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-- Posted Friday, 18 January 2008 | Digg This Article | Source: GoldSeek.com

Rick’s Picks

Friday, January 18, 2008

“Phenomenally accurate forecasts” 

In the bond pits yesterday, there were murmurs and groans of outright despair. “The bond market has already priced in that nobody will ever be able to sell a house again in his lifetime," said Michael Davis, a CBOT trader. "It's not as if there's more bad news that we could factor in fundamentally,” he told a Wall Street Journal reporter. “It's just that the market is taking its cue entirely from stocks.” No question, the action on the world’s bourses has been bumming out a lot of investors lately. The Dow Industrials, for one, have fallen nearly 15 percent since peaking in mid-October just above 14,000. If they were to fall for just a few more days at yesterday’s pace, we’d have an “official” bear market – a 20-percenter – by next Wednesday. The magic number is 11358, for those of you who are keeping vigil.

Just why a bear market would rear its ugly head at this time must be a mystery to the board members of the Federal Reserve. After all, it could not have been more than a week ago that the Fed chairman himself said there was no recession in the central bank’s forecast, at least not yet. Sure, the banks have been racking up losses that are now pushing toward the trillion dollar threshold. But those are only ledger entries, right? It’s not as though anyone but shareholders have lost real money.

‘Real’ Losses Are Small

Actually, there is some truth to this, since the pain and suffering of mortgage bondholders has been mostly due to unrealized losses rather than actual. That’s because, although quite a bit of subprime paper has been marked down by 80 percent or more, most of it has yet to mature. And although we read about huge write-offs by banks and other institutional lenders, the actual loss of principal tied to subprimes is probably less than $10 billion, according to one well-placed source whom we trust. No less surprising, perhaps, is that there is brisk business in distressed mortgage debt, since it has been priced to discount Armageddon. For example, you could buy securitized mortgage bonds priced to yield 8 percent over the next three years -- even if every home in the bundle gets foreclosed and is eventually auctioned at 1970s prices.

Looking ahead a few years, the most likely losers among those connected to the housing business are the builders. With their cost of materials continuing to rise, how can they hope to build and sell homes for less than what “used” homes will fetch on the open market?  Older homes simply cost less to build, and the owners will therefore be able to price them lower than comparable new homes. For this reason, any home builder that has survived the real estate collapse so far will almost certainly face bankruptcy at some point in the next few years. The ones that emerge to build again will be stronger for it, but the creative destruction of the industry in the meantime will not be pretty.

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Seminar Filling Up

The Hidden Pivot seminar scheduled for February 9-10 is already half-full, so if you’re planning to attend, we’d suggest registering soon. Click here for a $50 discount and instructions for signing up. The class will be held on Saturday/Sunday from 9:00 a.m. to 12:30 p.m. Mountain Time.  If you want to learn how to forecast stocks and commodities as confidently and precisely as top pros, this is an opportunity you should not pass up.

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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 © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com 

-- Posted Friday, 18 January 2008 | Digg This Article | Source: GoldSeek.com

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