Addison Wiggin – April 12, 2012
- Look out below: Three — no, make it 4 — reasons it feels like 2007-08 this morning…
- Subprime lending up (again… really?), private equity opting for IPO and a shocking fact you didn’t know about oil prices…
- “Normal market behavior”… Vancouver favorite cheers up gold holders who bought at the most recent top…
- Death, taxes and one grim statistic… still time to buy a house… muddy boots in South America… and more!
“Even I wouldn’t make a loan to me at this point,” says Annette Alejandro. Ms. Alejandro recently emerged from bankruptcy, her car was repossessed last year and she has no job.
But her mailbox is stuffed with offers for credit cards and car loans.
We begin today’s episode with “deja vu”-induced vertigo this morning. Three items flitted into our inbox in the last 24 hours. By themselves, the items might not mean much. Coagulated, they give us the same queasy feeling we had in 2007-08.
Credit card lenders issued 1.1 million new cards to subprime borrowers last month — up 12.3% from a year ago, according to the credit-reporting outfit Equifax.
“As financial institutions recover from the losses on loans made to troubled borrowers,” reports The New York Times, “some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.”
Plotted on a chart, it looks like this…
Not exactly 2007 levels, we concede. But the trend is enough to move a former Federal Reserve bank examiner to say, “It’s clear that we are returning to business as usual.”
“Business as usual” meaning… spending more than we earn.
The second item in our 2007-08 trifecta: Like Blackstone a few years back, Carlyle Group — the second-biggest U.S. private equity firm — is going public.
But Carlyle isn’t just any private-equity outfit. It’s based not on Wall Street, but in Washington — the better to connect its umbilical cord to the belly of the beast. The first President Bush was a senior adviser. Clinton White House Chief of Staff Mack McLarty is still one.
“Carlyle plans to sell a stake of about 10% in the IPO,” Bloomberg News reports, “and will start marketing the deal to investors as early as next week.” The valuation it’s seeking: $7.5-8 million.
Undoubtedly, Carlyle’s principals have concluded they’ve made the easy money and now it’s time to draw in the suckers. Just like Blackstone Group, which went public in — drumroll, please — 2007. That worked out very nicely… for Blackstone’s bigwigs, if not for retail investors.
“Contacts in many districts commented on rising transportation costs due to higher fuel prices,” reads a recurring theme throughout the Federal Reserve’s latest Lily White, er… we mean, “Beige” Book — compiling anecdotal reports about the state of the economy.
“Manufacturers in many districts,” reads another passage, “expressed optimism about near-term growth prospects, but they are somewhat concerned about rising petroleum prices.” (Emphasis added.)
There are plenty more such tidbits collected from the 12 Federal Reserve regions…
- Minneapolis and Dallas: Airlines raising fares to cover fuel costs
- Richmond: Rising fuel costs a problem for both land and ocean shippers
- Cleveland, Chicago, San Francisco: Rising fuel costs becoming hard to pass on to consumers
Shades of 2008, when oil started its trend toward $147 a barrel.
Currently, Brent crude — the price most of the world pays — has traded above $100 a barrel for 191 straight days. In 2008, that run lasted 170 days.
This morning, Brent is $120.38.
But don’t get the wrong impression: Just because subprime credit is growing like a weed, a major private equity outfit needs public participation to keep the good times rolling, and oil prices being persistently high doesn’t mean another “Lehman moment” is right around the corner.
Not at all. But we do see it on the horizon once agian. In which case, you still have some time to batten down the hatches.
U.S. stocks continue their climb back from the thrashing they took Monday and Tuesday. Major indexes are all up about 1%.
Amid pitiful volume, as has been the rule lately. In fact, daily U.S. volume averaged 6.59 billion shares a day last month, the lowest since — hey, here’s a fourth harbinger — since the official “recession” began in December 2007.
“There is no fresh money going into the markets,” Doug Kass of Seabreeze Partners said in a remark that got past the CNBC rally censors. “Why should we be surprised the retail investor is not there? We’ve had two huge drawdowns in stocks since 2000, a flash crash two years ago and real incomes are stagnating.”
The jobless recovery just became a little more jobless, judging by the numbers crossing the tape this morning…
- First-time unemployment claims: Up big to 380,000 — the highest since late January. And once again, the previous week’s figures were revised up
- Producer prices: Flat in March, thanks to easing (relatively speaking) energy prices
- Trade deficit: It shrank in February to $46 billion. Exports rose slightly, while imports fell 2.7%.
This isn’t a bad sign: Precious metals moved up on Tuesday when stocks went down. Today they’re moving up as stocks go up. The bid on gold right now is $1,673.
Silver has reclaimed the $32 handle convincingly, currently $32.38.
“This is normal and healthy [market] behavior,” writes our friend Rick Rule even as he acknowledges the pain for anyone who bought gold at $1,900 last September.
“Readers with a long memory will remember the 1970s gold bull market, in which the gold price advanced from $35 per ounce to $850 per ounce, and investors with a good memory may remember 1975, in the middle of that epic bull market, when the gold price declined by 50%!”
“While a 50% decline is a near-religious event for many market participants, particularly those on margin, it is instructive to note that at the bottom of the retrenchment the gold price was up threefold from its $35 low, and that gold went on to increase eightfold in price after the bull market resumed.”
“Has gold’s decline made it more likely that sovereign debts can be serviced? Can the U.S. government’s unfunded obligations be met? Does it mean that insolvent banks are now healthy? Does it mean that creating trillions of unbacked dollars and euros and renminbi will have no consequence?”
“Of course not. Traders are simply uncomfortable with volatility.”
[Ed. note. Rick’s presentations offer boatloads of common sense like this when he appears each year at our Symposium in Vancouver… but what really gets people in the room at 7:00 each morning is when he fields questions about your favorite tiny resource stocks. He knows ’em all. It’s his business and his life, and has been for decades.
You can still register for our gathering July 24-27 at the lowest available fee. But we can’t keep this early-bird special going indefinitely. Details here.]
With the tax deadline coming next Tuesday, we offer the following warning: Drive carefully.
Canadian researchers have found car crashes in the United States bump up 6% on April 15 — or whatever day taxes are actually due; this year, it’s Tuesday the 17th.
And this trend doesn’t respect the fact fewer people are driving to the post office at 11:30 p.m. “Although electronic submissions might be expected to lessen driving on tax day,” write the experts at Sunnybrook Research Institute, “we observed an increase rather than a decrease in fatal crashes in recent decades.”
The most-likely victims, they find: Young men in rural locations.
Death while rushing to pay your taxes… how cruel is that? And then, you get taxed again. Ouch. Ouch… Ouch.
Only slightly more cruel than getting felt up by the TSA. And to what end?
That’s the only question that comes to mind after taking in this infographic from a website called Online Criminal Justice Degree…
Don’t miss the “timeline” — in which we’re reminded of things we’d long forgotten. Did you know that nonpassengers were still allowed past security as late as 2004? It’s a wonder any of us is still alive…
“Don’t follow the PC brigade,” a reader writes on the ongoing Burma-Myanmar dispute that’s rippled through our virtual pages. “We also call it Austria instead of Oesterreich, Vienna instead of Wien, Florence instead of Firenze, Naples instead of Napoli, Munich instead of Muenchen and Bangkok instead of Krung Thep.”
“The Chinese call anything with their own words, never the original. Just ask, what Hilton or Marlboro or Austria means in Chinese (the latter is Audili ). Why we follow the stupid fashion of calling Bombay Mumbai or Madras Chennai, etc., is also not clear.”
“More holy than the pope, I say.”
The 5: Amen.
“There are many instances in which a country is not called properly by the U.S. or foreigners,” another avers. “Let me give you an example that will surprise you.”
“We call the country that has its capital Budapest Hungary, obviously a reference to the Huns. Yet Hungary refers to itself in its own language as Magyarorszag, which translates as ‘the country of the Magyars.’ The Magyars were a tribe distinct from the Huns. So why don’t we refer to that country as it prefers to call itself?”
The 5: Because 90% of Americans don’t have passports? I don’t know. Wait… is this a trick question?
“Do you not see a disconnect,” a reader inquires, “between your recommendation to buy housing and your categorization of your primary residence as a wasting asset (my translation) and a money pit?”
“I agree on the negative value of homeownership and question the advice to buy either a primary home or a rental unit. I enjoy The 5, and wish you well.”
The 5: You’re free to question anything you like. We’re just making the case that for some people it makes sense to invest in housing now… might not work for everyone.
“I have purchased seven three- and four-bedroom homes in El Mirage, Ariz,” writes a reader as if to agree.
“Average price $65,000, average age six years old, average mortgage prior to short sale $250,000, all rented with yearly contract $810/month. Purchase price only 6.5 times annual rent. Where can you beat this?”
“I am a retired farmer, and this sure beats farming. After 18 months, the going price is now over $90,000.”
“I could not agree more that your home (primary residence) is not an investment,” writes one of our regulars on the other side of the globe.
“Whether you trade up/down in 10/20 years, it still fulfills the same function for you and your family. And as I see it, there is no depreciation or appreciation…the original three bedrooms remain three bedrooms (well, maybe two plus an office) and the roof keeps the rain and snow off your back. And then you can will it to your kids and they can suffer the financial depreciation or smile with the windfall.”
“This seems to work everywhere…even in Myanmar!”
“I believe prices will fall much lower,” a reader suggests, “and if they don’t, I already have one. One prediction says in five years we’ll be able to buy a house for 100 ounces of silver.”
“But winters in Montana are starting to get to me, and I’ve thinking about wintering in Las Vegas, which is a nice place to live even if you don’t gamble… So many nice restaurants. Thus, I might head that way in November, and look around at the house situation.”
“Houses are very cheap in Vegas even at present. We’ll see.”
“Just wanted to make a short comment on boomers and the extra houses they may own,” writes our final correspondent. “My sister and I are those people.”
“Through inheritance and hard work, we have each accumulated three properties — two fully paid for and one with a mortgage each — and are looking forward to them providing us with rental income for many years to come when we retire.”
“Since these were family homes, we have always invested in keeping them in good shape, so upkeep costs are kept at a minimum. This has been for us a much better route to retirement security than our 401(k)s, which have taken large hits during this recession.”
The 5: At the same time, we sympathize with those who have no desire to be a landlord. If you fall into that category, here’s an income source worth a look.
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. “There’s one direction in Colombia,” said the guide. “It’s uphill. This country is so mountainous that everything requires you to walk uphill.”
Byron King is following our footsteps, as it were, paying a visit to Colombia this week. But he’s venturing into some different territory, on the edge of the Andes… and definitely getting his boots muddy.
“We walked and walked and walked… mostly uphill,” he writes.
“Even getting to the helicopters — to get back to base camp — required walking uphill… followed by a rest in the copilot’s seat as we flew over the rugged cordillera between Medellin and Bogota.”
“What am I looking for in these forested peaks and valleys? I’ll give you a hint…”
“Back in 1978, a French geologist was driving on a steep gravel road. He forgot to turn off his Geiger counter. When he crossed one section of road, the machine went off with a loud buzz.”
“The French geologist stopped his truck, got out and noticed brownish mineral staining a nearby rock outcrop.”
“Many years later, and after much work by a host of players, this spot on the map may be one of the largest uranium deposits in South America.”
“It’s worth a hike in the rain forest… and getting your boots muddy.”
Byron will reveal the fruits of his research to readers of his microcap resource advisory, Energy & Scarcity Investor. This premium research service ordinarily commands a four-figure annual subscription fee. But you can secure access for substantially less… only through next Monday.
P.P.S. “After working 12-hour days for a month,” a new report begins, “Tian Yu still had not received her salary card. Totally broke, exhausted and frustrated… she climbed to the fourth floor of her dormitory and jumped.”
“Unknown to anyone, the 17-year-old changed the world economy forever when she took that desperate leap.” Read on…