$0.41, gas +$0.01 and natural gas -$0.08. Gold was +$2.50, silver was +$0.05 and copper was +$0.01.

India sees a normal monsoon and a good harvest that will boost purchasing power to buy gold. This will help support gold prices later in the year.

Thursday’s gold price ended down $4.80 to $648.20 as silver fell $0.13 to $12.44. The August contract fell $3.80 to $651.20, silver fell $0.10 to $12.59 and copper rose $0.05 to $3.59. The question is how does gold go from +$6.00 to $-4.80 with oil up +$0.44 to $71.85 and the dollar unable to stage any kind of a rally gains only .08 to 81.31? The euro fell .0016 to $1.3599, the pound fell .0041 to $2.0121, the yen fell .11 to $1.2281 and the Canadian dollar rose .19 to 94.65. Gas rose $0.02 to $2.28 and natural gas fell again -$0.13 to $6.62. It will find a bottom between $5.80 and $6.20. The yield on the 2-year Treasury rose to 4.98% and the 10’s rose to 5.14%. Believe it or not the Illuminati is in serious trouble. When they run out of gold we’ll be waiting for them. We will destroy them and they will flee in terrible terror. Soon the tide will turn. The Dow lost 24, S&P 17 and Nasdaq 40 Dow points. Tomorrow will be a down market.

Gold open interest rose 535 contracts to 375,643 as silver OI gained 599 to 117,290.

Commodities were strong and copper is about to breakout over $3.60 again to retest $4.00. All those in the pits, especially in London, know there are fully paid warrants claiming between 140% and 169% of the copper in stock. The copper market is soon going into default. Stockpiles have dropped for the 8th consecutive session, falling 2,425 tons or 2.2% to 107,950 tons. This year stocks have fallen 41%.

           The Fed can now only stand still and watch. The game is almost over. In four years there may no longer be a Federal Reserve. There game and the game of the other Illuminists will be over. The dollar will soon test 80 and it will break, as interest rates move higher.

The weekly ECB sales were announced and three central banks sold 631 million euros worth of gold, or 40.87 tons. This was probably the ECB selling 37 tons that was finally being reported.

On Tuesday, the Tocom big shorts covered 3,060 contracts to net 123,730 and on Wednesday, they increased their shorts by 2,980 to 126,710. On Tuesday, Goldman increased their short by 255 contracts to 23,308. On Tuesday, the same group increased their silver shorts by 126 contracts to 5,686 and on Wednesday, silver contracts remained unchanged.

Newmont Mining announced the elimination of its entire 1.85 million ounce gold hedge position. This will maximize gold price leverage. Another company has seen the light and now believes gold is headed higher.

On Thursday, the HUI rose 6.93 to 343.18 and the XAU rose 1.53 to 140.38, as gold and silver fell. This is a good omen.

Early on Friday the Dow was up 13, S&P +20 and Nasdaq +12 Dow points. FTSE was +60 Dow pints and CAC was -10 and DAX +20. The yen was -29, the euro +.0004 and the pound -.0010. The 2-year Treasury was 4.96% and the 10’s were 5.14%. Oil was +0.06, gas -$0.03 and natural gas +$0.02. Gold was -$1.70, silver -$0.12 and copper -$0.01.

On Friday, Thursday’s losses were erased as gold rose $4.30 to $652.80 and silver was up $0.20 to $12.64. The August gold close was up $7.10 to $657.60, silver rose $0.25 to $12.82 and copper was unchanged. From early morning gold was down $2.00, up $2.00, then down $4.00, then up as the employment report came up and oil hit $75.00. Oil ended up $0.81 to $72.62, gas rose $0.02 to $2.31 and natural gas fell again $0.19 to $6.43. The dollar was mixed to lower all day. The euro rose .0036 to $1.3625, the yen was +.39 at $1.2337, the pound +.0005 at $2.011, the Canadian dollar hit a new high up .71 to 95.34 and the dollar index fell .04 to 81.27. A very bullish factor for gold is that gold timing newsletters have no exposure to gold at this time. This is down from 64.3% bullish. It shows you they are all reading the same charts, which we recommend throwing out the window. Gold shares are screaming breakout, so we’ll see if we are right again. The 2-year Treasury yield rose to 4.99% and the 10’s finished at 5.19% having filled the gap made on the way up. The Dow rose 47 to 13,613, S&P rose 46 and Nasdaq 60 Dow points. The big Tocom shorts reduced net gold shorts by 979 contracts to 125,731 contracts, as Goldman covered six contracts putting their short position at 23,302. Silver shorts were reduced 148 contracts to 5,538. We again predict an upward turnaround in gold and silver shares. The XAU rose 4.65 to 144.96 and the HUI exploded 9.43 to 352.61. We saw AEM up $1.47, but some profit taking moved in toward the close and it ended up $1.16 to $40.76, only 10% off its all-time high. The cartel is in trouble.

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