Harry S. Dent Jr

It doesn’t look homeowners will get any reprieve from home prices soon enough.

Harry S. Dent Jr., who provides forecasts based primarily on demographic shifts, recently stated the bottom is a long, long ways away.

Harry Dent, American demographer, economist and writer, predicts the median U.S. housing price is going to $120,000. This is significantly lower than the 2007 median U.S. home price of $191,000 which is the lowest level since 2004.

In an interview with Goldseek Radio (listen to interview here) Dent further adds:

“We’ve seen the greatest housing bubble in history. With low interest rates and wealth created by the Baby Boomers and so much speculation towards the end, that housing prices need to fall 50% or more to get back to normal and that is going to hurt a lot of people who own houses, and it’s going to be the greatest gift to the younger generation coming along where housing isn’t affordable to them.

“It will become affordable and the deleveraging process will happen, Governments can’t prevent it. They always think they can. They couldn’t prevent the Great Depression or any downturn since. So this is going to happen and the best thing people can do is prepare for it now.”

As the whole world waits for a bottom in housing, it is increasingly clear that it isn’t coming anytime soon.

Consumers Get Pinched

Bloomberg reports on U.S. homes with negative equity:

More U.S. Homeowners Have Mortgage Higher Than House Is Worth

“The states with the highest shares of homes with negative equity either had rapid appreciation in prices, manufacturing declines or higher proportions of subprime loans, according to First American.

“Nevada had the highest share at 48 percent, followed by Michigan at 39 percent, Florida and Arizona each at 29 percent, California at 27 percent, Georgia at 23 percent and Ohio at 22 percent, First American said.

“New York had the lowest share of homes with negative equity at 7 percent, followed by Hawaii at 8 percent, Pennsylvania at 9 percent and Montana at 10 percent, according to the report.

“The negative equity report was compiled from 41.7 million first and second mortgages and covers single-family homes, cooperatives, condominiums, town homes and multiunit attached properties up to four units,” Khater said.

Drop in Housing Value Hits Economy Hard

The fall in housing prices isn’t only impacting the borrowers who bought homes they couldn’t afford, banks that were willing to lend to them, and investors in real estate and REITs, the problems spread much wider.

The number of Americans who hold mortgages with negative equity is on the rise. Foreclosures and the weakening economy are only compounding this number. Continued job losses and reset mortgages aren’t helping either. These factors, coupled with negative market sentiment, frozen credit, and a sharp decrease in value of commodities, real estate and stocks, have all brought a painful ending to the longest growth period in history.

Almost 20% of U.S. mortgage holders hold mortgages with negative equity. This means that more than 7.5 million properties in the UNITED STATES are now worth less than the mortgages that support them. This is a serious problem for borrowers and consumers that lived off the growing equity in their houses.

As you can see in the chart, $200 billion worth of equity was pulled out of the U.S. housing market. And this is no longer the case. Net equity extracted in Q208 was closer to $10 billion.

As we’ve been bracing for at Q1 Publishing for a while, U.S. consumers cut spending in September showing the largest drop since 2004. Even discount retailers like Wal-Mart (NYSE:WMT) are feeling the pressure to increase discounts, despite an increase in October sales. Wal-Mart’s October Sales (at U.S. stores open for at least one year) increased 2.4%, a nice increase from their forecasted sales increase of 1%.

The issue with declining real estate values is just one of the problems facing the U.S. and global economies. As a result of the decline, World GDP will grow by just 1% next year, according to Fitch Ratings in its latest Global Economic Outlook report. Major economies are going to experience their sharpest decline in history.

Harry S. Dent Jr
Chief Investment Strategist, Q1 Publishing

Andrew Mickey, Q1 Publishing

It’s been a wild year for fertilizer stocks. Many investors who have been loading up on agriculture stocks right along with the hedge and mutual funds have taken some big lumps over the past couple of months, but it looks like the panic selling period is behind us.

When overleveraged traders and hedge funds are forced to sell anything and everything, we’re all forced to relearn that fundamentals mean next to nothing in a bear market. But that could be slowly starting to change right now. And if it does, the long-term outlook for fertilizer and potash should be getting a boost.

As we’ve already seen, miners who enjoyed the run-up in commodities are now dealing with falling commodity prices. A lot of marginal mines have been forced to shut down.

Over the long-term, mine shutdowns are very good for commodities. The global economy will turn around and demand for commodities will be back on the rise, but if this downturn lasts long enough and more mines are forced to shut down, we could be right back where we’ve been over the past five years when supply was significantly lagging demand.

 Of course, a few commodities have been able to weather the storm. Gold has only fallen about 30% from its highs earlier this year, molybdenum has held up relatively well, but one of the strongest has been potash.

The fertilizer ingredient, which is priced in private negotiations between buyers and sellers, hasn’t experienced virtually any downturn at all. After soaring to $1,000 a tonne over the summer, potash prices haven’t taken a big downward swing like most other commodities. That doesn’t mean potash companies aren’t expecting lower prices in the near-term.

Earlier today, the Russia-based potash producer Uralkali (Pinksheets:URALY) announced it will be cutting potash production in 2008 (huh…seemed unthinkable just a few months ago, right?). In response to the announcement (view original here), the company stated:

“The decision ... is prompted by the current decrease in potash fertilizers purchased in the global market ... The planned reduction in production offers Uralkali a good opportunity to repair and modernise its facilities that for the last several years have been used at their full capacity.”

“Liquidity crisis is hindering the farmers' ability to purchase and use fertilizers.”

It looks like no one is immune from the credit crunch, not even farmers.

The problems in the potash industry don’t stop there. Yesterday, Rio Tinto (NYSE:RTP) announced it will “cautiously” push forward with its potash mine development plans in Argentina.

The South American country has watched its stock market collapse and a big part of the nation’s pension plan disappear right along with it. To make up for the losses, the Argentine government is considering ratcheting up export taxes. This would greatly impact the profitability of the Rio Tinto’s potash mine currently under development.

Despite all of the bad news, at the end of the day, I consider it mostly good news for potash stocks over the long-term.

The major North American producers like Potash Corp (NYSE:POT), Mosaic (NYSE:MOS), and Agrium (NYSE:AGU) will continue to produce potash. They’re still making a lot of money. But Uralkali drawing down production is a sign there could be even weaker times ahead for potash prices.

Over the long-term, potash producers will be seeing even more gains. After the recent slide, fertilizer stocks have most of the potential bad news to come already built into them. There is more potash production expected to come on line over the next decade, but these events prove expectations are probably a bit too high for the actual growth in potash production. As a result, we could be in for another solid (although somewhat more volatile) slide from here.

For the time being, there are still plenty of quality agriculture stocks out there which are just as undervalued as fertilizer stocks. After what has happened over the last couple of months, I can’t tell you where they will be in the next week or month, but if you’ve got a couple of years to wait, they’re probably going to be significantly higher.

Good investing,

 

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Andrew Mickey

After three straight days of a market rally, a lot of investors are starting to slowly move back into the markets.  Leading the way up has been agriculture and gold stocks. In a recent interview, Jim Rogers explains why he’s still bullish on both.

The man who turned bullish on commodities at precisely the right time nearly a decade ago and has managed to stay one step ahead of the rest of the investment world is speaking publicly again. This time, Rogers (view Jim Rogers Bloomberg interview here) provided some further insight into his thoughts on where the markets are headed over the medium and long-term.

Although he didn’t say much of anything new, he continued to stick closely to many asset classes which we’ve been watching come down in price a lot.

Rogers continues to be bullish on gold and said the United States and other western economies are headed for an “inflationary nightmare.” He added, “Gold is still in a bull market and will continue to be for a long time.”

That’s no surprise. The gold bulls are starting to come back to life. He is continuing, however, to be as bullish as ever on agriculture stocks. Rogers says, “I expect to make more money in agriculture than I do in gold or stocks.”

I agree completely there. The agriculture story has been unfairly beaten down. Yes, for readers of many of my other posts, I’ve been bearish on agriculture stocks since the middle of the summer. It seemed like a very frothy high and it was no time to be chasing after many of the hot names like Mosaic (NYSE:MOSE) and Potash Corp (NYSE:POT).

Sure, they’re great companies, well-managed, and facing incredible opportunities, but they had just gone a bit too far too fast. And then you add forced selling from hedge funds, mutual fund redemptions, rising U.S. dollar and a worsening economy, and you’ve got the makings of a massive unwarranted sell-off in commodity and mining stocks across the board. Everything was getting sold off hard, gold, fertilizer, silver, copper…everything.

It was a forced liquidation. Rogers agrees. In a recent interview with CommodityOnline.com, Rogers said, “We have had 8-9 periods of forced liquidation over the past 100-150 years wherein everything was liquidated without regard to fundamentals. This is such a period.”

 The boom in agriculture stocks is slowly starting to reappear. As I say in my latest agriculture stock report, “We’re in the third inning of the global agriculture boom.”

The root cause of the agriculture boom hasn’t changed a bit. Demand is rising and supply is barely keeping up. The amount of arable (suitable for farming) land is in steep decline compared to the world’s population…and it’s only getting worse. 

In 1961 there were only 3 billion people in the world. There was plenty of food to grow around. There were about 40 arable acres for every man, woman, and child in the world. That was more than enough to feed everyone.

In the five decades since, the situation has completely changed. Today, the world has about 6.6 billion people. That doubling of population has pushed the amount of arable land down to less than 25 acres of farmland per person. That’s a 37% decline in arable farmland per person…and falling.

All the fundamentals are still there and now agriculture stocks are as cheap as they’ve been in a couple of years. The world’s population is growing and the amount of available farmland is not. Nothing has changed, except an uptrend has formed.

If this is the time agriculture stocks take off, they’re going to go up for a long time to come.

Good investing,

 

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Andrew Mickey

Recession fears have taken their toll on almost everything. Even popular recession-proof stocks like Wal-Mart (NYSE:WMT) and McDonald’s (NYSE:MCD) have taken their lumps too. The worst place to be invested though has been in commodity stocks.

No one knows how bad this recession will be, how long it will last, and how great an impact it will have on the once-quickly growing economies of China and India which have propelled the commodity boom. Frankly, it all depends on when the world’s shattered confidence can be rebuilt. But with credit markets remaining tight, a stock market that has tanked, and unemployment on the rise, you can bet we’re not going to see the light at the end of the tunnel for a while.

This uncertainty has been a huge drag on commodity markets. After all, a deep global recession would send commodity prices plummeting further and could push them all the way back to historic norms. So far, recession fears and reduced demand for commodities have caused the Reuters/Jefferies CRB Index to fall 33% in the past few months.

The CRB Index is made up of a wide basket of commodities. Everything from oil to gold to livestock prices has an impact on the CRB Index. Energy and agricultural commodities are off anywhere between 5% and 60% from their recent highs. The biggest drag on the index has been 50% to 70% drop in base metals over the past few months.

Base metal prices are down…way down and a global recession may push them down even further. As a result, I wanted to take a look at the “worst case” scenario for base metals and what impact it would have on energy on mining stocks. After all, if the recession really took a turn for the worse, base metals could return to their 2002 lows.

Think it can’t happen? Just take a look at zinc.

Zinc is used primarily in steel production. The downturn in the global has economy sharply reduced demand for steel. Falling auto sales and lack of new construction projects will have (and have had) a very negative impact on steel demand.

A commodity like zinc, which doesn’t have many other uses outside of steel, would naturally have its fortunes closely tied to steel. Right now, that’s not a very good place to be. Zinc prices continued their fall to 52 cents a pound earlier today. That prices marks a 75% decline from zinc’s peak of more than $2.00 per pound in 2006 is the lowest zinc price since mid 2005.

It’s not just zinc though; similar drops have occurred in nickel and aluminum prices. The world’s largest aluminum giant, Russia-based RUSAL, now says, “75% of aluminum producers in Europe, the United States and China were operating at below break-even with the metal trading at or below [current prices of] $2,500 per ton.”

The downturn in base metals has caused a tremendous sell-off in mining stocks. Leading the way down has been zinc, uranium, and fertilizer mining stocks. The combination of forced selling hedge fund by hedge funds and falling commodities prices has pushed energy and mining stocks to new 52-week lows.

If we look at the current lows, they’re still not as low as they could go. If we consider the start of 2002 as the previous bottom in energy and mining share prices and use it as the “worst case” scenario, there could be some more downside left.

Take a look at the chart below. In a “worst case” scenario, there could be some more downside to go.

Historical Mining Share Price Snapshot
Company	Recent Share Price	104-Week High	% Decline So Far	Jan. 2002 Share Price	How Low Can They Go?
Rio Tinto (NYSE:RTP)	154.27	554.93	72%	77.85	50%
Freeport-McMoRan (NYSE:FCX)	33.11	124.83	76%	13.28	61%
Hecla Mining (NYSE:HL)	3.22	13.03	76%	0.93	71%
Teck Cominco (NYSE:TCK)	13.20	52.61	75%	6.43	52%
Southern Copper (NYSE:PCU)	11.50	47.12	76%	11.75	--
PetroChina (NYSE:PTR)	74.92	263.70	71%	18.09	75%
Occidental Petro. (NYSE:OXY)	42.84	97.85	56%	26.51	39%
Aluminum Corp. of China (NYSE:ACH)	10.12	88.05	89%%	5.25	48%

 

As you can see, there could be a lot more downside left in commodity sector stocks. These companies are highly leveraged to underlying commodity prices and there is still plenty more room to fall if the world economy gets really ugly.

Of course, when analyzing the individual companies we also have to consider expansions, investments made over the past few years, and the general price level increases resulting from inflation over the past few years when determining the true bottom for these stocks. And I think the 2002 lows will not be reached, but in a market like this where uncertainty reigns and markets would rather err on the low side, it’s certainly not impossible. When earnings, fair value, and future growth are unpredictable, watching many of these stocks swing a bit lower over the next few months is not out of the question.

I realize most of these mining stocks are at the lowest prices they’ve been in a couple of years. But considering the overcapacity in the automotive industry, sharp fall-off of industrial production and the unknown impact of a global slowdown on base metal prices, there could be even more downside to come.

Most mining stocks have incredibly low P/E ratios and very high yields. For instance, Teck Cominco sports a current P/E of 4 and a dividend yield of 6%. But if copper and base metals prices continue their downtrend, earnings will decline sharply and the company will be forced to slash its dividend payments.

For now, it’s best to take a “wait and see” approach for mining sector stocks. For investors that do want to start nibbling away at mining stocks, it’s probably best to use a more conservative investing strategy. One that will allow you to start buying today, have you positioned to enjoy the inevitable and likely sharp rallies, and still benefit from any further sell-offs. Although with markets as volatile as they are, there could be more downside to come.

Good investing,

 

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: I have no position in any of the stocks mentioned in this article.

Andrew Mickey, Q1 Publishing

As investors become increasingly risk averse amid market turmoil, credit markets remain unstable, and oil and natural gas prices retreat, the alternative energy sector is facing yet another challenge.

Many of the smaller start ups that were working their way towards profitability cannot get the financing they need just to stay in business. As a result, share prices alternative energy companies are dropping increasingly faster than most other sectors.

On top of that, the world’s political leaders have shifted their focus to the economy and questionable green subsidies might even get slashed as well. In Canada the recent re-election of Prime Minister Stephen Harper’s minority government pretty much sealed the deal on the elimination of the opposition’s $13 billion carbon tax-based program.

Senators Obama and McCain both have promised to support the sector in hopes of increased energy independence and a greener planet. But when faced with the current economic crisis, the market is forced to wonder if the U.S. government will be willing to extend their commitments to the green industries for the long-term? More importantly, if the economy doesn’t get turned around, will anyone even care?

Clifford Krauss at the New York Times reports in a recent article Alternative Energy Suddenly Faces Headwinds.

But after years of rapid growth, the sudden headwinds facing renewables point to slowing momentum and greater dependence on government subsidies, mandates and research financing, at a time when Washington is overloaded with economic problems.

John Woolard, chief executive officer of BrightSource Energy, a solar company, said he believed the long-term future for renewables remained promising, though “right now we are looking at tumultuous and unpredictable capital markets.”

Venture capital financing for some advanced solar projects and for experimental biofuels, like ethanol made from plant wastes, is drying up, according to analysts who track investment flows.

At least two wind energy companies have had to delay projects in recent days because of trouble raising capital. Several corn ethanol projects have been delayed for lack of financing in Iowa and Oklahoma since last month, and one plant operator in Ohio filed for bankruptcy protection last week.

Tesla Motors, the maker of battery-powered cars, recently announced it had been forced to delay production of its all-electric Model S sedan, close two offices and lay off workers.

Investment analysts say initial and secondary stock offerings by clean energy companies across global markets have slowed to a crawl since the spring, and for the full year could total less than half of the record $25.4 billion for 2007.

Worldwide project financings for new construction of wind, solar, biofuels and other alternative energy projects this year fell to $17.8 billion in the third quarter, from $23.2 billion in the second quarter, according to New Energy Finance, a research firm in London. The slide is expected to be sharper in the fourth quarter and next year.

In the United States, financing for new projects and venture capital and private equity investments in renewable energy this year might still top last year’s results because so much money was in the pipeline at the beginning of the year, but the pace has slowed sharply in the last month.

If credit continues to stay tight and energy prices don’t rebound we should expect to see further declines in this sector.

There will be some demand for solar, wind, and other alternative energy projects, but without economic efficiency as the driving force behind investment in the sector, there could be a long time before any rebounds come.

We’ve been speaking quite a bit about the potential impact of a deflationary environment. We’re already starting to see the impact of it in the way mining companies run their businesses. Some mines are shutting down, others are “temporarily” closed for care and maintenance (which is never an issue when commodity prices are high), and new projects getting shelved half-way through their development.

Renewable energy companies aren’t much different than mining companies. They too have long lead times and projects which take years of development before they even get their first dollar in revenue.

The alternative energy sector has taken a drubbing. Early investors in many ethanol projects have learned their lesson. The Financial Times states the six largest ethanol producers in the United States have shed more than $8.7 billion since their highs in 2006.

As a result, most institutional investors just aren’t willing to cut a check for a few hundred million dollars right now. Uncertainty is high and almost no one is willing to take the plunge on a business which might not even be economically viable in another six months.

The money is only going to three places right now. It’s either going to the sidelines, companies that we know will survive a recession and come out even stronger, and stocks with moderate to high (and sustainable!) yields.