Tuesday, March 25, 2008


The turn is here. It has been here for a while but, only a couple of days ago, a couple of readers said they could not see the turn. Can you see it now?

In the past 5 days, bank stocks were up 14% while gold and silver stocks were down 15%. Retail stocks were up 13% while energy stocks were down 5.5%. The Russel 2x 2K was up 11.6% while materials were down 6%. The inventory of unsold homes has fallen three out of the last four months but last month sales of unsold homes rose by 3%. In other words, sales of homes have fallen in the past 4 months but, not as fast as the production of new homes fell; after 4 months of declining inventories, buyers in some markets decided they had better jump before the best bargains got away. Since the unsold supply of homes is a function of both the numerator (homes) and the denominator (sales per month), this ratio can change quickly. A jump in the purchase rate represents both a decrease in the numerator and an increase in the divisor. Of course, some folks who have been waiting to put their homes on the market will do so once they see home prices jumping. It may be many months before builders are adding much new supply because the value of current homes must rise substantially before the ratio of new home price to used home price is back in line.


Monday, the ability of banks to buy deeply discounted mortgages was boosted by another 150 Billion Dollars. This was on top of the $200 Billion authorized by the FOMC last week. There is now solid support under the deeply discounted mortgage paper. The recovery in the price of trillions of dollars of paper is going to be substantial.

The total amount of "helicopter money" to be dropped as tax rebates pales in comparison to the money being offered to the banks by the FOMC. The total new lending by the FOMC is approximately ONE TRILLION DOLLARS and this is money that can be leveraged! Speaking of TRILLIONS OF DOLLARS, millions of variable rate loans, in excess of 20 trillion dollars worth, have been or will be "reset" at lower rates over the coming months. For example, loans tied to the commercial bank prime rates have fallen about 3% in the past 6 months. Should the annual savings average 2% on 20 trillion in loans, the reduction in cost would be better than 400 Billion Dollars. The rest of the world will see an even larger aggregate annual savings! You and most of your neighbors are likely to benefit far more from lower loan rates than from government tax rebates.


The supply of available shares in US companies has never seen the kind of reduction that has taken place over the past several years. During the credit crunch, it appeared that the stock buy-out and buy-back train had run out of steam but this powerful trend is not over. Deals are getting done. Firms are being purchased. Even the Sirius-XM radio deal appears ready to go and MSFT has locked its arms around YAHOO in a tremendous "bear hug". More importantly, corporate buy-backs are soaking up shares rapidly. Corporations are still cash rich. Even highly leveraged airlines have accumulated 10's of billions of dollars in unrestricted cash.

The gold and oil bubbles are leaking while foreigners are buying American. People from Canada to Europe to Brazil have discovered that condos on Florida beaches are going for half price in dollars and double half price in other currencies. The turn is here, grab all the bargains you can!