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The Daily Reckoning Thursday, November 5, 2009 Your front row seat at the value investing conference, Disturbingly graphic content: Where we are in the housing crisis, Plus, one possible reason the market feels so weak and plenty more... Bill Bonner, back from his wanderings in the wilds of Argentina, reports... After spending a week trying to figure out how to run a wilderness ranch here in Argentina...and a few days with our old cowboy friends, Doug Casey, Rick Rule and Porter Stansberry...we're back in Buenos Aires. We're back in civilization... Wait...you call this civilization? Looks more like Bubble Land again! Gold is headed towards $1,100... Bonds are soft...so is the dollar... Speaking of old friends, Marc Faber says he's long the dollar. Faber thinks the buck is over-sold. It could rise 10% in this last quarter. But the Fed says it will keep interest rates low for an "extended period." So there is still no sign of the kind of policy turnaround that might send the greenback back up. Instead, we'll have to wait until the bubble pops! Oil is over $80... Republicans are winning elections... Hey, party like it was 2006... The Dow is moving back up, too...and so are all the world's markets...led by Asian stocks. China is booming...with its stocks up 4 days in a row... The rise in gold comes as India's central bank does the smart thing. Central banks need reserves. And historically, the only reserve a central bank can trust is gold. Putting US dollars in your vault - instead of gold - is a little like laying in a supply of lettuce to tide you over in a bad harvest year. Imagine what would have happened if pharaoh had stocked up on radicchio instead of grain? Those 7 lean years would have been a lot leaner than they were. The Chinese have seen what happens when you rely on dollars for a reserve. You're stuck. Because your reserves can wilt fast. The Indians have a better idea - they're buying gold. The metal has outperformed stocks and bonds this year as it heads for the ninth straight annual gain. The Standard & Poor's 500 Index has risen 15 percent in 2009 through yesterday while returns on the benchmark 10-year US Treasury note are down 5.7 percent. Gold may average $1,125 in 2010, "with strong investment demand anchored by a negative real-interest-rate environment and probable central bank purchases," analysts at Toronto-based Desjardins Securities Inc. said in a report. And here's another interesting item we found when we got back to an Internet connection: "Companies that become too big, complicated and debt-ridden should be allowed to 'creatively destruct,'" says our friend Nassim Taleb, author of The Black Swan. Taleb likens the process to natural selection. "Why is it that there are no land animals bigger than an elephant?" he asks. "Because nature doesn't permit it. Bigger animals die off. Likewise, the market system disposes of companies that are 'too big to fail.' It gets rid of them." Unfortunately, says Taleb, the US government is impeding this natural process. The government is preventing the bankruptcies of large corporations that would clear the way for a new generation of healthier, more nimble, corporate organisms. Furthermore, these trillion-dollar bailouts are polluting the financial ecosystem with toxic piles of debt. "We're not destroying debt," Taleb complains. "When you move it into the government, it stays in the government and that's a problem." Now here's Eric Fry, with a few observations from Laguna Beach, California... The stock market rallied throughout most of yesterday's trading session, then stumbled into the close. This pattern has become unnervingly familiar of late. It's true that the Dow has only dipped 2% since closing a notch above 10,000 on October 19, but the decline feels a bit worse than that. Maybe that's because so many midday rallies have turned into late-day selloffs. Or maybe the market feels so weak because it IS so weak. Most of the broad indices like the S&P 500 and the NASDAQ Composite are down more than 5% from their recent highs. Meanwhile, former market leaders like the BKX Index of financial stocks have tumbled more than 10% from their recent highs. These corrections aren't devastating, just discomforting. Every rational investor knows that the market recovered much more ground from its March lows than economic fundamentals warranted. But that doesn't automatically mean that the market is a "sell." Maybe it is just a "do nothing for a while." Your editors are agnostic on this topic. But almost no one else seems to be. When the stock market becomes as volatile as it has been lately, every stock market commentator from Pensacola to Pismo Beach trots out a forecast - usually based upon stock charts that show trendlines, resistance levels, Fibonacci retracement points, stochastic indicators etc. Unfortunately, the identical price charts can yield completely opposite forecasts. Show us a trendline, and we'll show you two emphatic forecasts - one bullish, one bearish. Both forecasts will be honest and informed by experience, but only one of them will be correct. That said, our friends over at "Penny Trends" delivered a very persuasive (and bearish) forecast yesterday, based on a very clever technical indicator: "The market is rolling over... The transformation is amazing... Our list of exchange-traded funds (ETFs) is one of the best tools we've ever developed for determining the trends in the markets. By distilling the investment universe into just 87 'baskets' of stocks, and then ranking them by three-month performance, we get a fantastic sense of the big picture. We can tell immediately if investors are building optimism or sinking into pessimism. And we can see which individual sectors and markets are strong and which are weak by the way they react relative to one another. For example... "A month ago, the five best-performing ETFs in the world were showing an average three-month gain of 34%, while the five worst-performing ETFs in the world were showing an average loss of just 8%. Now, the five best-performing ETFs are up an average of just 17%. The bottom five are down an average 15%. In other words, uptrends are getting weaker and downtrends are getting stronger. It means the market is probably rolling over. "Here's another way of looking at the same thing: The 87 ETFs we monitor represent every major currency, stock market, sector, and commodity. A month ago, only eight of the ETFs on our list were showing a three-month loss. That means 79 were showing a three-month gain. Now, 22 ETFs are in negative territory and only 55 are in positive territory...another strong sign the market is rolling over." But don't let this forecast bring you down, dear investor. Things could be worse. The stock market could be just as bad as the housing market. "But wait just a minute!" some readers may protest. "Isn't the housing market recovering?" Well, sort of. Prices are no longer in freefall. But a sustainable recovery still seems like a delusional hope...especially when one considers that there's a lot more pain to come in the mortgage market. Chris Mayer, editor of Capital & Crisis, shares the grim details in the column below. --- Outstanding Investments Metals Report --- From Hulbert's # 1-Ranked Advisory Letter Over 5 Years, Our Most Shocking Forecast Yet... GOLD $2,000 "I'm so sure gold will soar higher I'll even make you a guarantee...plus, I'll give you five entirely new ways to play the trend... "Including one hidden way to snap up gold... for less than one penny per ounce..." How can that be possible? Give me the next four minutes and I'll show you how...Continued Here. --------------------------------------------------------------- The Daily Reckoning PRESENTS: Just when you thought the housing-bust tsunami had already swept through your village...and that it might be safe again to dip a toe in the home-buying market...along comes an even bigger shock - a new killer wave of mortgage-resets that will make the subprime crisis look like a mere ripple... The Housing Bust -The Final Chapter By Chris Mayer Gaithersburg, Maryland I was in New York earlier in the week for the Value Investing Congress. Among the more valuable presentations were those of Sean Dobson at Amherst Securities and Whitney Tilson and Glenn Tongue of T2 Partners. They were valuable because they helped frame where we are in the mortgage crisis, which has been the main shark in the water over the past couple of years. You should know where that shark is and whether or not it is hungry. The chart below shows you the ferocious fish may still have an appetite. It shows you that we are past the viscous subprime crisis, when that shark chewed through the balance sheets of a number of banks and financial institutions, in some cases devouring them whole. However, it is not yet safe to get back in the water: There are these other slices of mortgages that are not quite as risky as subprime that reset in the next couple of years. Years 2010 and 2011 face big resets in so-called Alt-A and Option ARM loans. What this means is more write-downs and more losses for banks and others who hold these mortgages. Making all this worse is the fact that the housing has not yet recovered. The T2 duo made the case that the current "stabilization" of the housing market is a head fake. Mostly, it's due to huge government support of the housing market. But there is still a large inventory of homes out there. And with these resets coming due, we've still got a large amount of foreclosures on the horizon. All the while, the unemployment numbers are still poor. The T2 duo calls the unemployment situation the "most severe since the Great Depression." The US economy has shed over 8 million jobs in this recession and unemployment - officially - is nearly 10%. Plus, it's not like the average US consumer is in a good position to sail through this crisis. Household liabilities are still high, as this next chart shows: US consumers need to save and rebuild their financial strength. This is why the savings rate is on the rise. This is why, for the first time since the 1950s, household credit debt declined. As investors, it seems clear that any idea that depends on discretionary consumer spending - say, buying trendy new sweaters or watches or expensive shoes - faces some big head winds. Better to the stick with the necessities, I say. Also, it looks like the bounce in the stock prices of overleveraged banks and financial institutions is premature. Most bank stocks should be sold, not bought. The bounce in home building stocks looks ridiculous in light of what they have to look forward to. The T2 duo actually recommended shorting the home building stocks through the iShares Dow Jones US Home Construction ETF (ITB). By shorting it, you make money when the stock prices of the home builders go down. They made a compelling case, of which I will highlight a few things. Exhibit A would be the fact that the average new home has been on the market for 12.9 months. Exhibit B is that we have about 2-3 years of existing home sales just to absorb the vacancies that exist. According to T2, about 6% of all homes built this decade are vacant. Exhibit C is that the home builders themselves have too much debt and too much inventory relative to their thin equity cushions. The home builders are in the position of trying to hold up a bowling ball with a sheet of paper...in the rain. Lastly, the home builder stocks are almost universally expensive on a price-to-book basis, as this chart shows: Stocks with lots of debt, too much inventory and an awful market don't deserve premiums over book value. Discounts are more like it. So there you go. I like the idea of shorting the home builders. At the very least, I wouldn't buy one. I'd also stay away from banks and financial institutions that hold mortgage assets. American real estate is not worth zero, as Dobson said, but it can be worth a lot less than today's price. I recommend staying with the sorts of companies that own essential assets and/or sell essential items. As I like to say, stick with what keeps civilization a going concern. And avoid any stock that is dependent on regular access to the credit markets. As we saw in 2008, a mortgage crisis can shut down the credit markets. We don't want to be held hostage by lenders in that situation, so stick with excellent financial conditions. Regards, Chris Mayer, for The Daily Reckoning P.S. With all this in mind, I've been developing what I call a "personal bailout plan" in my research service, Capital & Crisis. We're building a robust portfolio of rock solid companies with sound financials as value investors do...at a discount. If you are interested in building your own "personal bailout," here's a free report to get you started. ---- Major News Outlet Calls This the "Next Crisis"... ---- THE GREAT AMERICAN "RECOVERY RIP-OFF!" America on the mend? HORSE HOCKEY! Here's what's real: Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history, engineered by none other than Wall Street and Washington, DC. How does their scam work? It's a crafty "triple-swindle" just clever enough that most Americans won't even see it happen... until it's too late. The short of it is, every three days, these flim-flam artists use this strategy to secretly suck wealth out of your savings account. Nobody's immune. And if you don't do something now to protect yourself, you risk losing even more... starting with the next government-backed "swindle" event, scheduled to happen in an little as three days from right now...report continued here.   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.