Home Prices Plunge, Avoiding the Dollar, Investing in Nuclear, The China Dilemma and More!

by Addison Wiggin & Ian Mathias

  • The latest chapter in the housing bust: Home prices collapse, but insiders bullish?
  • Chris Mayer with a way to escape the dismal U.S. dollar
  • Our resource man explains why oil should rise, but why you shouldn’t trade it
  • Americans ready for more nuclear power… Patrick Cox on whether you should invest accordingly
  • Plus, a “front lines” forecast for China’s economic future


  First today, an important trend: The housing swan dive continues…

U.S. home prices have been reduced to levels unseen since 2003, says the latest rendition of the S&P/Case Shiller Home Price index. Yesterday’s printing capped off 2008 with another record decline. December data showed a 19.2% yearly fall for the 10-city composite and a 18.5% slump for the 20-city — both records. This index has now fallen every month for two straight years.

“The broad downturn in the residential real estate market continues,” says David M. Blitzer of S&P. “There are very few, if any, pockets of turnaround that one can see in the data. Most of the nation appears to remain on a downward path.”

  We suspect this home price trend will continue in Case Shiller’s January and February reports. According the National Association of Realtors today, the median new home price fell to $200,900 in February. That’s a record 18% fall from the same time a year ago and the lowest level since 2003. Consider yesterday’s record fall in existing home prices and it seems this trend is still alive and kicking.

  But never mind the prices, here’s what you’ll read in the papers: The National Association of Realtors surprised the Street again today, this time with a 4.7% pop in new home sales during February. Coupled with a similar existing home sales bump yesterday, we’ve got two — count ’em, two — positive home sales numbers.

That’s a good thing, no doubt… but home sales only rebounded in February because prices have fallen so dramatically. Distressed sales occupied a huge portion of existing home sales, and there is still an incredible 12.2-month glut of new homes on the market.

Durable goods orders jumped 3.4% in February, breaking a seven-month losing streak. According to the Commerce Dept. today, orders for goods designed to last at least a few years popped up by the largest amount since December 2007 — ironically, the “official” start of the current recession. 

  The two data surprises above have given stocks a boost today. Pre-market trading indicated a flat trading session today… a reasonable response to Monday’s boom and Tuesday’s profit taking. But stocks are back on the rise, thanks almost entirely to durable goods and new home sales. As we write, the Dow is up over 200 points.

The current recession (or depression, as Bill Bonner insists) will end by 2010, opines a UCLA study today. The school’s economists forecast a sizable GDP decline of nearly 7% for the first quarter of 2009, a 4.5% contraction in the next quarter, a 1.7% fall in Q3 and then a slow return to growth. The group thinks unemployment will persist, peaking at 10.5% in the middle of 2010.

We’re skeptical.

  The dollar remains under pressure today. President Obama demonstrated, among other things, serious resolve to push his mega-budget through during his address last night. Pile that on top of the trillions the Treasury is spending and trillions more the Fed is printing… we’re hard-pressed to find a long-term case for the greenback. The dollar index fell back below 84 and goes for 83.5 as we write.

  “Buy the stronger currencies or assets in stronger currencies,” Chris Mayer urged his Capital & Crisis readers this week. “All paper currencies are on the long road to zero. But some are on a faster road than others. For example, the Norwegian krone is starting to look like a safe-haven currency. David Bloom, an analyst at HSBC, recently called the krone, “the ultimate safe-haven currency.” He said it was “probably the best currency in the world.” Why?

“The krone is one of the few currencies outperforming the dollar this year. Despite all the actions of the Fed to destroy it, the dollar has rallied in the face of an economic crisis and a strong desire to hold cash. But this is temporary. Those dollars are like kindling. They will ignite soon enough. In the meantime, the krone’s strength is particularly noteworthy.

“The krone is strong because its central bank is not printing nearly as much of it as everyone else is printing of their own currencies. The Norwegian economy is still growing, while the U.S.’ is on the ropes. Norway also has lots of oil. You can see the market’s confidence in the krone by looking at the cost to insure Norwegian debt. It is cheaper than trying to insure U.S. debt. In fact, among the 10 most-traded currencies, insuring Norway’s debt is the cheapest insurance out there.

“Less direct is to own Norwegian stocks. If you own a solid Norwegian company, for instance, a stronger krone — all other things being equal — means a higher dollar price for your shares.”


  Despite all the worldly woes for the dollar, gold is simply out of favor this week. The spot price fell as low as $920 an ounce yesterday, and remains at that level as we write.

  Crude oil continued its winning ways yesterday. After a brief retreat, the front-month contract returned to its 2009 high of $54 a barrel. Crude is under pressure today, though. The Energy Dept. announced an increase in oil and gas supply, helping push prices down to around $52 a barrel.

  “We use crude oil as a barometer more so than a trading vehicle in these unique conditions,” writes Alan Knuckman on behalf of his Resource Trader Alert readers. “Crude has rallied and stabilized above the psychological $50 a barrel level, signaling a rebound from worldwide panicked demand destruction.  Like our income taxes, when we pay more for crude, it means we are in a better financial situation to do so. Sorry about the hot-button issue, but it simply means we are making more money and are better able to afford to do so.

“Though it is difficult to envision crude oil near $150 again, a simple 50% retracement of the move off the recent lows puts a target at $90 a barrel.

So is now the right time to buy crude? “With volatility off of the charts and the present unheard of backwardization in the crude market, a proxy in the Canadian dollar is a more-efficient trading vehicle. As crude rises, so does the currency from the No. 1 exporter to the United States go due north.”

  The global airline industry lost a net $8.5 billion last year and will lose another $4.7 billion in 2009, says a report today from the International Air Transport Association. Heh, just in case you forgot this industry is still in the pits. Over the last 15 months, just under 40 worldly airlines have gone bankrupt, out of business altogether or “suspended operations” indefinitely.

After suffering the sting of $140 oil in 2008, the IATA says today’s “relief of lower fuel prices is overshadowed by falling demand and plummeting revenues.” Interestingly, the group predicts Asia-Pacific airlines will fare worst over the next 12 months, while North America will likely deliver the “best performance.”

  “There is evidence of a return to rationality regarding nuclear power,” reports our tech analyst, Patrick Cox. Patrick is referring to a recently published Gallup Poll that shows the highest level of American support for nuclear power since at least 1994, when Gallup first started polling this matter. Nearly 60% of “Joe Six-packs” now favor its use, compared with 53% two years ago and a low of 46% in 2001.

“Even green leaders,” continues Patrick, “are admitting the folly of rejecting this cheap, clean and safe (when compared rationally with other energy sources) technology.

“The green turnaround on nuclear power is particularly relevant now. President Obama has picked several global warming activists to serve as top officials. The most important is Harvard physicist John Holdren. As presidential science adviser, he could have a significant impact on energy policy. His career, in fact, has focused on climate change, next-generation nuclear energy and nuclear disarmament.

“From the perspective of an investor, what does this mean? Among other things, it could rapidly accelerate the transition from the current generation of nuclear power plants to the next. I would, incidentally, never invest in a technology simply because it has political support. Ethanol, for example, had lots of it. It was never a good idea, though, and is finally being recognized as such.”

But Patrick is interested in investing in this technology, namely in nuclear energy derived from thorium, which we’ve discussed in The 5 before . If you’d like his investment advice on the matter — and other emerging technologies — definitely check out his Breakthrough Technology Alert.

  Last today, here comes another easy target for the angry mob: hedge fund managers.

In a masterstroke of political timing, Alpha magazine released its list of top-earning funds and fund managers yesterday. Turns out the top 25 worldly fund managers pulled in personal earnings in excess of $11.6 billion in 2008. Most of the names are familiar: James Simons, John Paulson, John Arnold and George Soros round out the top four, each earning $1.1-2.5 billion last year alone.

  Heh, and if you’d like to bet on their future, here’s your chance: IndexIQ unveiled the first-ever ETFs that track the performance of hedge funds today. The company will launch five different ETFs… one will try to match the average performances of the world’s event-driven funds, one is for short funds, another is for long funds and so on. Just what the modern man needs, we say… complicated derivative investments based on the performance of secretive, underregulated organizations.

  “Having just spent the past eight years doing business in China,” writes a reader in response to our China boom/bust debate, “and having traveled there as far back as 1990, I can speak to the China issue with a bit of authority.

“Clearly, China will be a major power, and the current setback will certainly be difficult, but China has a number of resources and advantages, including:

 – $2 trillion in foreign reserves

 – 1.3 billion people, most of which are hardworking

 – A recent history of how to really screw things up.

“That being said, I doubt the Chinese will achieve such goals as replacing the U.S. as THE major superpower, because:

 – Habit of using military force to annex places like Tibet

 – Corrupt party officials

 – Corrupt business leaders who got their jobs from corrupt party officials

 – Dysfunctional economic views (the yuan should have been free-floated years ago and would likely be about 5RMB=1USD.)

“What we have seen is corrupt party and business leaders hold onto a unfair currency exchange in order to quiet the masses and keep them busy with a job so they don’t ask questions as to why things are so unfair… better to let them have the idea that they will get ahead someday and then use the threat of unemployment to keep them in line. The corrupt business leaders may change at some point, but the top two are pretty well fixed. I guess our bankers and AIG were trying to close the corruption gap.”

The 5: It’s that “history of really screwing things up,” that intrigues this editor the most. Seems as though China has done a fine job at missing out on global booms for a long, long time. They were such an incredible world power and innovator from roughly 500-1500, and then it just… stopped. China became isolationist, the Ming Dynasty fell, then the Manchu conquest, the Opium Wars, Taiping Civil War (probably worst civil war of all time) and then rebellions all through the 1800s. Then came a military spanking in the First Sino-Japanese War, cession of Korea and Taiwan, WWII and widespread civil chaos that was only “cured” by what might be the biggest socioeconomic blunders of modernity: the Great Leap Forward and the Cultural Revolution. There were some bright spots, no doubt, and things have certainly improved lately. But it’s been a tough couple of centuries over there.

Someone like Fareed Zakaria might say that’s why China is poised for a comeback — that they’ve learned from these mistakes and that a “regression to the mean” is long overdue. We’re more cautious… we would invest very carefully in a stock or fund with a track record like that.  

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. Addison sends his regards from the slopes. Fresh powder beckons in the Northeast, and even “the Chief” needs an occasional break from this mad world of daily publishing. He’ll return soon.

P.P.S. Have you read our latest energy investing report? We’ve come to call it the “grizzly power” discovery… it’s a great story and an even greater investment theme. Check it out here, and do it soon — there’s a new EPA mandate in the pipeline that could change the whole game.



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