-- Posted Tuesday, 19 September 2006 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Tuesday, September 19, 2006
For investors who’d rather be smart than lucky
If the stock market is about to get short-squeezed to new record highs, a possibility I raised here the other day, what would be the catalyst? A plausible answer can be glimpsed in the very interesting letter that I received recently from a Rick’s Picks subscriber, a man in the construction business who says things don’t look too bad from where he’s sitting, at least not right now they don’t. The subscriber’s long-term outlook is very bearish but he is nonetheless willing to accept that the U.S. economy is not quite ready to go down the toilet.
For balance, and lest we be lulled off guard by his pragmatic point of view, I have included at bottom a report on foreclosures in California from Merrill Lynch that could make one’s scalp tingle. With ARMs just starting to ratchet up by 2% or more, the housing bust continues to evolve beyond the nostrums of monetary policymakers.
A Bullion Buyer
The subscriber writes as follows:
“I have been reading all of the doom and gloom forecasts for the U.S. economy and believe, like many others, that they will prove to be correct. To prepare for hard times, I have been positioning myself over the last six months for the long haul, buying physical gold and silver bullion. I will probably buy more soon.
“On the other hand, I see the realities of what is going on in my own business. Our bid activity is still high, sales are steady and we will at least equal our volume over the next 12 months. Our year ends on September 30, and we will have done approximately $14 million in gross sales. We currently have an $8 million backlog. These are projects that will get built. In our trade, it is typically four to seven months from sale to delivery of materials to the job-site. There is still just so much money out there that I think forecasts of doom are premature.
Headlines Deceive
“Having been around construction all my life and worked in the business since 1981, I have been through hard times before. During the early 1990s I saw my income cut by 50 percent in one year. I do not think we are at that point yet. There are declines in business sectors and in areas of the country that are making headlines. But aren't we seeing the same thing in the markets? Certain sectors are doing well others are falling, but there is no broad decline yet.
“Again, I believe that the day of reckoning is coming, but there is just too much noise about it right now. Maybe after everyone is breathing a sigh of relief about the ‘soft landing’ we are experiencing, and about how ‘Helicopter Ben’ has saved the day – maybe then all hell will break loose. I don't know about timing, but I do know that when I can't take jobs unless I do so at a loss (i.e., buying work to keep the lights on), the end is near. We are not there yet. Maybe March or April of next year? Just a guess.
“I do want to be on the winning side of the trade when that happens, and I am getting my education now in your chat room. So far, a few early losses because I’ve been too aggressive. I have to keep reminding myself that cash is a position too.”
California Foreclosures Soar
And now for that chaser from Merrill Lynch, followed by a brief commentary from our friend Jas Jain:
“In California, foreclosures are up an astounding 160%. The culprit, according to RealtyTrac, is the resets on option ARMS – apparently coming in at a typical two percentage points above the rate on the initial mortgage. That’s a bit of a problem for an economy whose median wage rate is rising by a whole lot less than the growth rate of the debt-servicing obligation.
“About 25% of all mortgages carry adjustable rates, and more than half of those loans are to sub prime borrowers (according to data gleaned from USA Today). As a result, 12.2% of ARMs borrowers were late in making their mortgage payment in 2Q – the highest since 2003, when the economy was shedding jobs and the Fed was freaking out over the deflation threat. In 18 states, more than 15% of homeowners with sub-prime ARMs were behind in making their payments in the second quarter. And it’s not just in frothy areas – the Midwest may already be borderline recession as the auto sector cuts hit home because the delinquency rate in Ohio is 11% for homeowners with sub-prime ARMs.”
Here’s Jas’ take:
And this is with home prices down barely 5% from their highs! One genius assured us recently that even a 25 percent drop in home prices wouldn’t harm the U.S. economy. What is this guy smoking? The 160% rise in foreclosures in CA is from a low levels, but it could go to 400% if prices drop another 10-15% in less than six months.”
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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Tuesday, 19 September 2006 | Digg This Article | Source: GoldSeek.com
