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  1. #1
    Join Date
    Sep 2003
    High up above and deep down under

    Default Are you prepared for a Global financial shock?

    Are you prepared for a Global financial shock?

    When we called the TOP of the U.S. housing bubble in 2005, the vast majority of Wall Street analysts and other cheerleaders in the mainstream media were unequivocally bullish on housing, predicting continued growth and further appreciation in home prices and housing stocks. So although our research was showing clear signs of a long-term peak in the U.S. housing market, it required an enormous amount of courage and contrarian spirit on our part to predict that “the U.S. Housing bubble will burst!” Well, luckily for us, that has turned out to

    Sales volumes and prices of new and existing homes have been plummeting ever since we made that now famous market call. Those who heeded our warnings and sold residential real estate and investment properties a couple of years back have almost certainly saved
    themselves a lot of money already.
    Also, those who dumped housing stocks after our July 9, 2005 bearish call on this sector, were able to cash out at the peak of the housing bubble and have saved themselves from serious losses.

    The Philadelphia Housing Index ($HGX)
    has dropped 32% since then! Some of the biggest homebuilders like TOL, LEN, DHI, BZH,
    and PHM have dropped 58%, 52%, 56%, 74% and 55% respectively from their mid-July 2005 levels! Interestingly, after an initial sharp plunge into mid-2006, the homebuilders actually began a multi-month “counter-trend” bear market rally which prompted the Wall
    Street cheerleaders to start calling for a “housing bottom.”

    Our research continued to predict further declines in home sales and prices so we once again summoned up our contrarian spirit and in our February 10, 2007 commentary we boldly declared, “the U.S. housing
    sector is in the midst of a secular bear market which implies that the recent rally in housing stocks ($HGX) is clearly not sustainable.” That has turned out to be another Excellent bearish call, as the homebuilders have collapsed all over again losing 23% since then! In fact, the $HGX plunged 10% in just the last 5 days! We continue to suggest staying far away from this sector because it’s fundamentals continue to deteriorate rapidly as seen below:
    1) The National Association of Realtors reported this week that existing home sales fell for a fourth consecutive month falling 3.8% in June. This particular report somehow managed to claim that home prices were flat last month, but as anyone who has actually been trying to sell a home in most parts of the U.S. knows, home prices are still moving steadily lower despite already having suffered double-digit % price declines. The inventory of unsold homes dipped slightly last month but still remains near record high levels at 4.2 million units.
    2) The Commerce Department reported that sales of new single-family homes dropped by the largest amount in 5 months sliding 6.6% last month. Prices of new homes continued to drop as according to the National Association of Homebuilders, “Home builders continue to
    trim prices and offer large non-price sales incentives to buyers”. The inventory of unsold homes at 537,000 units remains near record high levels based on recent sales volumes.
    3) The Mortgage Bankers Association reported that its index of mortgage applications fell 3.6% to a five-month low led by a sharp 5% fall in the index of purchase applications and a drop in refinancing. This accelerating decline in demand for home purchase loans most likely reflects a realization on the part of prospective home-buyers that home prices are likely to fall even more soon.
    4) The “subprime mortgage debacle” has driven dozens of mortgage companies out of business and forced the remaining mortgage lenders to substantially tighten lending standards. This continues to shrink the pool of potential home-buyers and just as we predicted, now even the quality of loans made to so-called prime borrowers is being called into question!
    Last Tuesday, Countrywide Financial, the nation’s largest mortgage lender reported a 33% drop in earnings as defaults on home-equity loans made to prime borrowers also surged. In the words of Countrywide CEO Angelo Mozilo, the U.S. housing market “is experiencing home price depreciation almost like never before, with the exception of the Great Depression!” The Dow fell 400 points on that news!

    Amidst all the market turmoil, we were intrigued to see a Bloomberg interview of Treasury Secretary Henry Paulson, who when asked to comment on the sharp market decline said it was his job “to be vigilant and be prepared if and when we have a global financial shock.” Hmmm… be prepared… but how? Because the global financial shock is already here…;
    1) Home prices are plunging in the world’s largest economy as millions of American homeowners now face the grim prospect of foreclosure,
    2) Trillions of dollars of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) held by Wall Street banks, hedge funds, pensions funds and insurance companies have already suffered a significant decline in their fair market value and global financial
    institutions are most likely already saddled with HUNDREDS OF BILLIONS OF DOLLARS in capital losses due to the unfolding mortgage debt crisis,
    3) High-yield bond yields are rising fast, creating a liquidity crunch as lenders balk at financing the dangerously over-stretched borrowing needs of the Private Equity/LBO crowd,
    4) The world’s reserve currency is teetering as the tradeweighted $USD is near a record low and
    5) Stock market investors have just suffered their worst week in five years as the S&P 500® dropped 5% this week!

    So in our opinion, the only thing that can
    prevent a MAJOR MELTDOWN in global financial markets in coming weeks is another “artificially induced” market rally similar to the many ‘suspicious’ rallies seen post-1987, whenever it seemed like the “you-know-what” was about to hit the fan! Will “free market” forces prevail this time and drive global markets sharply lower in the next few weeks? It’s very likely!

    But don’t count out the Wall Street manipulators just yet. If markets ‘miraculously’ recover next week and the S&P 500® climbs to another new high in coming weeks, you’ll know what happened. Either way… be prepared!

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


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