Tuesday, May 19, 2009

Expecting The Unexpected

Surprise drop in housing data checks market's rise
NEW YORK (AP) -- A record low in housing construction has investors doubting the economy again.

Stocks closed narrowly mixed in light trading Tuesday as the surprise drop in construction and a cautious outlook from retailer Home Depot Inc. led energy and utility stocks to pare gains.

Construction of homes and apartments fell 12.8 percent last month to the lowest pace on records going back a half-century, the Commerce Department said. Analysts had expected housing starts to rise.

WHAT!? How can this be? Just yesterday we were told that a 22% drop in Lowe's first qtr profits, and a pithy rise in the "Home Builders Sentiment Index" was a sure sign that THE BOTTOM IN HOUSING WAS IN! Hope springs eternal...

And where there's hope, there is NO sign of a bottom. The bottom will come when all hope is lost. When will these knuckleheads quit trying to "call the bottom" in housing? Bottoms in markets are seen in hindsight, NOT in real time. When will people quit putting so much faith in "analyst expectations"? Analysts are as pathetic as the weatherman, they're lucky if they're right half the time.

And when will the financial media quit trying to spin every instance of "more bad news" into something "hopeful"? Today's housing news was 100% bad. Expected or unexpected, makes no difference. There was absolutely NOTHING good about it...but you'd never know it by this headline that popped up AFTER the market closed today:

Housing bottom in sight, but recovery will be slow
WASHINGTON (AP) -- Single-family home construction posted a modest rebound in April, raising hopes that the three-year slide in U.S. housing is leveling off. But a bulging supply of unsold homes, record levels of foreclosures and still-falling home prices suggest a sustained recovery isn't likely until next spring at the earliest.

The Commerce Department said construction of homes and apartments fell 12.8 percent last month to a seasonally adjusted annual rate of 458,000 units. That's the lowest pace on records going back a half-century.

Applications for new building permits dropped 3.3 percent to an annual rate of 494,000, also a record low.

The National Association of Homebuilders said this week that its survey of builder confidence rose for the second straight month in May, reflecting growing optimism.

The Washington-based trade group's index rose two points to 16, the highest reading since September. Even with the rebound, the index remains near historic lows. Readings lower than 50 indicate negative sentiment about the market.

The worst in half a century! Yeah, that gives me hope... There are homes all across this country sitting empty, and unsold. Why would any builder in his right mind build more homes? Because some analyst hopes he will? LOOOOOOOOOOOOOL!

Tax Revenues Tanking
By David Galland, Managing Editor, The Casey Report
While everyone else has been focused on the banks’ stress tests and how much government is spending to bail out troubled “too big to fails,” a disturbing trend on the other side of the equation is now emerging: how much (or rather, how little) the U.S. government is receiving in tax revenues.

Here’s what’s going on:

-In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.

-Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!

-When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus -- on average about $68 billion.

What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper.

Falling tax revenues is going to make it that much more expensive for The Obama to fund his grand stimulus package and gargantuan fiscal budget. With buyers turning up their noses at Treasury auctions, and a falling tax base, the Fed is going to have to turn the handle on the money printing machine ever faster. This has serious implications for the US Dollar, interest rates, and ANY HOPE of an economic recovery "in the second half". Maybe in the second half of this century, certainly not the second half of this year.

Physical Gold Is on the Move
By Trace Mayer
The entire eligible COMEX stockpile represents an immaterial 0.36% of the current assets of the five oil majors. The oil majors could drain the COMEX with a rounding error. It would be 14% of what Exxon Mobil was spending per quarter buying back stock. Why buy back stock when oil is so cheap compared to gold? Why not just buy physical gold and truck it away?

London and Zurich have been the loci of gold trading for centuries. The London gold vaults serve the needs of the London Bullion Market Association. On 11 May 2009 The LBMA reported, “Gold ounces transferred between accounts held by bullion clearers fell 7.6 percent to a daily average of 20.5 million ounces in April from a month earlier. … Ounces transferred in silver rose 2.4 percent to a daily average of 101.1 million.” This amounts to approximately $19B of physical gold and $1.4B of physical silver which exchange everyday.

On 13 May 2009 Emirates Business 247 reported that the Dubai Multi Commodities Centre has finished a state of the art vault which will become the new home for the Dubai Gold Securities’ ETF. Additionally, ”It’s a natural home for the central banks in the region to store their gold in Dubai rather than in London where they have typically held their gold. Particularly when DMCC has a state-of-the-art facility to store such precious metals,” said Jeffrey Rhodes the CEO of INTL Commodities DMCC, a Dubai-based gold dealer.”

As revealed by China’s recent announcement of an increase in gold reserves from 600 to 1,054 tons it appears that the Western central banks are overstating their physical gold reserves while the Eastern central banks are understating them. Now the Middle East is demanding physical possession of their gold. It will be interesting to see whether a failure to deliver occurs at a major exchange such as the COMEX or LBMA.

At all times and in all circumstances gold and silver are money. Even though the great credit contraction has begun there is a microscopically small amount of physical gold and silver bullion compared to the financial assets which have not yet evaporated. The GLD and SLV ETFs purportedly hold large amounts of physical bullion but their respective prospectus are riddled with risk. For decades Western central banks have bled gold through minor wounds.

But now Eastern and Middle Eastern central banks, ETFs and gold dealers are reducing their risk by taking physical delivery of bullion. In effect, they are digging into and ripping wide-open the wound and causing gold to spurt out like a failing dam. Gold is cash and to be bought when one does not know what else to buy. Like the Eastern and Middle Eastern central banks, individuals should only buy gold or silver bullion for physical delivery or use a trusted third party vaulting service that has the physical bullion in possession along with appropriate corporate governance like GoldMoney or your gold might learn how to vanish.

Have China watchers never heard of a decoy?
By Adrian Douglas
The Chinese have a $300 billion sovereign wealth fund. If that is properly positioned in commodities, it alone will hedge China's entire bond portfolio.

The notion that the Chinese have accumulated this massive U.S. debt portfolio and only now are wondering what to do about it is so naive it doesn't warrant serious consideration. I have dealt with Chinese in business and they are the sharpest knives in the drawer. My guess is that China has already diversified most of its dollar holdings.
Now, like magicians, the Chinese keep the eyes of the China watchers fixed on the hat, because we all know that is truly where the magician has hidden the rabbit, right?

The Chinese have no interest in collapsing the U.S. Treasury market, but if you think that the Chinese strategy to protect themselves against such an eventuality is to sit tight, buy more, and keep their fingers crossed that everything will work out fine, then you shouldn't go out in public alone.

The Chinese have vault-loads of intrinsically worthless Treasury bonds that they no doubt have used as collateral to buy intrinsically valuable assets. In contrast, Western central bankers had vault-loads of gold they have loaned or sold to buy intrinsically worthless interest-bearing government debt.

The US Dollar is in a world of hurt. Continued strength in the equity markets will only pressure it further. This equity market strength may be just an illusion, but it's just what the Dollar Bears doctors ordered. The growing us government deficit [and debt] is also pressuring the Dollar and it's lone crutch, the US Treasury market. The bond market is the verge of collapsing, down over 20% since the first of this year.

A head and shoulders top is now clear on the US Dollar chart. It's neckline was broken on April 28 as the Dollar slipped below 85. On may 8 the Dollar slipped below it's uptrend line off the July 2008 low at 71.31. The Dollar has now spent the last eight trading days below it's 200 day moving average. As each day passes, the cap on the Dollar at its 200 day moving average grows stronger. Today's Dollar close below 82 was its lowest close since the first week of January 2009.

There are signs that the Dollar may be about to bounce here near 82. If it should succeed in doing so, sell the rally. It will be short lived and capped by one of three areas of resistance: The 200 day moving average, the broken uptrend line, or the falling 50 day moving average. The future of the US Dollar is not bright.

A bounce in the Dollar may, or may not pressure Gold here. Doubts continue to grow about the bond market, and a strong percentage of Dollars that in the past have sought refuge in the bond market, may instead seek safety in Gold. This of course presumes a bounce in the Dollar will cause a fall in the equity markets. One thing we can count on going forward...VOLATILITY. And volatility means trading opportunities in the Precious Metals.

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