Tuesday, May 30, 2006

Housing and Oil

As I see it, the two biggest problems facing the US are the housing picture and oil.

Housing IS the US economy. Two thirds of US families now own their own homes, and they've used their homes like ATM machines. They've refinanced and borrowed heavily against the value of their homes. They've considered the rising market value of their homes as "savings." But now inventories of new homes are surging and sales are dropping. The latest figures for the "'hot" state of California show that the median price of an existing home increased by 10.2% from April a year ago, but sales dropped 21.4%. In housing declines, turnover drops first, followed by prices. In California we're seeing the first signs of a seller's market turning into a buyer's market. Condos in areas like Las Vegas have become a drug on the market with some construction projects being called off.

Next, oil. You think the oil and energy picture is OK, that it will "take care of itself." Maybe it will, but I'm highly skeptical. Too many oil-producing nations are unfriendly to the US, and too many nations are ready to nationalize their oil facilities. And there is too much lying about the size of oil reserves.

Gold -- Over the years there's been a running ratio of the price of oil to the price of gold. In the past, an ounce of gold would have bought and average of around 20 barrels of oil -- but at extremes as much as 27 barrels of oil. Today an ounce of gold will buy only 9 barrels of oil. Currently, based on the ratio, gold is "too cheap" compared with the price of oil. I believe the current rising price of oil will be a bullish factor for gold. Gold is far too "cheap" in relation to the sheer amount of fiat paper money that has flooded the world. And gold is too cheap compared with the rising price of oil.

A month ago all the experts were warning about the parabolic rise in gold. What everyone knows ceases to be a factor where markets are concerned, and I was skeptical about the widely-advertised "parabolic" danger of a gold collapse. Now gold has become oversold, while still holding above its 50-day moving average. In the meantime, a lot of people have sold their gold and are waiting on the sidelines for lower prices.

You may have heard of BRIC. This stands for Brazil, Russia, India, China. These four countries are considered to be the four emerging economic giants. But suddenly, in recent weeks, the stock markets of these four hit the deck. Russia is down 17%, India is down 14%, China is down 11%, and Brazil is down 8%. But over the past year all are up over 50% -- with Brazil up a spectacular 113% and India up 62%.

These increases have come about partly as a result of heavy buying by US investors. I show the daily charts of the stock averages of these four big emerging markets, and the question is -- are these just "gut-check" corrections or have these markets topped out? The markets of the world are heavily dependent on the US markets and US consumer buying? So a further question is this -- do the markets of the world sense that "something is wrong" in the US?

All eight of the home builder stocks that I watch were down again today. This market is taking a "wrecking ball" to the housing stocks. I understand that 40% of all the houses bought last year were second homes. Madness is upon us. The last thing in the world most Americans need is a second home. They'll have all the problems they want with their first home.


Anonymous m said...

get a life

2:13 PM  

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