Gary's Market Commentary

November 18, 2009

• UNEXPECTED DROP IN HOUSING STARTS, NOT FROM THIS LETTER!
• MIXED MESSAGES ON HOUSING
• US$ CONTINUES TO BE WEAK, CHINA REFUSES TO RE-EVALUATE THE ASIAN TIGERS ALL APPEAL FOR STRONGER US$
• $ FOR CAUKERS NEXT?
• % RATES UP BEFORE THE ELECTION IN 2009 OR 2012?
• INVENTORY DECLINING, PENDINGS DECLINING, SALES DECLINING, CANCELLED/EXPIREDS/WITHDRAWNS REMAIN UNCHANGED

Gold continues to move higher as it stands at $1144.60 per troy ounce today. India has purchased 200 metric tons for their reserves and other Asian Tigers have informed the International Monetary Fund they plan to purchase at present and future auctions. Cotton has more than doubled from $38.71 to $72.55. Copper is higher up over 7% for the week at 313.35, which is from a 52 week low of 125.00. Finally, the other builder need, Lumber is at 233.90 from the 52 week low of 137.90. Of course, let’s not forget Crude Oil at 80.33 and a 52 week low of 32.40!

I saw a paving contractor I recommended for a project in 2003. I asked if he remembered the project and the price he bid. “Sure do”, he said, “that project at $58,000 would cost about $150,000 today”. “Oil and labor benefits are the reason for the higher price”, he said.

Should housing starts be unexpectedly low when cost of construction is rising and the inventory of short sales and foreclosures and REO weigh in on the market? I don’t know where the newspaper people are getting their forecasts from, I do know common sense tells me unless builders work for no profit housing starts will be low.

That leads us to existing home sales. With the tax credit ending 2010 ( sign by April and close by June 2010), will home prices begin a slide back down, remain the same or slowly inch up? Oh Boy, where is Merlin now? Let’s try and take that apart.

With the tax credit gone will the benefit for buying lessen? That really depends on interest rates. Bernanke has said he will not raise rates. The rally we have in the stock market has been on profits by US Corporations based upon their ability to cut back, lay off rather than increase revenue. So that means we need employment to increase. The Congressmen are already looking at the November 2010 election. Congress knows that if unemployment remains high and is not declining their job is on the line. Do you want a job Mr. congressman, get employment moving. Are the Congressmen up for election intent on passing a universal medical coverage or moving on the employment issue? My common sense tells me jobs will replace health care issues. At present the expectation is that unemployment will move to 11% next quarter and then down to 10% by end of 2010. That is not going to help the Democrat “Blue” majority! The GOP, “Red”, is already aiming at employment.

Adding to the unemployment question is the Household Creation question. 2008 was the first time in years that household creation fell. Household creation was a major motivator of home buying along with employment numbers. It has since flattened with a pent up of demand of the household created in 2008 and 2009 laying to the question of how long will they rent? Many economists are optimistic on this pent up demand bursting into the housing sector. If you add the potential of employment declining, we could very well see a stronger market in 2010. The National Association of Realtors expects home prices to increase 4% in 2010 with sales hitting 5.7 million units slightly above the 2007 level.

Of course the key to this will also be interest rates. Bernanke says rates will remain the same as we have no inflation, economist look at rates increasing by the 4th quarter of next year. Other economists see flat rates for 2 more years or 2012. The “4th economists” of the national poll think the employment numbers will be declining, job creation expanding and most probable is the household creation log jam busts and renters become buyers. On the “other side economists”, the forecast is for a weaker economy, weaker dollar and increased unemployment. With all pressure on the US$, I put my money with Congressman wanting their jobs and job creation as the major focus of the remaining 2009 and into 2010. What does your common sense tell you?

Obama got the message from China, no on revaluation of the Yuan! The U.S. will only hurt the rest of the world who use the US$ as a reserve currency by keeping the US$ low or falling. This will only drive the 3rd world and maybe other allies into the China Circle. Let’s get back to basics. We can drop the price of commodity prices and control inflation at the same time we raise interest rates and strengthen the US$. Does that make sense? What I am saying is that commodity prices are rising only because they are a store of value versus owning the US$. The rises in commodity prices were and are not from supply and demand for end product use. The Chinese are supposedly buying for their stock pile. Where they, or was it to put further pressure on the US and the populace. Their citizens are subsidized to a great extent. Individual rights are not a subject for discussion China told Obama. OK, Obama back to the drawing boards. IF and that is an IF, the economy picks up production begins to increase, inventories accumulate and interest rates increase what happens to the speculator and investor who bought commodities for a hedge. The answer is they sell. Gold is ONLY a store of value. If the US$ strengthens the move is from GOLD which cost to hold to the US$, Treasury Bills and Bonds which pay interest!

So where is the new wave of stimulus that will help in job creation come from? How about a new twist to an old success story: Cash for Clunkers becomes Cash for Caulkers. One highly successful program was Cash for Clunkers. It would not have induced a boom without it! John Doerr of Silicon Valley and former President Bill Clinton have suggested Cash for Caulkers and it has one of the top things Obama is looking at per Rahm Emanuel Obama’s Chief of Staff. Doerr’s plan would cost $23 billion over 2 years and most for incentive payments of $2000-$4000 for weatherization projects. The homeowner would pay half the costs. $3 billion would be allocated to retailers and contractors to promote the program. Bill Clinton points to the Houston program that pays about $1000 to winterize a home. It worked because homes need other improvements and the cost is bore from the stimulus. Not bad thinking!

Oh yes, watch out for a correction in the stock market if this all comes out. Commodity driven companies will be liquidated, the bond market will go down and we could see another bubble burst. So go out and take some profits before the end of the year!

The key to the buyer is VALUE! Oh yes, a new chart with more information. Let me know if you want other cities added.