Big Market Rally, War Costs Rise to $1.6 Trl, Gold’s New Resistance, Mayer’s #1 Indian Investment, and More!

by Addison Wiggin & Ian Mathias

  • Stocks rally… how Wall Street’s most hated sector led the charge
  • Foreclosures up 30%, home sales expectations downwardly revised for 9th time this year
  • Gold tests $800… Ed Bugos on how low it could go before the next breakout
  • Chris Mayer’s No. 1 Indian investment idea
  • Democrats reveal new “cost” of war on terror
  • Should you be worried about the money in your E*Trade account?

Stocks defied gravity yesterday. Financials led the way. Citigroup, J.P. Morgan, and Merrill Lynch — not exactly the most successful firms on Wall Street lately — all rallied by as much as 7%. Bank of America announced it would take a $3 billion write-down… “Investors” bought the stock anyway, sending it up 3%.

Overall, the Dow levitated to its second biggest single-day gain of the year… up 320 points, or 2.4%. The Nasdaq soared 3.4%. The S&P wisped its way to 3% gains.

The buying continued in Asia. Japan’s Nikkei 225 shot up 2.5%, and the Shanghai Composite broke its recent losing streak with 1.3% gains.

In London, HSBC announced early this morning that it will take a large third-quarter write-down too. Theirs will top $3.4 billion. Yet following yesterday’s market “logic,” traders bought HSBC. It’s up 4% on the news.

We have a hard time believing foreclosures and resets are done wreaking havoc on these big bank balance sheets.

Foreclosure filings, for example, were up a staggering 30% in the third quarter of ’07 compared to the previous three months. California, Ohio and Florida are still leading the charge, says RealtyTrac.

Of the nation’s 100 largest metropolitan areas, 77 saw a rise in delinquencies in the third quarter. The worst city in the third quarter proved to be Stockton, Calif., where one in 31 households was delinquent. Close behind was Detroit — 1 in 33.

For what it’s worth, the metro areas least affected included Greenville, S.C., McAllen, Texas and Baton Rouge, La.

Countrywide announced yesterday that its mortgage loan origination fell 48% in October year over year. The company drafted $20 billion less in loans last month than in October 2006. GodMozilo and company originated $42 million in subprime mortgages last month — down 99% from the $3.2 billion they drafted in October 2006.

The National Association of Realtors revised their forecast for 2007 home sales… again.

Their ninth consecutive downward revision now estimates a 12.7% decline in existing home sales in 2007. If this prediction holds, only 5.6 million homes will be sold in 2007, the lowest level since 2002.

We’re not writing this number down in pen, either. The NAR has proven to be about as forward-thinking as a house pet. Not too many credible organizations can get away with publishing a “2007 Forecast” in mid-November.

The NAR releases one more “forecast” in December… maybe they can pull off 10 revisions. That feat would have to earn them some kind of smiley face or bonus rewards at Chili’s or something.

The U.S. and China both released October “retail” numbers this morning. One nation reported 0.2% growth, the other 18.1%… we’ll let you guess which country consumed more.

Here’s a hint from Ian: “That number helps explain a 8% hike in Wal-Mart earnings… and a 6% boost in the stock yesterday.”

Gold prices, which sunk to $795 in New York trading yesterday, rebounded back above $800 overnight, settling in at $810 as we write.

“There appears to be a floor above $785 at the moment,” writes Ed Bugos, watching the gold price from his perch in Vancouver, “and even more substantial support lying between $750-775 on the chart:


“The 50-day moving average lies at $758 today — and it is both common and healthy for the market to retrace to this average a few times during an advance, as it did on three occasions during the 300-point 2005-2006 surge.

“But gold has only pulled further away from this average since breaking out in September. Given this fact, so close to a critical long-term resistance point, combined with the oversold forex value of the dollar (in the short term), we can’t rule out a fall back to the $750 area.”

Ed tells us such a correction could last a few months, but he still has a four-digit price target for the long term.

Oil prices continued their recent slide yesterday, testing $90 and coming to rest around $91. Could $100 oil be just too expensive for today’s oil trader?

“Track the current CPI the way it was calculated in 1980, and today’s inflation rate is about 7% higher than the current ‘official’ CPI statistics,” writes Chris Gilpin in this morning’s Rude Awakening. “It turns out that 1980 barrel of $39.50 crude is the equivalent of over $200 per barrel in today’s anemic dollars.

“In that context, crude prices are nowhere near their all-time high, and $100 oil still looks to be quite cheap. With all that is going on in the Middle East today, where the world still gets much of its oil, and combined with increasing proof… that Peak Oil is upon us, the odds are better each day that oil is going much, much higher.”

Amen. For more from Chris, check out your latest Rude Awakening.

“We haven’t seen the full pass-through [of high oil prices] yet. I would say what’s in the pipe right now [for gasoline] is about another 20 cents,” said Guy Caruso on Monday. Caruso is the top dog at the Energy Information Administration… might know a thing or two about gas prices.

Caruso said he expects prices to climb 20 cents in as little as two weeks. Given that average gas prices have risen 25 cents since this time last month, we wouldn’t be too surprised.

Today, the average price for a gallon of gas is a mere 10 cents off its all-time high of $3.22.

“Go develop and run hotels in India,” Chris Mayer tells us, along with Capital & Crisis readers in their latest issue. Not exactly what we were expecting, but Chris has a powerful argument.

“India suffers from an acute shortage of hotels. Our group stayed at wonderful hotels during our trip, such as the Rambagh Palace in Jaipur and the Oberoi Amarvilas in Agra. Still, the room rates were so out of whack with everything else. The supply-demand balance is so tight that the average room rates in some cities have reached the $400 level. Overall, room rates in India are higher than current average room rates for New York, London and Singapore. It was one of the most stunning economic facts of the trip.

“Take a look at this chart, which I found pretty amazing. It shows you the total number of available rooms in India compared with those in the U.S. and several U.S. cities. The entire country of India has fewer hotel rooms than the city of Orlando!”


For more on this topic, including Mr. Mayer’s latest stock recommendation, read your latest issue of Capital & Crisis. Not a subscriber? Become one here … it’s one of the best deals in our business.

The wars in Iraq and Afghanistan have been estimated by Democrats in Congress to cost $1.6 trillion — more than double the amount the White House has requested to pay for them.

To arrive at the $1.6 trillion figure, Chuck Schumer and friends extrapolated the entire cost of oil to Americans as the price rose from $37 to $90… and attributed it to the war. The report, says CNN, “estimated that high oil prices transferred ‘approximately $124 billion from U.S. oil consumers to foreign [oil] producers’ from 2002-2008.

Paying lip service to other factors in the rising oil price, they then go on to surmise “the sum of interest paid on ‘Iraq-related debt’ from 2003-2017 will total over $550 billion”… including the rising cost of oil.


Number fudgers Pelosi and Schumer: “Ooh… we got em this time!”

We pointed out which foreign governments were the recipients of these oil-rich proceeds yesterday. But we’d hardly attribute the high price of oil exclusively to the war. Not even considering the declining reserves of easy-to-reach oil, Chinese demand alone has risen by more than 2 million barrels per day from 2003-2007. Total world demand has jumped from 79 million to over 84 million barrels per day.

We remember when oil was trading in the mid-20s, we predicted it would hit $40 on demand increases alone. “Fear mongers,” our reader mail screamed. What, we wonder now, will they call a Congress who blames the war for the price of oil and assumes the price will stay that high for a decade?

“I find it insulting,” begins one reader, referring to another, “that a reader feels that all the money pulled out of American paychecks since Social Security was created is not a debt that needs to be repaid.

“Not only have those of us who paid this tax never received any return and will never get the value we put in, and not only has the government already spent the money in the so-called ‘trust’ fund, the dollar itself has lost tremendous value. For the last 40 years, the government was happy to garnish these funds from my check, and this new-era politician suggests it owes me nothing.

“Now, it is not a debt anymore? Political office is a perfect job choice for this reader. Or if not elected, how about a job in finance?”

“The reader who thinks the sovereign debt of the United States,” writes another, “is an obligation for each American citizen is a bit confused. Examples of nations defaulting on their debt are common enough to provide an illustration of how the real world works.

“One could easily argue that national debt is a moral obligation of a nation’s citizens, but that is a different thing entirely. Even if we were personally responsible for paying back the enormous national debt, we couldn’t do it out of GDP. GDP is not a measure of personal income. It is also a manufactured number, just like corporate earnings. The money the government collects goes directly into producing the second largest part of GDP.

“Following the tortured logic that ‘debt is good,’ maybe we should borrow enough so that all of our taxes go to paying interest, instead of the 25% that currently does. This is the part Dick Cheney and his ilk fail (refuse) to understand. The money borrowed from foreigners, Social Security and American investors has to be serviced. That cost is variable and could rise to be half the budget, even if we had no yearly deficit.”

The 5 Responds: The borrower shall be slave to the lender. Proverbs 22:7.

On a practical note, one reader asks: “I have a sizeable brokerage account with E*Trade; what are the risks of holding an account with this company if it is in serious financial difficulty? I seem to recall Chris Mayer mentioning that he uses E*Trade. I’m sure many of your subscribers would find a professional opinion on this matter very helpful.

The 5: “Yeah,” Mr. Mayer responds, “I do use E*Trade. Funny story: A few months ago, I was going to open up one of those 5% CDs they were throwing around. Then I decided to check out the financials on E*Trade’s bank. I didn’t open the CD. But I’ve kept my brokerage account there. Even if E*Trade goes bankrupt, your brokerage assets are safe. It shouldn’t affect you in any way.

“What might happen, which could be a pain, is if someone buys E*Trade. Then you’ll have to get used to using another broker. But that’s a risk you take with any financial institution these days. They are all for sale at some price.”

Good luck,

Addison Wiggin
The 5 Min. Forecast


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