Featured Trades: (RESIDENTIAL REAL ESTATE),
(LEN), (PHM), (XHB),
(GOLD/EURO), (GOLD), (EURO)
(SILVER DOLLARS)

1) The Hard Truth About Residential Real Estate. Anyone who believes that housing is on the rebound, and that now is the time to buy, should take a very hard look at the numbers I dredged up for my spring lecture and luncheon tour. There are 140 million personal residences in the US. Today, there are 19 million homes either directly or indirectly for sale. According to a survey by Zillow.com, a real estate appraisal website, 5 million homeowners plan to sell on any improvement in prices. Add to that 4 million existing homes now on the market, 1 million new homes flogged by companies like Lennar (LEN) and Pulte Homes (PHM), and 1 million bank owned properties. Another 8 million mortgage owners are late on their payments and are on the verge of foreclosure, bringing the total overhang to 19 million homes. Now, let’s look at the buy side. There are 35 million who are underwater on their mortgages and aren’t buying homes anytime soon, nor are the 35 million unemployed and underemployed. That knocks out 50% of the potential buyers. Here is where it gets really interesting. There are 80 million baby boomers retiring at the rate of 10,000 a day. Assuming that they downsize over time from an average 2,500 sq ft. home to a 1,000 sq. ft. condo, and eventually to a 100 sq. ft. assisted living facility, the total shrinkage in demand is 4.3 billion sq.ft. per year, or 1.7 million average sized homes. That amounts to a shrinkage of aggregate demand for a city the size of San Francisco, every year. You can argue that the following Gen-Xer’s are going to take up the slack, but there are only 65 million of them with a much lower standard of living than their parents. Throw in the disappearance of state and federal first time buyer tax credit. You can count on a jump in long term capital gains taxes and state and local property taxes, further diminishing property’s appeal. If you are looking for a final stick to break the camel’s back, how about eliminating, or substantially reducing the home mortgage interest deduction? Add it all up, and there is a massive structural imbalance in residential real estate that will take at least a decade more to unwind. We could be looking at a replay of the same 26 year period from 1929 to 1955 when prices remained flat, and we are only 3 years into it! A second down leg in the real estate market seems a no brainer to me, as is the secondary banking crisis that follows. Perhaps that’s why hedge funds have been big sellers of the homebuilder’s ETF (XHB).What’s a poor homeowner to do? Don’t ask me. I sold everything in 2005 when my research threw up these numbers, and have been happily renting ever since. And, if the toilet blocks up, I just call the landlord.

From This Home

To This Home

To This Home

2) It is Time to Revisit Buying Gold Against the Euro, which I have been dabbling in for the last 15 months (click here for my initial call). This involved buying gold and then going short an equal dollar amount of Euros against it. I don’t spend a lot of time looking at Europe, which I view as perennially slow growth, ossified, sclerotic, and lacking America’s immigration advantage as a GDP contributor.  But, the widening interest rate spread between the euro and the dollar was so obvious, that even I could see it from San Francisco with my own jaundiced, astigmatic eyes. Since then, the barbaric relic priced in euros soared 41% from €720 to €1,020. I have to give credit for this trade to Dennis Gartman of The Gartman Letter, who saw the set up months before I did, and therefore deserves, the trademark, the copyright, the patent, all the credit. Kudos to you Dennis, and I’ll be sending a check in your name to the University of North Carolina Endowment Fund. How far can we run?  If gold continues happily motoring on to $1,500/ounce by year end, which many are now forecasting, and we get an overshoot with the euro to parity, that takes the gold/euro trade to €1,500, or up 55%. That’s a big enough bight of the apple for me to go for.

3) Who Said the Dollar Was Going Down? I knew silver was doing well, but not that well! Possibly the oldest silver dollar in existence, a mint condition 1794 liberty dollar, sold at auction for $7.85 million last week, the highest price ever paid for a coin. The value of the silver in the coin is about $18. Some 1,578 of the “flowing haired” dollars were struck on a hand cranked press, and only 140 are still known to exist. The remainder were probably melted down, or lost. Collector Steven L. Contursi sold the coin to the Cardinal Collection Educational Foundation of Sunnyvale, a special purpose entity for another private buyer. The previous record for the world’s most valuable coin has long been held by a 1933 $20 gold piece, once owned by King Farouk of Egypt, and one of a handful issued by the Treasury before Franklin Delano Roosevelt ordered the rest destroyed.

4) Silver Buffalo Update. It seems like we have a lot of graduating relatives this year. The link I sent you to buy .999 silver buffalo coins yesterday sold out within the hour. If you are still interested in accumulating these sought after coins, please click here.

QUOTE OF THE DAY

“Housing could be the first of the double dips,” said Art Cashin of UBS.