Record Low Home Sales, Buffett Wisdom, Gold Stocks Advice, Costs of the CA Fires, and More!

by Addison Wiggin & Ian Mathias

  • Home sales stun analysts… housing crisis claims another record low
  • Buffett’s worrisome warning… why he’s ditching the dollar, and his new favorite emerging market
  • Ed Bugos on the eternal gold question: What to buy… gold bricks or gold stocks?
  • Crude oil springs back to $89… which key data points pushed oil back to near-record highs?
  • Will the California fires cure the Golden State’s housing glut?

Existing home sales fell in September to their lowest pace on record.

The National Association of Realtors announced yesterday that the annual pace of existing home sales had dropped to 5.04 million. That’s an 8% drop from August’s previous low of 5.4 million. The slowdown far exceeded your average economist’s expectation of a 4.6% decline.

Since the NAR begin tracking this data in 1999, existing home sales have never fallen by such a degree. Nor has the annual pace of sales been so slow.

The NAR also reported a 4.2% drop in the “median existing home price” since September of last year— the second largest year-over-year decline on record.

The national median home price now rests at $211,700, thanks largely to the incredible glut of existing home inventories. The NAR estimated 4.4 million homes are on the market, which would represent about 10 months of supply — the biggest in 12 years.

On the NAR’s gloomy news, the Dow and S&P 500 lost at least 1.5% in early morning trading yesterday. But traders sent out the “Bat-Signal” over lunch, and by the end of the day, the Dow and S&P were essentially back where they started.

The Nasdaq succumbed to the Joker and never quite recovered… it lost 0.8%.

“In the next six months, one year, two years,” Warren Buffett said this morning, offering up a rare taste of bearish sentiment, “the problems in the mortgage market can cause a lot of problems with consumers and hurt buying power in the United States.” He went on to warn that crisis would have “more of an impact” than investors have already endured.

“We are still negative on the dollar,” Buffett continued, shifting his focus to Berkshire’s strategy for dealing with the troubled U.S. currency. “We bought stocks in companies that are earning their money in other currencies. We are gaining foreign currency exposure.” His comments echo Jim Rogers’ and Julian Robertson’s bearishness from yesterday.

So where will the $52 billion man be putting his money?

“My impression is that the Korean market is modestly cheaper than other markets in the world. I think the Korean market will do better for the next 10 years,” said Buffett. The Oracle of Omaha is currently visiting the TaeguTec facility in Daegu, South Korea. TaeguTec is a subsidiary of Iscar — a company Berkshire Hathaway bought a $4 billion stake in last year. While there, he voiced his approval of South Korean steelmaker Posco.

“It’s a great company,” Buffett said of Posco, “and great companies get worth more and more all the time.” Free Market Investor readers will love to see these comments. Since editor Chris Hancock recommended Posco in January, the stock has risen 93%. For more on FMI, including Chris latest pick, click here.

Chinese economic growth “slowed” last quarter to a rate of 11.5%, said the National Bureau of Statistics this morning — all the way down from the second-quarter rate of 11.9%.

2007 — the Year of the Pig — promises to log China’s fifth straight year of double-digit growth and its fastest year of growth since 1993, when it topped 13%.

Six Brazilian IPOs are expected to price this week, for a total of about $5 billion. Such a number will shatter the country’s previous weekly record of $3.1 billion. Our Free Market Investor Chris Hancock has been excited about Brazil’s future for months… so add this news to your “reasons to be bullish on Brazil” file.

Overnight, the dollar lost ground against most of its major adversaries. The euro sprung back to $1.43 this morning. The pound regained $2.05. The yen held still at 114. And the Canadian loonie gripped $1.03 tight like a 4-year-old caught nicking a Fruit Roll-Up before breakfast.

Gold swoons on dollar weakness and stock market mischief. Since the opening bell yesterday, for example, the precious metal has climbed $10, to $766.

“During the wild upswings in gold prices,” advises Ed Bugos writing in this month’s Strategic Investment, “the average gold stock does not keep up with bullion. In fact, mining stocks won’t outperform gold in the long term, either. Certainly, they track gold, and sometimes lead it, as investors try to anticipate favorable changes in the spot price of gold.

“As the chart shows,” Mr. Bugos explains, “traditionally, the best time to buy gold stocks if you wanted to outperform gold was at the trough of a cycle, before gold prices started advancing heavily. This is true of every situation in the graph except for two brief anomalies: 1973-74 and 1986 (shaded regions are gold rallies).

“Even better, and requiring less hindsight, buy when the ratio of gold stocks to gold is at a low. When the ratio is closer to 1 (see gray line, bottom graph) — as was the case in the early 1960s, the early 1980s, and in the 1999-2000 period — you could have outperformed gold just by throwing darts at a list of gold stocks. Picking gold stocks that were likely to outperform gold prices at any other time simply required much harder work.”

Like now. You can find it for as little as a penny per ounce here.

Crude oil prices shot back up to $89 in New York yesterday. Oil’s sudden rebound was attributed to the biggest decline in U.S. imports since March and a surprisingly low inventory report released by the U.S. Energy Information Administration.

“Crude stockpiles came in with a 5.3 million barrel draw,” write the clandestine advisers of the Secret Order of Jurojin. “The market was looking for an increase of 1.1 million barrels.”

The reason for the shortfall? That ravaged husk of a currency we call the U.S. dollar. “As the price of the dollar falls,” the Jurojin flash explains, “crude is more expensive in dollar terms. Crude is also cheaper for foreign buyers, as their currencies are rallying versus the dollar.”

No more goo for you!

Bank of America added 3,000 bodies to the carcass heap of unemployed financial workers this morning. A week after revealing their $4 billion in write-downs and 93% drop in third-quarter profits, the mega-bank announced this morning that they will be forced to lop off 2% of their total work force.

Most pink slips will be delivered to BoA’s investment banking departments. Sorry if you’re hearing it from The 5 first.

The Witch fire and all her sisters in California may cost insurers over $1 billion, reports The New York Times this morning. Thus far, nearly 1,600 homes have been destroyed by the wind-buffed flames. Hundreds more have been significantly damaged.

A charred estate in Rancho Santana

Thus far, over 679 square miles — about double the size of New York City — have been damaged by fire. A billion dollars is a flash in the pan compared with havoc wreaked by Hurricane Katrina. That biatch cost the insurance industry $41 billion in payouts.

All together, the property insurers hold about $513 billion in capital.

“No one is saying anything about the fires in California,” writes a reader. “At the present time, 1,300 homes have been destroyed, with more to come. I know that won’t take 1,300 homes off the market, but these are homes that were being lived in. 1,300 families need homes immediately. They’ll either take them off the market or build them. Either way, the housing market in California is helped. It will be a big loss for the insurance people. Will any of them go under?

“In any event, a lot of money will be transferred from insurance to housing, and maybe some mortgages. Any comments?”

The 5 Responds:
Money will be transferred, yes. But if you think this will help the housing market or help build wealth because people are put to work building new homes, you’re falling into a classic economic mind trap, first exposed by the French economist Frederick Bastiat in the early 1800s, and then updated and popularized in the 20th century by the journalist Henry Hazlitt. If you have time, we recommend Hazlitt’s Economics In One Lesson. It should take you an evening to read. He examines the economic impact of a thief breaking a shopkeeper’s window and shows that destruction of property is a net negative for all involved.

Both Bastiat and Hazlitt were concerned with man-made tragedies like war. But the lesson applies to natural disasters like fires, floods, droughts and hurricanes, too.

“After reading a number of your gloomy predictions,” writes another reader, “I have two major observations to make:

“1. While most of the world stock markets are indeed ‘U.S.-centric’ — the major exception is Shanghai) — the world economy has not been ‘U.S.-centric’ for some time.

“The prime example is Canada, which is tied economically to U.S. more than any other country: The Toronto Stock Exchange follows the U.S. markets with a five-minute delay (you must like this), but it does not have the housing crisis, the credit crunch or the current account deficit. Construction and houses prices are booming. [Heh-heh, for now.]

“2. Unfortunately, most opinions from the U.S. are very ‘U.S.-centric’ and suffer from reality ignorance and/or denial of monumental proportions. The underlying reasoning is something like this: ‘We are in really big trouble, but we are the best. Therefore, everybody else must be on the verge of collapse.’

“As another example, I can offer my other ‘home’ country, the Czech Republic: The economic growth, real income growth and optimism are unprecedented. In the last five years, the exchange rate has dropped from about 40 CK/US$ to 19 CK/US$, while the average income (in CK) has more than doubled… was this growth driven by the American consumer?

“Well, Americans would have to drink a lot more beer, because that is just about the only export to the U.S. of consequence I can think of. Actually, to export anything to the U.S. from outside NAFTA and not through a U.S.-based company is all but impossible.

“Don’t take me wrong, I have the greatest respect for the U.S. and U.S. people. I just wish they would do what they have always done the best: find the problem and fix it!”

The 5 responds:
First of all, who are you calling gloomy? We don’t make the news, we just comment on it. Nicely.

Second, you have a point. We’ve said as much ourselves. The U.S. economy is less the “economic engine” of the world than Ben Bernanke and most of the financial media would have you believe it is. But we wouldn’t be so sure that the exchange rate improving on the Czech end is a reflection of strength in that economy as much as it is the willful destruction of the dollar on this end.

Thanks for reading,

Addison Wiggin,
The 5 Min. Forecast

Fires’ Cost to Insurers Is in Range of $1 Billion
Buffett sees dollar weakness
Home sales sink 8%



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