The New Housing Crisis, Dow 10,000, Big Brother Goes to China and More!

by Addison Wiggin & Ian Mathias

  • Foreclosure data surprise: Is this the second wave of the housing bust?
  • Media cheers Dow 10,000, but traders already showing buyer’s remorse
  • Forget London and NYC: Greg Guenthner on the new king of Big Brother surveillance
  • Plus, Chris Mayer finds a property bubble in the most unlikely of places


  U.S. foreclosures jumped to an all-time high of 937,840 in the third quarter. That’s a 23% rise from the same time last year, says a report from RealtyTrac today. One in every 136 households received a filing — also a record. Once again, Nevada takes the cake… and incredible one in every 23 households was in some form of foreclosure last quarter.

And they tell us the economy is recovering?

But here’s the kicker — a theme that should be no surprise to 5 Min. loyalists: This isn’t about subprime anymore. The most recent data from the Mortgage Bankers Association claims subprime mortgages currently account for hardly a third of foreclosure starts, down from 50% last year. Prime loans — the gold standard of the mortgage biz — now take up a 58% share.

Even the foreclosure scene in terms of home prices has been turned on its head. Check it out:

About 35% of home foreclosures occur in the bottom third of the housing market, says, down from 55% in 2006. In June, the most recent data available, 30% of foreclosures were in the top tier — nearly double the rate the year before. (How could this happen? Heh, check out today’s reader mail.)

And the dirty icing on this rotten cake: Option ARMs. This pending rate reset crisis — which just about everyone in “the know” saw coming in early 2008 — looks like its really going to happen. 46% of option ARMs are currently 30 days past due, despite the fact that just 12% have reset to higher payments. Resets for the rest of those ARMs, as you know from this famous chart, are right around the corner.

Is this the foundation on which a recovery is built? C’mon… Addison answers the question, and more, here.

  Lest you think just the residential market is in hot water… the delinquency rate on commercial mortgages soared sevenfold last month, says a report from Credit Suisse. Sevenfold!

The Swiss bank reports that $22.4 billion in commercial mortgages were at least 60 days past due in September, up from just over $3 billion in September 2008.

  But hey, screw those back-page bits… Dow 10,000! Hooray!

Financial and energy stocks led the way to this headline-grabbing high-water mark yesterday. J.P. Morgan spearheaded the five-digit charge, beating expectations and setting a tone for the rest of its banking brethren this earning season.

But today, we note an interesting detail: Citigroup came out with earnings of its own early this morning, which far exceeded expectations. But look at the trading action:

  “Most of the earnings news is garbage,” opines Dan Denning, “Earnings are whatever an accountant wants them to be. Compared to last year — which was a shocker — this year’s earnings are bound to be better. And when analysts’ expectations are subjective, are you surprised to learn that the people who sell you stocks think that earnings are ‘surprisingly’ good?”

  The latest retail sales numbers are also tempering market gains. Sales fell 1.5% in September — a hangover from August’s “cash for clunkers” binge. Strip away the cars and trucks, and it’s not that bad… sales ex-autos managed to rise 0.5%.

  Foreign investment in China is back en vogue. Direct foreign investments rose 19% in September, year over year, marking the second month of improvement after a 10-month drought. According to the Ministry of Commerce, nearly $8 billion in foreign cash flowed into the Red Nation.

"The two months rebound shows the confidence of foreign investors in the Chinese economy,” said Commerce Ministry spokesman Yao Jian. “With the strong rebound in the domestic economy, I believe more foreign investors will participate in China’s economic development.” We concur. Yet another reason to check out our shiny new service: BRIC by BRIC.

And how will China use some of that newfound cash? Heh, by building one of the biggest Big Brother networks the world has ever known… of course!

  “Right now, the Chinese government is in the midst of a massive security overhaul,” writes Greg Guenthner, with a unique opportunity. “When the dust clears, the sprawling city of Shenzhen will contain more than 2 million closed-circuit television cameras. That’s double the number of cameras lining the streets and shops of London.

“Make no mistake about it — Big Brother is watching the Chinese every moment of every day.

“This industrial hub of Shenzhen is not only home to millions of residents — it’s also teeming with high-tech surveillance equipment. As part of a project that began a couple of years before the Beijing Olympic Games, the government installed about 200,000 surveillance cameras throughout the city, according to journalist Naomi Klein.

“‘China today, epitomized by Shenzhen’s transition from mud to megacity in 30 years, represents a new way to organize society,’ Klein writes. ‘Sometimes called “market Stalinism,” it is a potent hybrid of the most powerful political tools of authoritarian communism — central planning, merciless repression, constant surveillance — harnessed to advance the goals of global capitalism.’

“The surveillance industry in China is booming,” Greg continues. “It will be a $43 billion industry by next year, growing 20% annually for the next two years, according to the Chinese Security and Protection Agency. This robust growth won’t happen by itself. China’s ruling political party and big business will be supplying the cash to expand surveillance and security measures in every city and town in the country.

“Whatever bumps or growing pains the Chinese economy will face over the next several years, it is all but certain that the current expansion of the security state will continue unabated. And one small company is emerging as a security and surveillance industry leader — nabbing lucrative government contracts left and right, all while buying out smaller competitors to fuel its growing business.”

Greg just put that company in the Penny Stock Fortunes portfolio yesterday. The ticker alone is worth the amazingly low subscription fee… details here.

  The new global hot spot is… Luanda, Angola?

“That was a fascinating aspect of the real estate expo we attended in Dubai,” writes Chris Mayer, on the last legs of his “New Silk Road Tour.”

“Ridge Solutions, the biggest developer in Angola, had a big exhibition near the front of the hall with a Formula One race car to grab your attention. Turns out the story in Angola is kind of intriguing.

“After a long civil war, Angola found peace in 2002 and has since become one of the world’s fastest growing economies. According to the IMF, Angola’s economy grew 16% last year. A natural resource boom — especially in oil and diamonds — is driving development in the capital city of Luanda.

“Hard as it is to believe, this has made Luanda one of the most expensive cities in the world. A basic apartment can cost you about $15,000 per month.

“As usually happens, there is an infrastructure boom in its wake — a building bonanza in everything from sewer systems to roads. There is also a nascent agriculture boom. Ridge, for instance, is also building a dairy farm and laying the groundwork so the country can grow fruits, wheat and corn.

“So you see, bubbles can alight nearly anywhere.”

Did you know that you can now get $1 trials of Chris’ Special Situations letter? If you’ve been meaning to kick the tires on his high-end advice, there is no better time… check out this rare offer here.

  “Your Confused Reader yesterday was dumbfounded by Mr. Bonner’s deflationary forecast,” a reader writes. “Given that inflation is too much money chasing too few goods, please ask Confused where in the USA is there too much money, and where is there too few goods? My goodness, whatever you want to buy there are 10 sellers rolling out the red carpet. And where would one get the idea that the government is printing money and dropping it from helicopters?

“Despite Bernanke’s infamous remark, why would the U.S. government need to print money when every T-bill and bond sale is 3 times oversubscribed by foreign governments and central banks tripping over themselves to buy our debt? You don’t need to print when you can borrow every dollar you need. Look at the M2 and M3 statistics — where is all this money being printed?

“If there were hyperinflation coming next week, the smartest people in the world (bond funds — i.e., Bill Gross at Pimco) wouldn’t be buying 30-year Treasuries at 4.05%. Nice to see the boys at Agora can still see through the smoke screens.”

The 5: Consumer prices remain in deflation, the Commerce department claimed this morning. They say that despite a 0.2% rise last month, the CPI is down 1.3% annually. That’s the seventh month in a row of year-over-year deflation. We wouldn’t put it past the government — not for one second — to milk these numbers to support its fiscal and monetary policies. But your logic makes sense… inflation might be coming, but it certainly isn’t here yet.

  “It’s a tale of two cities, or two houses as it seems — mine and his,” another reader writes. “The neighbor down the street had the best of times for several years, having purchased the small estate in late 2006 with no money down, cobbling two loans together for $1,283,000. Being a mortgage broker he should have known better. Obviously, he has not been following The 5.

“Well, the worst of times has come about. After pulling the property profile and reviewing, it he has been putting the house in and out of escrow with people he knows, who later drop out just to continue staying in the home without paying the mortgage payments. It finally caught up with him, and after 2½ years, the house finally foreclosed. The price… $427,000 !!!!! The banks are now taking the ZIP codes and looking at the mean price per square foot and selling the homes for that price with no on-site inspection.

“The final result inflicted upon his fine neighbors, of which I am one, is that all homes in the area now are substantially valued lower. How many homes in my area just went underwater with their mortgage? Multiply this situation across the USA and this mess is nowhere near over. Bill Bonner will prove prescient raising the crash alert flag the other day.”

Thanks for reading,

Ian Mathias

The 5 Min. Forecast

P.S. As far as this editor knows, this is an Agora Financial first: Agora on Indian TV. Here’s Addison’s interview from yesterday’s NDTV broadcast.

P.P.S. Four of Chris Mayer’s favorite natural gas stocks, for just $1? It’s true, but not for long… look here for details.


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