Another Foreclosure Crisis, The No. 1 Oil Investment Lesson, Products of the Cold Snap and More!

by Addison Wiggin & Ian Mathias

  • Record foreclosures in 2009, record forecast for 2010… why the worst might still be yet to come
  • White House plans “fiscal responsibility fee” on banks… then announces biggest budget deficit in history
  • Chris Mayer on THE most important thing for oil investors
  • The New Cold War: Patrick Cox on how to turn the U.S. cold snap into triple-digit stock gains
  • Plus, a front lines report from Haiti… and one way you can help


It’s hard to picture 2.8 million homes. That’s about how many detached homes are in all of Pennsylvania or Illinois. It’s also how many homes were lost to foreclosure in 2009.

There were 3.9 million foreclosure filings last year, RealtyTrac reports today, 2.8 million of which resulted in foreclosure. That’s a record dating back to at least 2005 — when RealtyTrac started keeping track. We say it’s safe to call this one another “worst since the Great Depression” statistic.

Worse yet, RealtyTrac is planning on 3 million foreclosures in 2010. Makes sense – home prices are still way, way below what most people paid from 2003 to today. And 10-20% of the population is out of work… not the seeds of which a housing recovery is sewn.

So check out this bar-napkin math: Census says the average household is 2.59 people… times the 2.8 million homes this year and 3 million guess for 2010… that’s as many as 15 million people up the creek. OK, maybe half of those foreclosures were unoccupied homes… so 7-8 million — equal to the population of Virginia.

  “The force of the correction is equal and opposite to the deception that preceded it,” is a dictum of Financial Reckoning Day.  With that logic in mind, and the S&P/Case-Shiller Home Price Index, we’d be lucky to just get away with another 3 million foreclosures.

  More scary signs for real estate: 8% of American apartments are vacant, a 30-year high, says a report from research firm Reis. And that’s despite effective rents falling a record 5.6% in 2009.

  But if you live in a 9-foot wide, three-story home, there’s hope.

The “skinniest” home in NYC sold for $2.1 million this week, 31% higher than its 2000 sale price. True to form, the new owners of former alleyway (seriously) in the Village have already listed the place for rent — $10,000 a month. What a steal.

  A little further south, on Wall Street, major American indexes eeked out small gains yesterday. Traders reportedly found comfort in the two most unlikely of places: The Fed and the biggest U.S. banks:

  The American economy has “improved modestly further, and those improvements are broader geographically than in the last report,” reads the Fed’s latest Beige Book, which covered late November to early January. We’re told this was a driver in yesterday’s stock gain, which is almost hilarious. Considering the Fed’s forecast history, we’d sooner look to tea leaves and chicken bones.

  And on Capitol Hill, it was time for another public lashing of Wall Street fat cats yesterday. CEOs of Goldman Sachs, JP Morgan, Morgan Stanley and Bank of America showed up at another gathering of the Financial Crisis Inquiry Commission — a task force designed to assign proper blame to this mess. Former California state treasurer Phil Angelides gets the metaphor of the day award, for suggesting that Goldman CEO Lloyd Blankfein was selling cars with no brakes and then buying insurance on the driver. Heh. What a charade.

“Frankly, the banks and the media and the financial industry are incredibly blase about the risks to the economy and the financial system,” Dan Denning opines from down under. “We’re not two years removed from a major systemic crisis, and most financial professionals are treating it like it was an anomalous near miss, and not a sign of a more fundamental rot in the very DNA of the financial system.

“That rot, we would contend, is the attitude toward debt and leverage. It’s a series of embedded assumptions about how to use borrowed money and what to expect (in terms of risk and performance) from asset markets over time. The financial world is using 20th- century assumptions for a 21st-century world in which the basic premises (the cost and availability of capital) have radically changed.”

  And just as we forecast, President Obama is expected to announce a "financial crisis responsibility fee” on major U.S. banks. Mr. Obama will propose a 0.15% levy on the 50 biggest banks in the country — whether they were TARP recipients or not. Details are still shady, but we hear the measure is supposed to raise $90 billion over the next 10 years.

  That won’t even last a month here in I.O.U.S.A. While wagging his finger at the banks for their lack of financial responsibly, Mr. Obama and his team announced a record-setting $91.9 billion budget deficit for December. That’s also the 15th monthly deficit in a row. The White House budget office still expects another $1 trillion-plus deficit for the current fiscal year.

  News like today’s makes you want to diversify out of the dollar, no? The dollar index is down just a few tenths of a point today, at 76.9

  Oil gave up the $80 mark yesterday, and goes for $79 a barrel today.

  “Of course, no one knows what the price of oil will be,” Chris Mayer admits, “but there is no shortage of forecasts. Goldman Sachs says it will be $95 by the end of 2010. Deutsche Bank says $65. They are all guessing.

“There is one thing we do know. And fortunately, this is the most important thing to remember as an investor in oil: The market is still pricing proved oil reserves at less than replacement cost. In other words, it is cheaper in today’s market to buy proven reserves in the stock market than to drill for new ones…

“Here is a scatter plot by an energy firm I respect a great deal, Lucas Capital Management. It shows you the universe of stocks it follows. EV is enterprise value, which you can think of as the cost to acquire the entire business, both the stock and the debt. So EV/BOE shows you how much you are paying per barrel of oil. It plots this number against reserve life. Take a look:


“The math is easy. You have lots of companies here in which you can buy oil in the ground for under $10 a barrel… and it costs on average $25 a barrel to replace it.

“I could not make a more compelling argument for oil stocks than this.”

Buying for less than replacement costs is a mainstay in Chris’ investing ethos. “Whether I’m buying potash mines or gold mines or factories or oil rigs, “ he says, “if I can buy it in the stock market for less than it costs to replace those assets — and as long as I’m not buying buggy whips — then I’ve got a good chance of making money.”

And we heartily agree. Many, many of companies like this can be found in his Special Situations portfolio… get access to this worthy hit list here.

  The great American cold snap of 2010 is easing today, but some severe economic and political damage has already been done, reports our tech editor Patrick Cox. “There were snow flurries in Naples, Fla., just across the bridge from this island where I live,” he says. “Considering that we’re at the same latitude as Miami, that’s pretty amazing. Mass fish die-offs have taken place in the nearby Everglades waters, and even sea turtles and manatees are dying. Cold records are being set across America, Europe and Asia.

“This would all seem to bolster those who point to solar cycles as the main climate driver. This rather startling chart of average planetary solar particle impact on the Earth’s magnetic field shows the reason why.

“Current solar magnetic activity is, amazingly, lower than it has been since scientists began measuring it in 1844. Previous periods of solar quiet were also accompanied by global cold spells. (If you’re interested, you can find more here.)

“The economic impact of this weather on agriculture is going to be ugly. The effects will be felt by Canadian wheat producers as well as Florida citrus growers. Given that the Earth’s primary energy storage system, the oceans, is losing heat, we may be entering into a prolonged cooling. Unless we see a quick turnaround in solar activity, which isn’t likely, Brazilian and other tropical agricultural producers will do well in coming years.

“The other major financial impact will be positive, however. On top of the Climategate revelations, these record colds have killed chances that an economy-crippling cap-and-trade bill will become law anytime soon. And if it doesn’t happen soon, it probably won’t at all, since polls predict massive shifts next election.”

Patrick’s keen sense for the science world has yielded one company that jumped 288% over the last year (up 598% since he recommended it) and another that’s up 259% in the past 12 months. A third has gained 209% in the same time frame. You could do worse than following tech innovations out of the ongoing fiscal mess that’s gripping Wall Street and Washington. Mr. Cox is among the leading analysts in the field. If you’ve missed them, check out his 2010 predictions here.

  Last today, a sign of the times: Abu Dhabi announced its latest (maybe most unusual) investment this week — a 10% stake in the Ultimate Fighting Championship.

Nothing says “distinguished, Middle Eastern Muslim” like cage fighting…

Flash, the state-owned media company that wrote the fat check, says it’s committed “to building Abu Dhabi’s profile as an international entertainment destination, and this partnership provides further proof of our company’s bold ambitions.” UFC has already scheduled a pay-per-view event at the Emirates Palace Hotel.

If you ask just about any man or boy between 10-40, they’ll say Abu Dhabi made a smart investment. We’ll see…

  “I read with interest,” a reader writes, “the reader mail about the parent who has a son with a student loan of $90,000 with a master’s degree.

“We also have a son with a master’s degree in education and no job. He is substitute teaching at $90 a day with no prospects of a permanent teaching job, since elementary school teaching jobs are saturated. (Plus, I think there is a bias against male teachers in the elementary school system!) They keep advertising "Teach NYC" — but where are the jobs? Now he’s applying for Teach for America…”

  “A good, well-rounded education is a good thing,” another reader writes, “but common sense is a better thing, and you get that from experience and listening to your parents, especially your grandparents — they know a lot because they have been through a lot. I had junior college business education and then got my bachelor’s degree in business administration. While I really never got to use too much of the four-year education, the two-year education in business-related subjects was to be invaluable.

“Courses on money and banking should be now taught at the high school level. The kids today have no idea how to handle money or credit, and this goes for the previous generation that has now gotten us into this mess. They are the ‘now’ generations that want everything now and don’t worry about the consequences. I, too, am now retired (a little early) and the lessons learned of how to use and manage money have put my wife and I in good stead for now and the future.”

The 5: Amen.

Ian Mathias

The 5 Min. Forecast

P.S. By now, you’ve heard much about the Haiti earthquake disaster, and you surely know it’s a horrific situation. Byron King, editor of Outstanding Investments and Energy & Scarcity Investor, passed this along to us:


"The Haiti earthquake could not have been worse. A shallow fault zone gave way, almost directly below Port au Prince. The full force of the shock — at least 7.0 on the Richter scale — transmitted directly into the foundations of a city that lacks even the rudiments of good building practices.


"There may be more than 100,000 dead in Haiti. Millions are homeless. It’s a terrible situation in an impoverished country where uncommon poverty is common.


"If you want to help, please donate to the Hospital Albert Schweitzer.


"Hospital Albert Schweitzer (HAS) was founded in 1954 as a joint project of the Mellon family in Pittsburgh and the legendary humanitarian Albert Schweitzer. Today, Schweitzer is the ONLY functioning hospital in Haiti. All other hospitals in Haiti were destroyed within seconds during the earthquake.


"Schweitzer has been serving the needs of Haitians for almost 50 years. The staff are used to seeing bad situations. But now, overnight, Schweitzer has been swamped by a sea of human pathos. Schweitzer is literally in a life-and-death struggle to provide relief to people who are truly helpless.


"I have a close friend who has dedicated his life and career to working with Hospital Albert Schweitzer. I can vouch for the dedication of the staff, and their effective use of resources.


"If you are looking for a good cause that can help relieve the suffering in Haiti, there is none more worthy than Hospital Albert Schweitzer.


"I urge you to help. Many thanks, and may God bless the suffering people of Haiti." 

* Note: If you make a donation to the hospital, send us confirmation of your donation and we’ll credit you a year’s worth of Outstanding Investments.



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