When the Oil Price Portends Recession

What a nuisance! Our laptop computer collapsed this morning. Hours were wasted trying to revive it. We were like a carpenter without a hammer…a clown without a red nose…an idiot without a village.

Meanwhile, the financial world seemed to be on the verge of collapse too. Stocks rose 161 points on the Dow yesterday…after a big drop the day before. Gold rose a bit too.

This is the kind of market nervousness that usually resolves itself – in a big drop. Yes, our “Crash Alert” flag – tattered, faded, and frayed – is out. Ignore it at your peril!

…..read more HERE

Housing Prices Still the Bane of Economic Recovery

Whoa…this looks bad too.

In the housing sector, the fed’s ultra-low interest rates are supposed to make it easier to refinance…which is supposed to help firm up prices. But prices haven’t firmed. They’re still giving way.

he latest numbers show prices falling, hitting post-bubble lows in 11 cities. Of the 20 major cities in the survey, only two of them had positive price movements last year. No surprise, only one – Zombietown itself, Washington, DC, home of the feds – showed an increase of more than 2%.

Worst hit were the sunshine states – California, Florida, Nevada, Arizona and Georgia. Along with Michigan, more than a third of homeowners in these states have negative equity in their houses…with 70% of them underwater in Nevada.

Wealth effect? Not in housing. According to the Case/Shiller numbers, homeowners saw their net housing wealth decline by $650 billion in the last quarter of 2010. And since many more households own houses than stocks – 66% are homeowners – falling housing prices has a much bigger effect on the economy than rising stock prices.

And it gets worse. The big wave of resetting (and recasting) ARM loans begins to crash into the housing market next month. There are about $700 billion worth of loans in this group. Many will not be successfully rewritten. Falling housing prices will make it impossible. Homeowners will prefer to walk away, rather than be shackled to a long- term mortgage 30% to 50% higher than the value of the house.

Says housing expert Robert M. Campbell:

“I continue to believe that the second downward leg in house prices that began in 2010 will likely take US housing prices to a point that is 15% to 20% below current levels.”

*** And what’s this…

“This is great…it’s down 35% since we bought it.”

This is not the kind of message you usually get from your financial advisor. But this was no ordinary advisor…and no ordinary advice.

Rob Marstrand advises our Family Office on what to do with money for really good, really long-term returns. He was speaking about a Chinese food producer; he thinks this is one of the greatest opportunities to come along in many years.

“Doesn’t sound so great to me,” we responded. “We’ve lost a third of our money.”

“You don’t understand Bill, this is not the same sort of investing most people do. We let time work for us. The average guy would be petrified. He’d be looking at his retirement account…and wondering how he would make up for a 35% loss. He’ll need more than a 50% gain to get back to even.

“But we’re not concerned about retirement. The key to family office investing success is to find the right positions…get in them at the best prices possible…and stay in until they go where they ought to go. This is a stock that is debt free…and it is trading at less than 3 times this year’s earnings.

“This is an almost unbelievable gift…but only if you’ve got the time to take advantage of it. If China blows up…or the world sinks into another big slump…this could stay down for years. But over the long run, this is likely to produce huge gains. If it just went to a ‘normal’ P/E of 10…you’d quadruple your money. But this is a company whose revenues are growing at 20% per year…so you might expect a P/E more like 20 – which would be about a 700% gain.”

Will Rob be right about this? We don’t know. But our family office investing strategy is a little like the advice we gave to Edward. In the short run, you can’t know what will be a big winner and what won’t. So, you invest in the things that deserve to be winners in the long run.

Regards,

Bill Bonner
for The Daily Reckoning

P.S. We don’t invite anyone and everyone to participate in our Family Office project. And, to be frank, we can’t accept everyone who applies. That said, long suffering dear readers get first dibs, if they’re interested. Here’s an invitation from our son, Will, in case you want to learn a bit more about it.

In this Issue:

• While you were sleeping: the big news overnight was the G-7 joint intervention in the FX market; while there is talk of a cease fire in Libya, the turmoil in Bahrain is showing no sign of abating; policy tightening in emerging Asia is another source of worry
• Has the game changed? The uptrend that began in early July has come to an end; evidence is mounting that the economy and corporate earnings are losing precious momentum; it is becoming more difficult to identify what the tangible effects were under the bond buying program; the widespread view that Treasury yields will rise sharply once QE2 is over is wrong
• Strong Canadian story remains intact

Read full article (PDF 830KB)
Read summary (PDF 271KB)

Here is an interesting set of charts on labor pool statistics and housing courtesy of my friend Tim Wallace. First consider a chart of various civilian population numbers.

……but investors reluctant to follow

While rough diamond prices have surpassed their pre-recession peak and polished prices are also doing well, money isn’t flowing into the diamond space as it has with every commodity in the mining sector.

At this week’s Prospectors and Developers Association, it was evident that diamond juniors are looking for alternatives while they wait for the money to return.

“People don’t realize that the recovery in diamond prices since the recession has been second only to gold,” said an investor relations representative for one junior.

In the meantime, they are continuing a trend that started during the recession, branching out to other commodities. Junior diamond companies are marketing gold, iron ore, nickel and copper projects – either as a way to lure investors, or to make a few bucks to support their diamond exploration activities.

After receiving disappointing microdiamond results from its Nanuq North JV with Peregrine Diamonds (PGD-T) in November, Indicator Minerals (IME-V) is now focusing on its Mohave copper project, in Arizona, acquired last year. Arctic Star Diamond (ADD-T) has turned its attention to rare metals, and Sanatana Diamonds (STA-V) to gold. Dianor Resources (DOR-V) is still advancing its Leadbetter project, near Wawa, Ont., but is also trying to attract a buyer for the iron ore potential on the property, 500 metres northeast of the deposit. Diamonds North (DDN-V) is continuing to explore its Amaruk project for diamonds, while also scoping out nickel, gold and iron potential at its properties.

Although diamond juniors are still waiting for investors to catch on to the diamond story, there was a noticeable increase in interest in the annual diamonds session at the PDAC. The room was full for the “21 years of diamonds: Coming of age?” talk – a marked improvement over last year’s numbers (which themselves were up significantly from the 2009 attendance).

The importance of the developing world to all commodities markets, including diamonds, was a running theme at the convention.

In a luncheon that examined the sustainability of China’s role as a demand generator for commodities, Ray Goldie, a senior mining analyst at Salman Partners, noted that while up-market diamond sales in the U.S. were recovering “nicely,” the real growth is in Asia. Peregrine Diamonds’ president Brooke Clements pointed out in a separate presentation that diamonds are very popular with men in China, for example in wrist watches, opening up yet more potential.

And in a presentation about the Bunder diamond project in India,  Andy Davy, a consulting geologist for Rio Tinto (RIO-N) noted that the project is actually pretty small for a company like Rio, with the Attri South lamproite pipe containing about 27.6 million carats. A central reason the company is moving forward with the project, where a prefeasibility study is under way, is to get a “foothold” in India, where Rio Tinto is not all that well known, despite its size. The country’s economy is expected to overtake the size of China’s in 2040.

Conference attendees received updates on diamond projects including: Peregrine Diamonds’ and BHP Billiton’s (BLT-L) Chidliak project, where 50 kimberlites have so far been discovered; Stornoway Diamonds’ (SWY-T) Renard project, for which a feasibility study is expected to be released in the third quarter of the year; and Shore Gold’s (SGF-T) Star-Orion South project, for which a feasibility study is expected in the second quarter.

http://www.gurufocus.com/news.php?id=126411