Housing Woes Worsen, Paulson Promises No Bailouts, Doughflation, Oil and Gas Forecasts, and More!

by Addison Wiggin & Ian Mathias

  • Housing gets a quadruple dose of dismal reports… details on the latest record lows
  • Oil leaps to $87, but gas remains oddly cheap… Kevin Kerr on the $4 gallon just around the bend
  • Doughflation?… Dennis Gartman on remarkable “rise” of bakery prices
  • CPI on rise yet again… how massaged government numbers will determine your SS checks in 2008
  • Spanish officials seize treasure hunters at gunpoint… an update on the Odyssey Marine saga

Markets endured another day in the red yesterday. The Dow, Nasdaq and S&P 500 lost over 0.5% each. Bernanke’s not-so-rosy outlook
from Monday night coupled with the wretched builder confidence report must have outweighed positive reports from Intel and Wells Fargo.

But currency markets stood mostly still overnight. The dollar slipped against most currencies, but only very slightly. Yesterday’s prices are still intact — euro $1.41, pound $2.03, yen 116.

The housing industry was served four stiff doses of bad news in the last 24 hours.

First, the National Association of Home Builders confidence index reported a score of 18 for October — the lowest reading in the index’s 23 year history. Builders were also asked to score their expectations for the housing industry’s next six months, to which they gave a score of 26, tied with last month’s record low. The third facet of the NAHB’s report — current buyer traffic — also fell, to 15. You guessed it… a record low.

Yesterday’s report from the NAHB marks the eighth consecutive month of decline. Only two years ago, the overall confidence scored an amazing 74… times have changed.

Second, Doug Duncan, chief economist for the Mortgage Bankers Association, leaked his 2007-2008 housing outlook. Here’s what he’s expected to announce today:

Duncan forecasts a 2-4% decline in median home prices in both 2007 and 2008. California, Texas, Arizona, Nevada, Ohio, Michigan and Illinois will be hit the hardest. For 2007, Duncan predicts a stunning 22% drop in new home sales, 12% in existing. In 2008, both new and existing home sales will fall at least 10%. And on top of this year’s 60,000-70,000 mortgage layoffs, Duncan expects 40,000 more by early 2008… ouch.

“I have no interest in bailing out lenders or property speculators,” said Treasury Secretary Hank Paulson yesterday. “This is a 100% market-based solution. I believe in markets. The government is doing nothing here but facilitating people coming together.” Paulson and the Treasury Department hosted the talks that eventually led to the Citigroup/Bank of America/JP Morgan $100 billion-plus bailout fund. That’s as far as the guv’ment will go, says Hank…

(For more commentary on our “bail-out nation,” we urge you to read this morning’s Rude Awakening.)

And last, housing starts in September plunged 10%, to an annual pace of 1.1 million, its weakest level in 14 years. This morning’s starts report also crushed analyst expectations, who predicted a pace of nearly 1.3 million starts.

Housing permits, also a facet of the government’s report this morning, slumped as well. Permits fell 7%, to an annual rate of 1.2 million — a 12-year low.

Crude oil prices rose 3% yesterday from their U.S. close on Monday — up to an amazing $87 and change. Futures crested well above $88. Yesterday’s spike, much like Monday’s, was almost entirely fear driven. Tensions between Turks, Kurdish separatists in Iraq and the U.S. continue to worsen, and media outlets left and right are drumming up the fear factor of possible supply disruption within northern Iraq.

This morning, legendary oil investor T. Boone Pickens predicted $100 oil by this time next year. Boone was in the oil game when crude was selling for less than $3 a barrel… if he says $100 in 2008, well, there are worse people to listen to. This time last year, he predicted at least $80 oil by his 80th birthday… and he’s still 79. $100, here we come.

Gas prices continue to evade our forecast. Recall back in May, when gas prices were already setting record highs of $3.21, before summer’s peak driving season and hurricanes came into play. We predicted $4, maybe even $5, gas by the year’s end. Of all the price predictions we’ve made, this one felt like a lock.

Well, our timing may have been off… but we’re sticking to our guns. Today’s national average gas price, $2.67, is the same as when oil was barely worth more than $61 a barrel back in March.

“I expect to suddenly see gasoline prices leap, since crude is jumping so dramatically,” predicts our resource man Kevin Kerr. “Investors get nervous about higher crude, but consumers don’t feel it until gasoline or heating oil explode, and that hasn’t happened yet… I say yet.”

“Summer was amazingly quiet, largely due to the pullback caused by the subprime mess. Now as we head into fall, I expect refineries to be screwed. Not only have they been running full tilt all summer, but now they have to begin making heating oil while still making a variety of blends of unleaded. Demand for both heating fuels and gasoline is remaining constant.

“I fully expect gasoline to go to $4 this winter and heating bills to be up by 20-40%. If we skate through another season with mild temps, it may go up only the forecast 22%. But if Mother Nature gives us a cold winter… look out! The current energy plan the U.S. has in place is what you might call ‘weather roulette,’ and it doesn’t seem like a very good strategy to me.”

Gold continued its exceptional rise yesterday. For the second day in a row, aftermarket trading in Europe and Asia were the primary bullish drivers for gold prices. An ounce of the yellow metal will set you back 763 paper U.S. dollars as of this writing.

U.S. consumer prices rose 0.3% in September, says the Labor Department this morning. 0.3% marks the biggest jump since May. But the government would like to continue to remind you that without those pesky food and energy prices, inflation rose only 0.2% in September. Food prices rose 0.5% in September, up to a rate of nearly 5% for the whole year.

Energy prices are rising at an annual clip of 14.8% right now.

According to its current methodology, the Labor Department calculates overall inflation at 2.8%. Our government stats go-to John Williams will surely have his own reading of this number… we’ll let you know what he thinks later this week.

“What could be more elemental than baking flour?” asks Dennis Gartman in his latest edition of The Gartman Letter. Dennis is fired up about the Fed’s rampant “anomalous” price increases of just about everything the average Joe loves to consume. He highlighted a sector dear to our hearts in his latest edition… baked goods.

“Note the rise since mid-August of bakery flour prices. One would easily have to admit that this is essential to diet here in the U.S., and since early August, when the three types of flour were trading at or near $16-17/hundred weight, flour prices have risen to $22-23/hundred weight… a 40% increase in price in a mere two months… for a very basic segment of the domestic diet. But we are not to be concerned about this sort of thing, for the Fed assures us that these prices increases are anomalous.”

“Or take the ingredients necessary for donut production. At the beginning of the year, this index stood at 115; it is now 167 and is rising, having gained ‘only’ 45% since January. But we needn’t worry; this too is anomalous. ‘Let them eat cake’ and let them not worry about rising prices!”

Donut prices, says Mr. Gartman, are on the rise too… say it ain’t so!

“We’ve seen the government’s figures on inflation, telling us that consumer prices are rising but at a very modest pace, indeed, and we’ve listened to the Federal Reserve spokespeople, including Dr. Yellen, who tell us in speech after speech that we really needn’t be concerned about rising prices at the moment, for ex-food and energy, they are stable. However, we find their admonitions senseless, and we find their lack of concern materially disconcerting.”

This latest CPI figure has also prompted the Social Security Administration to adjust 2008’s benefits up 2.3% for “cost of living” increases. This will mark the smallest increase in four years. On average, beneficiaries will receive an extra $24 per month, as the typical retired worker in 2008 will receive $1,079 a month. Of course, this adjustment is derived from the “core” inflation statistics, since food and energy prices have nothing to do with retiree’s costs of living.

A Spanish Civil Guard ship seized the Odyssey Explorer at gunpoint yesterday. The Odyssey, you may recall, was the ship that found $500 million in sunken treasure back in May — the biggest find of its kind in history. We’re lucky enough to have close ties to Odyssey Marine, the parent company, and the representatives who would bring their find to market — and thus promised readers of The 5 one of the first cracks at this rare investment opportunity.

Well… we hope none of you have been holding your breath. Odyssey has since become ensnared in a legal battle with the Spanish government, who claim that the treasure is rightfully their own.

The battle escalated to a new level yesterday when the Spanish warship commandeered the Odyssey Explorer and brought it to Algeciras. The Spanish Navy had been waiting for the Odyssey to leave Gibraltar, a British colony on the southern tip of Spain, and pounced on the ship once it left British waters. Spanish authorities gave the crew the boot, arrested the ship’s captain and are currently searching the vessel for clues to the location of the $500 million treasure.

The Odyssey Explorer being escorted by two Spanish warships

You’ll love this. The captain was charged with “grave disobedience” because the first time the Spanish federales said they were coming aboard his ship, he said no. They made him spend the night in jail. We’ll continue to keep you posted on the fate of the Odyssey and its treasure. It’ll be an interesting ride… if anything.

“How many of your readers are old enough to remember the ‘Strontium 90 Count’ published in the daily news back in the ’50s?” asks a reader. “Radiation drifting over the land and ending up in the grass eaten by the cows that made the milk that we kids were drinking. Ah, brings back memories, aboveground testing, bomb shelters. You know, the good old days.”

The 5 responds:
We don’t recall this, but it doesn’t surprise us in the least. The nuke mail runneth over. Check out reader comments here.
If you haven’t already, you’ll need to register. But it’s easy… it’s free… and it’s only so we can keep out the riffraff. We don’t use your registration on the blog for any marketing purposes.

“You made a minor mistake,” noticed another reader. “Anyone who is born after 1941 will receive only 70% of the Social Security benefit, not 75%, if they take it early at 62. For each year that they wait, they will get a little more until the age of 66. If you wait until 66, you get the full benefit for however long it lasts.

“As for me, I will be 66 in a few years and will wait for the full benefit. I have the names of Nancy Pelosi’s five children posted on my refrigerator and will dance a jig every month when the check comes in knowing that the amount that my wife and I received was taken out of their respective paychecks. I will toast them and FDR and the idiots in the Democratic Party as I cruise around the world.”

The 5:
Well, lucky you. We’re nowhere near 66. By the time we get to collectin’ what we’ve put into the system, your generation will have spent it all and we’ll be left holding the debt. Cheers. Enjoy your cruise.

Best regards,

Addison Wiggin,
The 5 Min. Forecast

P.S. In case you missed our e-mail last night, we’re offering Options Hotline — Steve Sarnoff’s legendary e-letter — for half price this week.
Options Hotline is one of the industry’s longest-running and most successful options research advisories. Click here… you can get Steve’s next trade by Sunday evening.

P.P.S. “Good news!” writes our colleague Michelle Nickels in an e-mail to The 5 this morning. “EverBank’s MarketSafe Gold Bullion CD
and MarketSafe Silver Bullion CD
will be reissued for another term.”

These CDs are great for locking in any upside in the gold and silver markets without assuming any risk. They’re FDIC insured like “normal” CDs, except your yields are directly linked to the performance of the gold or silver markets. If you’re interested, apply soon… these extended terms will expire in less than a month.

Oil news from The Oil Drum
The Gartman Letter
Dave Gonigam on Paulson’s latest “smackdown”
Record Price of Oil Raises New Fears




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