The Rude Awakening
Wall Street, New York
Wednesday, November 22, 2006 ------------------------- - From pillar to post, housing cops a right flogging,
- What are you doing to protect your greatest
investment? - The water crisis continues to make Rude headlines,
gold marches onwards, a warning from Whiskey and
more...
------------------------- Eric Fry, taking a break from beach volleyball, reports... Last week, as faithful Rude readers will recall, we raised
the possibility that a "second wave" of the housing bust
might sweep across the nation: www.the-rude-awakening.com/RAissues/2006/march/RA111506.html "A second wave is coming," warned Mike "Mish" Shedlock,
contributing editor of Whiskey and Gunpowder, "and it's
gonna be a lot worse than the first wave. The second wave
will wash over the entire economy. We won't just see home
prices falling; we'll see lots of people losing their jobs
and lots of empty shopping malls and lots of bankruptcies.
It'll be bad." If a second wave were to arrive, we reasoned, it would not
likely spare the resurgent housing stock sector. Continuing this skeptical line of thought, Alan Abelson's
latest column in Barron's, remarked, "[T]he housing stocks,
which had been hammered from pillar to post, recently
enjoyed a whirl on the high expectations whipped up by the
never-say-die bulls. "But where is it written that every slide, no matter how
vicious, must be straight down?" Abelson wondered aloud.
"There was never a stock-dumping spree that didn't have a
few interruptions, head feints inevitably, falsely
suggesting the start of a genuine recovery. And this year's
vertigo-inducing collapse of housing and housing stocks is
proving no exception." "As witness the melancholy news last week, courtesy of the
Commerce Department, that starts of new homes skidded 14.6%
to a new six-and-a-half year low," Abelson continued.
"Worse still, permits, which foreshadow future housing
construction, fell 6.3% to a nine-year nadir; the fall in
permits was the steepest since 1997...What's more,
October's feeble showing was noteworthy because it was so
darned inclusive, embracing virtually every part of the
country. "Last month's dismal data merely reinforce our conviction
that so far as the decline in housing goes, we're not even
halfway home," Abelson concluded. "And in terms of its
wider impact on the economy, we've an even longer way to
go. One of these days, even the giddiest investors will
leave off their partying and take sober note of the fact
that the support beam of this wobbly expansion is rapidly
coming apart." Grabbing the housing-bust baton from Abelson, our own Chris
Mayer warns that the second wave of the housing bust will
crash over the entire economy...perhaps drowning a few
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take advantage of this Rude opportunity, read on here: http://www.isecureonline.com/Reports/RTA/ERTAGB44 ---------------------------- Grasshopper-Envy
By Chris Mayer "Wise men in their bad hours have envied
The little people making merry like grasshoppers
In spots of sunlight hardly thinking…" -- Robinson Jeffers, American poet
The housing bubble is in the midst of deflating. There is
no doubt now that the halcyon days of the housing boom are
over.
New home construction tumbled in October -- hitting six-
year lows. Sales are slowing. Inventory continues to build.
Based on September's rates of sales, it would take more
than six months to sell off the existing new homes on the
market. That's just new homes. Never mind the existing
stock of older homes. Existing home inventories are up 70%
from the beginning of 2005, with nearly 4 million unsold
units. So predictably, prices are falling. The median price of a
new home fell nearly 10% in September from a year ago.
That's the steepest drop on record, which goes back about
40 years. It was also the second consecutive month of price
declines. Anecdotal evidence suggests things are much worse
in certain pockets of the country. Who hasn't heard horror
stories from neighbors and friends trying to sell in this
market? Buyers are getting cold feet. They are starting to walk
away from contracts. D.R. Horton, one of the largest
homebuilders in the country, reported its cancellation rate
increased to 40% in its latest quarter. Toll Brothers, the
luxury homebuilder, reported the highest cancellation rate
in company history. Former KB Homes chief, Bruce Karatz (now disgraced in an
options-dating scandal), called the current downturn the
worst one he's ever seen -- including the early 1990s, when
many builders went belly up. As an aside, it's fascinating to me that this was a topic
of fierce debate not long ago. It seems only months ago
there were defenders who believed there was no housing
bubble. All sorts of reasons floated to the surface, like
dead goldfish, to deny the obvious. Now, it's just a matter of debate as to how bad things will
get. This is a nice illustration of Hyman Minsky's view on
financial stability. The late Minsky coined his thesis the
Financial Instability Hypothesis, which, despite its grand
name, offered up a relatively simple insight. "Over periods
of prolonged prosperity," Minsky wrote, "the economy
transits from financial relations that make for a stable
system to financial relations that make for an unstable
system." In simpler terms, long stretches of good times lead people
to take more chances. In Minsky's terms, we find more
"speculative units" and "Ponzi units" -- entities financed
increasingly with debt in a manner less than prudent. In
the housing arena, we certainly saw a vast increase in
creative financing. A wise individual once observed that innovation in finance
usually amounts to buying more and more with less and less.
Again, we saw that in housing, with a surge in
unconventional mortgages: more adjustable-rate loans, more
interest-only loans, "low docs," "no docs" and much more.
In this new era of creative financing, the old 30-year
mortgage with 20% down became a quaint vestige of a bygone
era -- like a vinyl record or a fully-funded pension plan. So now the pendulum has begun to swing the other way. What
does this mean? It means a rollback of the speculative and
Ponzi finance units, as Minsky would say. It means a
withdrawal of EZ credit to the housing market. Which means
a consumer-spending retrenchment…and a very likely
recession. In fact, as housing investment retraces, a recession of
some sort looks like a lock. "Since World War II," Fred
Hickey, eminent editor the Hi-Tech Strategist writes,
"whenever residential investment exceeded 5.5%, it has
always lead to recession." Last year, investment in housing
topped 6%. 
Consumers have less money to spend. In aggregate, cash
squeezed from home equity no longer flows so freely. The
latest numbers show cash-outs slowed to half of what they
were a year ago. In other words, the cash flowing to
consumers from cash-out refinancings could drop by more
than $300 billion. For perspective, the drop in gasoline
prices probably adds only $80 billion or so to consumers'
pockets. The loss from housing, as you can see, makes the
gasoline matter look like the proverbial fly on the chariot
wheel. Some slowdown in consumer spending seems inevitable. Where
else will consumers get the money? They are tapped out. Jeffers wrote about the wise men in their bad hours envying
the carefree people, who made merry like grasshoppers. For
some time, the wise men that warned of ill tidings in the
housing market were scoffed at, while the grasshoppers
played on. But playtime is almost over. Before long, we
would guess, the grasshoppers will be envying the wise men. --- Investment Special --- BLUE GOLD: The $661 Billion Market Your Broker Didn't See It's not oil...it's not gas... Even in the face of skyrocketing energy prices, its
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net you 300% gains this year - guaranteed! http://www.isecureonline.com/Reports/MSS/EMSSGB01 ---------------------------- Did You Notice? – Water Wars Are Brewing Our friends at MoneyWeek Magazine over in London just
published the following fascinating observation: "The Chinese are considering damming the Brahmaputra, a
river which starts in Tibet. The plan is to divert supplies
to the Yellow River to bring more much-needed water to
northern China. "73-year-old hydrological engineer Guo Kai backs the idea.
He reckons the Brahmaputra 'can quench the thirst of all of
China. The water supply can last for 1,000 years.' "The trouble is, the Brahmaputra doesn't just stop at the
Chinese border. It goes on to flow through north east India
and Bangladesh, before terminating at the Bay of Bengal.
Understandably, the residents of those areas are not too
happy at the thought of their river being summarily cut
off. "Chinese authorities say there are no such plans in place -
but the Indians are concerned enough to be raising it with
President Hu Jintao on his current trip to Delhi. "The disagreement is another reminder of the importance of
'blue gold', as water has been dubbed in recent years." MoneyWeek has published a number or articles about the
global water shortage. To read the magazine's latest storyu
on the topic, click here: www.moneyweek.com/file/12513/how-to-profit-from-the-worlds-water-crisis.html [Joel's Note: There is little doubt that this most precious
of commodities will continue to garner attention from
players both large and small. As the coming crisis bubbles
to the surface, more investment opportunities are bound to
present themselves. If you have not done so already, you
can view our FREE Rude water research report right here: http://www.the-rude-awakening.com/WaterReport.html -------------------------- | 
