Another Guess at Total Financial Losses, Jim Rogers Wisdom, Arctic Oil Rush, and More

by Addison Wiggin & Ian Mathias

  • Another guru predicts total financial losses… all signs point to credit crisis barely half over
  • The data point that kick-started yesterday’s sell-off, and two surprise measures that are buoying stocks today
  • Another look at bear market history… how this market compares and how far we might have left to fall
  • Jim Rogers… “the single best piece of advice” he’s got, plus one investment recommendation you’d never guess
  • Ed Bugos with the technical outlook for gold
  • Plus, USGS’ latest oil and gas report… the arctic land rush is on! 

  “Nearly $1 trillion of cumulative losses will finally mark the gravestone of this housing bubble,” opined Bill Gross this morning in his latest monthly missive. 

“The problem with writing off $1 trillion from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both, which, in turn, begins to affect economic growth.”

Ugh… yeah. A trillion bucks in losses is generally not good for economic growth. Let’s throw the Pimco chief’s forecast on our “Write-down Rundown” and see where it sticks:

“Make no mistake, the current conundrum that must be solved is how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again. That, however, is easier said than done. One of the wisest men I know has this serious, but admittedly impractical solution: have the government buy 1 million new/unoccupied homes, blow them up and then start all over again. Absent that, he’s not quite sure what to do, nor am I.”

  Existing home sales in June fell 2.6%, to a 10-year low, reported the National Association of Realtors yesterday. Put another way, existing homes sold in June at the same pace they did in 1998, when the U.S. had over 20 million fewer inhabitants.

The median home price for such resales fell 6.1% from June 2007. What’s worse, inventory grew as well… an 11.1-month supply sits vacant across the U.S. We learned today that when compiling this measure, the NAR counts only foreclosed homes listed by multiple agencies. We won’t pretend to know much about selling foreclosed homes, but that sounds a bit fishy.

  These latest home sales data weighed heavily on markets yesterday.

The report cast a sour mood on recently rebounding financials, and some lousy earnings reports from Ford and regional banking heavy hitter National City sealed the deal. The Dow and S&P 500 fell over 2.3%, while the Nasdaq managed a 2% loss. Fannie and Freddie caught our attention especially yesterday… both plummeted around 20% as investors came to their senses.

  But just as we were ready to write off today as another victim of the bear market… June durable goods sales unexpectedly rose. The Commerce Department said sales of goods meant to last more than a few years inched up 0.8% last month. That’s way better than the 0.5% loss the Street had anticipated.

Orders rose for primary metals, fabricated metals, machinery, defense-related goods and electrical equipment. Sales of commercial planes, motor vehicles, other transportation goods and computers fell.

  U.S. consumer sentiment has improved, too. The latest Reuters/University of Michigan index of consumer sentiment popped up 5 points, to 61.2. While it’s a far cry from the 2007 average of 85.6, we’re surprised to see it bounce off its 28-year low.

  And thus, the U.S. stock market has drifted up about half a percent this morning. With the violent up and down swings this week, we’re inclined to take another look at historical market behavior during bear markets. This correlation comes from the folks at… if history is our guide, you can probably bet on hard times to come:

  As we expected , China announced this week that it now has the world’s biggest Internet population. Internet users in China passed 253 million last month, reports a China Internet Network Information Center survey. That’s more than the 220 million estimated users in the U.S., now the world’s second biggest Internet population.

China’s Internet community is growing at an incredible 50% clip per year. Current Internet users in China represent only 19% of the nation’s population.

  “The single best advice I can give you,” Jim Rogers told our Symposium attendees yesterday, “is to teach your children Chinese. It will be the most important language in their lifetimes.

“We need to understand the rise of China… most people don’t. China is the next great country, whether you like it or not. The 21st century will be the century of China. It is really among the best capitalist societies in the world right now, if not the best. I assure you the Chinese are working dawn to dust, saving and investing. They save and invest over 35% of their income. It is changing the world, and it is going to continue changing the world. It is the most important thing happening in this century.”

Rogers spoke for nearly an hour at the Symposium. He gave us his favorite currencies, thoughts on the bond market, his favorite underpriced commodities, best countries to live and invest in and some great tales from his record setting drive around the world. His whole presentation and the following Q&A and the rest of this incredible Symposium are available on our CD and MP3 set. Grab one here.

And the most bizarre recommendation from Rogers? “I’ve been buying Asian baby stocks like Hello Kitty, because I think the Japanese government is going to do everything it can to start a turnaround in the demographic crisis there… just not making enough babies over there. Every time I’m in Japan, I offer to help, but no one ever takes me up on it.”

  Gold traded pretty flat in the last 24 hours. It’ll be $920 an ounce today.

  “If you look at the corrections in the gold market since 2001 in the chart below,” says our gold man Ed Bugos, “you’ll notice that rarely have they lasted much more than a couple of quarters before the bulls took charge again. You might also notice that the first leg in each correction has been followed by a second one that usually fails to make a lower low — 2004 being the exception. The market also likes to brush up against its 50-week moving average before completing the correction.

Moreover, we can even infer a loose relation between the extent of a rally and the depth and duration of the ensuing correction. These things are called “technical” mainly because they have nothing to do with the fundamentals. And let me tell you, it is dangerous to put too much weight on past performance and behaviors when we’re talking about investors and the market.

“Notwithstanding, if this were just a typical correction, we could expect to see a second ‘attempt’ by the bears to make a lower low over the next month or two before the bulls break out, sometime in the fall.”

  Oil continues to trend down today . Crude is selling for $123 as we write.

The crude story this week is the United States Geological Survey’s latest projection of arctic oil and gas reserves. You may recall the silly submarine-searching, flag-staking scuffle last year between Russia and Canada over possible arctic oil. This week, it looks like the land grab will soon resume… the latest from the USGS says there could be 1.7 trillion cubic feet of natural gas and 90 billion barrels of oil.
“For a sense of scale,” reports The Globe and Mail today, “that’s two-thirds of the proved gas reserves in the Middle East and four times current U.S. oil reserves.”

Umn… seriously?

  Gas prices fell again today. The national average price of a gallon of the stuff is down to $4 even. That’s down a full dime from its all-time high… not too shabby.

  “The gas price is controlled by the Thai government,” responds a reader to yesterday’s inbox . “It is the same everywhere in the country. Right now is 39.39 baht per liter. That’s $4.49 a gallon. Our Honda Civic runs on UGR 91 RON — whatever that is.”

  “What do you propose if the rescue is no good?” asks a reader of the government’s plan to bail out Fannie and Freddie. “Let them and all the other banks fall and let that create a domino effect that would create a worldwide panic (instantly) and a super recession? At least you would then be right about your stand, which is that you know everything and (very smart) people in the Fed, etc., know nothing.

“You are looking at this problem ONLY from your perspective as investors and analysts, and not from the perspective that the Fed must use. The Fed must take into consideration other countries, political parties, other central bank, investors and even the common man, etc. You use an armchair analysis when you write about your overly simplistic opinions of this VERY complicated matter.

“I personally admit that I have no clue as to what to do about this mess, but it irritates me when every layman out there is pushing his brilliant ideas of how-to-save-the-world plans that are fit to be in a comic book.”

The 5: We have to admit, after a Symposium like this, the “answers” appear a lot more complex and difficult than we can do justice to here in The 5. There are those at the Symposium who would say it’s not worth fixing at all… that’s true, too.

Further, we’re sure Ben Bernanke is smart. Alan Greenspan and Paul Volcker are smart guys, too. Even Arthur Burns was a smarty-pants. But where in the Fed’s charter does it say it’s responsible for saving the world?

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. These Symposiums can be brutal. We’ve been going at it for 14 hours a day for five days. Today’s the final session. This evening, we conclude with a wine tasting hosted by some friends who are developing the wine trade in Argentina… should be a nice ending to a busy week.

It’s nice to hear comments like this one from Chuck Butler: “I believe this conference to be the absolute best conference I have ever attended,” Chuck wrote in his Daily Pfennig this morning. “Believe me, I’ve attended quite a few conferences in my time!”

Indeed, he has… as have the hundreds of attendees that have approached us this week with similar praise. If you were able to join us, we, of course, hope you agree. If you haven’t, we’re offering a CD and MP3 box set of the show… today’s the last day to pick it up at a discount. Save some money, and enjoy the show, here.    


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