FHA on the Brink, China’s Gold Lust, Notes from Dubai and More!

by Addison Wiggin & Ian Mathias

  • First Fannie and Freddie, now the FHA? The 5 looks at this soon-to-be bailout mess
  • Fed test gives market pause… our propriety index says the rally has gone too far, too fast
  • Could China corner the global gold market? David Galland breaks down the details below
  • Addison Wiggin and The 5’s readers weigh in on Dubai… plus, two UAE companies worth watching


  Thirteen months ago, the government took over Fannie Mae and Freddie Mac, both on the verge of failure. What have we learned since then? Jack…

  The Federal Housing Administration, “appears destined for a taxpayer bailout in the next 24-36 months,” Edward Pinto said at a congressional hearing yesterday. As the former chief credit officer for Fannie Mae, he should know.

But it doesn’t even take an industry insider to figure this one out. Just a year after bailing out the overleveraged Fannie and Freddie, the FHA has managed to paint itself into the exact same corner. When the free market — in its infinite ignorance — stopped issuing easy money home loans last year, the FHA stepped in and became a huge player in the mortgage loan biz. It went from insuring 6% of new mortgages in 2007 to over 21% last year, and even more in 2009.

Now the FHA insures 5.4 million single-family home mortgages — most of which require only 3.5% down payment — at a value of $675 billion. Their cash cushion? Oops, must have forgotten to beef that up too… it’s just $30 billion. That’s the same 20-1 leverage our government’s been pooh-poohing on Wall Street.

And since the FHA has become the insurer of last resort, famous for their crazy-low down payments, the loans they cover are souring at an accelerating pace. The more recent the loan, the worse it’s performing… can you hear the wind sucking out of this one?

So what happens if the FHA goes belly up? Hey, don’t call us alarmists: “Let’s be clear,” said Congresswoman Maxine Waters at the hearing, “without the FHA, there would be no mortgage market right now.” As we’ve forecast before, look for the FHA to be the next multibillion-dollar bailout.

  “We remain concerned and recognize the risk associated with increasing numbers of seriously delinquent loans," Federal Housing Finance Agency acting director Ed DeMarco testified yesterday in a separate congresional hearing. Not to be confused with the FHA, the FHFA is Fannie and Freddie’s post- receivership regulator. Heh, what… you thought throwing them $100 billion would fix everything?

DeMarco testified that Fannie and Freddie loans, like the FHA’s, are souring at rates “disturbing both in their magnitude and the fact that they contine to increase.” Despite already being benificiaries of over $96 billion in bailout bucks, Fannie and Freddie will “likely require additional draws,” he said… the nicest possible way to admit both companies need billions more.

Is this housing recovery a big fraud? We think so… for more evidence, and how you can profit from it, look here.

  The FHA/Fannie and Freddie fiasco is one of several factors keeping the market from another day of gains. The Federal Reserve began testing “reverse repo” sales today… essentially a way for them to suck money out of the system when (if ever) they decide to tighten monetary policy. That’s taken a little wind out of trader’s sails and blown it into the dollar index. The gauge of greenback strength is up a few tenths of a point, from yesterday’s 52-week low of 75.7.

  “Our proprietary index shows the market rally is overblown,” says Jim Nelson, our resident income investor and member of our small-cap crew.

“We converged all the indicators of a proper market recovery — both small-cap performance and economic indicators — in an easy-to-read index. We call it the Small-Cap Recovery Index. While it may not have the sexiest name, we are quite proud of how well it’s working.

“The index itself measures where we are in the recovery. As of now, the SCRI shows a 7% increase since we started it a few months back. But here’s where it gets interesting…

“We wanted to use this as a tool to predict where the actual stock market is headed. That’s where the SCRI Oscillator comes in. The oscillator compares the SCRI’s performance to the S&P 500. If the SCRI is outperforming the S&P, stocks are generally undervalued compared with the whole economy. Unfortunately, the opposite is currently true.

“As you can see, the recent market rally looks like it’s overblown. It was simply too much too fast. Of course, this tool is very new and has yet to be truly tested. But so far, it’s working. When it was outperforming the S&P, it pointed to a short-term bottom. We expect the opposite this time. It looks to be pointing to a near-term peak.”

We’ll check in on this SCRI from time to time, but the best way to keep abreast — and learn about the world’s best small cap companies — is to check out Penny Stock Fortunes.

  Gold is backing off record highs today thanks to that slightly stronger dollar. The spot price climbed as high as $1,060 yesterday and trades for the still-impressive $1,047 as we write.

“Some analysts now contend that China can no longer afford to let the gold or silver price slump,” notes David Galland of Casey Research. “The rationale behind that contention is that with the Chinese government now telling the general populace to buy precious metals, it would be highly problematic should gold and silver subsequently take a nose dive.

“In many cases, what a government wants and what ultimately occurs can be wildly different… But in the case of gold, interestingly enough, the Chinese government has the means at its disposal to actually do something about prices. Namely, at $1,000 an ounce, the total value of all the gold ever mined comes to about $5 trillion.

“Of that amount, less than $1 trillion is held in official reserves. The rest is under mattresses, in jewelry and family heirlooms and in various ETFs — GLD being the biggest, by far, holding about $34 billion worth of gold.

“Against these totals, China has foreign reserves in excess of $2 trillion. In other words, more than enough to push the tiny gold market around in any way it wishes. Given that much of its reserves are now denominated in fragile U.S. dollars that it would sorely love to replace with something more tangible, and that China is the world’s largest gold producer, the country’s involvement with gold is something more than just a passing fancy.

“Simply, there is a new gorilla in the room in global gold markets. The extent to which the broader market hasn’t yet figured this out is the extent to which you as an early mover can ultimately profit. Especially in the more leveraged gold stocks, which continue to be strong even as the broader markets show weakness.”

  China is now poised to corner the market in Hummers, too (heh, they can have ’em!). GM is rumored to be sealing the deal on the Hummer brand today with Tengzhong Heavy Industrial Machinery Co. The decrepit unit will go for just $150 million. Tengzhong plans on maintaining current management and keeping Hummer manufacturing in the U.S. — for now anyway… wait till they meet the UAW.

  While China forges ahead, our brethren in the local government are taking the day off. Most city services aren’t available in our beloved “Charm City” today, as Baltimore is enforcing its first of five mandatory furlough days. The city faces a $60 million budget gap, which our Mayor Sheila Dixon — whose corrupt dealings and personal attorney fees have added to this gap — chose to close by shutting Baltimore down for a few days.

(Her defense team occupies a swanky office immediately across the street from this editor’s home office, where we bump into her — and her entourage, and local TV vans — more than we care to. If she spent half as much time being mayor as she does playing CYA with them, Baltimore would be far better off… or at least there would be more parking in our neighborhood.) 

  “We are off to Abu Dhabi today,” writes Addison, checking in from his UAE foray. “According to our German-born Australian friend Dr. Andre Homberg, Dubai is like the call girl beckoning the world to take notice of the capitalist miracle burgeoning here in the desert, but Abu Dhabi is like the queen — regal, relaxed and rich. The GDP per capita in Abu Dhabi is over $70,000, one of the highest in the world.

“Abu Dhabi is the only of the Emirates in the UAE to “earn” their money from oil. Businesses there open at 10 a.m. and close at 3 p.m. ‘Abu Dhabi time,’ they call it. But they too are afraid of peak oil and emissions regulations clamping down on the era of cheap oil. So in the newspapers and around the shisha bars, you hear discussion of the UAE’s entrance into the nuclear era. The government is buying French technology and planning to build nuclear reactors under the sand, and then pipelines for wires extending all the way to Europe. They expect to be able to sell energy to European consumers for $.05 a kilowatt, thereby maintaining their position as a low-cost energy provider to the West.

“The other night Andre introduced us to a Bahraini-Qatari whose mother was an Iranian-American. His name is ‘Mo.’ Mo works for a state-owned media company in the capital city. Today, Mo is prepared to show us all the amenities Abu Dhabi has to offer if we’re interested in moving our publishing operations to his great city. The same amenities he apparently wooed Forbes publishing with. They’re opening a new office in Abu Dhabi in the spring. If Dubai is a bastion of low-tax speculation, booms and busts, Abu Dhabi appears to be a well-oiled (heh) government-sponsored machine. We’ll have to let you know how our meeting with Mo goes.”

  “My sources in Dubai tell me two things,” a reader writes in response to Addison’s correspondence.


“Abu Dhabi is now financing Dubai, and Dubai will be designated as the worker’s city, where they can stay and play. All of the wheels will be moving to Abu Dhabi, the executive’s city. This arrangement makes a lot of sense — Dubai, overrun by ‘slave’ Indians, will keep them. And will continue to build their theme parks.


“Abu Dhabi, on the other hand, is where the ‘money’ will stay, and be loaned out to Dubai as needed to support the working force.


“I have spent a lot of time there, and trust my sources — they are plugged in, with direct connections to Sheikh Mohammed.”

  “One of my partners just got back from Dubai, where he designs golf courses,” another reader writes. “They were building an 8-lane free going over one of the waterways to get to one of the man-made lakes, when construction was suddenly halted. It seems one of the major sheiks had just bought a new yacht and it wouldn’t fit under the bridges being built. So the obvious course of action was to TUNNEL an 8-lane freeway under the water to get to the lake. I guess when money is no object… whatever. I sure wouldn’t want to invest in any of their enterprises.”

The 5: “I wouldn’t recommend anyone invest in their ventures, either,” Addison responds. “The companies to watch, however, because they are partially owned by the government, are Emaar and Nakheel. Emaar seems to be the more responsible of the two and has a 50%-plus float. It went from $2 to over $20 and back down during the boom and bust. Nakheel, on the other hand, is 100% owned by the government. They’re loaded down with debt… billions of which needs to be restructured by the end of the year. If they can pull that off, then it would signal some interest still in the real estate projects continuing here. If not, they’ve got a real problem.

“Our contacts here like DP World. Dubai’s main value is not property, but trade. Many multinationals — Baker Hughes, Cosco, Carrefour, Volvo, Ferrari (you name the car company, really) — use the port at Jebel Ali to move goods into the Middle East. DP World runs this port and many like it around the world.”

Have a great weekend,

Ian Mathias

The 5 Min. Forecast

P.S. Cheers to Addison and Bill Bonner, whose The New Empire of Debt has zoomed to the No.1 spot on three different Amazon best-seller lists. Do you have your copy yet? Get yours here and help us spread the word.

If you’re on the fence, here’s one review that just came our way: “Unlike many of the writers in this space, the prose is not verbose, bombastic or shrill. This is a thoughtful and cogent treatment of the most important issue the world is facing today." – Recoverypartners.biz 



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