Steve Christ - Angel Publishing

How Uncle Sam Fiddles with the Figures

Fuzzy Numbers. That according to Kevin Phillips is what the U.S. government is all about when it comes to official economic data.

In fact I wrote about Phillips in a piece published in May entitled: Uncle Sam's Phony Economic Numbers.

In a Harper's magazine story, Phillips wrote:

"Ever since the 1960s, Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the vigor and muscle of the American economy are measured.

The effect has been to create a false sense of economic achievement and rectitude, allowing us to maintain artificially low interest rates, massive government borrowing, and a dangerous reliance on mortgage and financial debt even as real economic growth has been slower than claimed.

The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range).

The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today's U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession."

Since then I've come across, a continuation on this theme via a post on The Big Picture.

It's a video from Chris Martenson, and it explains how the government massages the numbers in ways that mere print never can.

So if you want to know how it all really works, I recommend you click the link below:

http://www.chrismartenson.com/fuzzy_numbers

Martenson's entire course, by the way, is well worth your time.

The cleat of reality is out there folks-just don't expect to get it from the government.

Ponder that while you consider the recently released inflation data. It was hot again.

From AP by Martin Crutsinger entitled: Consumer prices rise at double the expected rate

"Consumer prices shot up in July at twice the expected rate, pushed higher by surging energy and food costs. The latest surge left inflation running at the fastest pace in 17 years.

The Labor Department reported Thursday that consumer prices rose by 0.8 percent last month, twice the 0.4 percent gain that economists had been expecting.

It marked the third straight month of oversized inflation increases following jumps of 0.6 percent in May and 1.1 percent in June. And it leaves inflation rising by 5.6 percent over the past year, the biggest 12-month gain since January 1991.

Core inflation, which excludes volatile food and energy costs, rose 0.3 percent in July, slightly higher than the 0.2 percent increase that economists had expected. For the past 12 months, core inflation has risen by 2.5 percent, the highest 12-month change since February.

The battering of consumers continues as prices are rising for just about everything," said Joel Naroff, chief economist at Naroff Economic Advisors. "If you think things are going to get a lot better with the drop in petroleum prices, think again. The increases (in July) were broadbased."

The core inflation figure was driven higher by a big 1.2 percent jump in clothing costs, the biggest increase in this area since August 1998. Airline ticket prices, which have been surging because of higher fuel costs, jumped another 1.3 percent in July.

The big rise in inflation left consumers even more squeezed. The Labor Department said that average weekly earnings, after adjusting for inflation, fell by 3.1 percent in July compared to a year ago, the biggest year-over-year decline since November 1990."

The truth is out there....

Greenspan Sees a Bottom, Foreclosures Soar

Alan, Alan, Alan.... you never learn.

That's what I thought this morning when I read Alan Greenspan has called out another prospective bottom in the housing market.

"Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," he told the Wall Street Journal.

And while it wasn't as awful as his Oct. 2006 call when he said the ``worst may well be over'' for the U.S. housing industry, it was pretty close. In fact, I'm a going to go on record and say that 2009 will make 2008 look very attractive by comparison.

So hold on to your glasses Al, the real "Age of Turbulence" is far from over. And try as you might, you will never be able to rewrite the history on this one.

Meanwhile, the bubble you created continues to collapse.

From RealtyTrac Staff entitled: Foreclosure Activity Increases 8% in July

"RealtyTrac, the leading online marketplace for foreclosure properties, today released its July 2008 U.S. Foreclosure Market Report^TM, which shows foreclosure filings - default notices, auction sale notices and bank repossessions - were reported on 272,171 U.S. properties during the month, an 8 percent increase from the previous month and a 55 percent increase from July 2007. The report also shows one in every 464 U.S. households received a foreclosure filing during the month.

"Bank repossessions, or REOs, continued to be the fastest growing segment of foreclosure activity in July, posting a 184 percent year-over-year increase - compared to a 53 percent year-over-year increase in default notices and an 11 percent year-over-year increase in auction notices," said James J. Saccacio, chief executive officer of RealtyTrac. "The sharp rise in REOs, combined with slow sales, has resulted in a bloated inventory of bank-owned properties for sale."

The Cape Coral-Fort Myers, Fla., metro area registered the highest foreclosure rate among the 230 metro areas tracked in the July report. One in every 64 households in the metro area received a foreclosure filing during the month - more than seven times the national average.

Three California cities followed in the metro foreclosure rate rankings: Merced was at No. 2 with one in every 73 households receiving a foreclosure filing; and Stockton and Modesto were in a virtual tie, each with one in every 82 households receiving a foreclosure filing.

With one in every 85 households receiving a foreclosure filing, the Las Vegas metro area's foreclosure rate ranked No. 5, followed by three more California metros: Riverside-San Bernardino, Bakersfield and Vallejo-Fairfield.

Fort Lauderdale, Fla., documented the ninth highest metro foreclosure rate, and the foreclosure rate in Phoenix took the No. 10 spot."

So where are you in the foreclosure morass? Here's the current foreclosure map from RealtyTrac. It's getting redder every month.

By the way, according to a new report from the National Association of Realtors (NAR), the nationwide median existing single family home price plunged 7.6% to $206,500 in the second quarter, down from $223,500 in the same period of 2007.

You missed again Alan. Now go away.

Investing in Uranium

With election season now kicking into a higher gear, the real issue of 2008 has suddenly grabbed the center stage. From Maine to California, and everywhere in between "it's the energy crisis-stupid" and it's changing the political landscape.

But that is what happens when energy prices skyrocket, wallets slam shut and our economy gets crippled in the process. Peak oil has its price and this is one cup that won't be passed.

Of course, the problem is that while our leaders failed to lead, the peak oil train just kept coming on down the tracks. In four short years, oil has gone from $40 to $140.

So people worry.... people get angry.... and suddenly people demand answers. And who can blame them?

That has made for some strange bedfellows as the political classes do what they do best - pander for votes. So now almost everyone but Nancy Pelosi wants to drill, drill, drill.

But even Nancy has her reasons. She is "trying to save the planet" you know—pretty heady stuff for a kid from Baltimore. (Full Disclosure: My Dad says he used to date Nancy back in the day. Of course, if he had married her instead of my mom I wouldn't be poking fun at her today. Cosmic huh? I bet she's sorry now.)

Meanwhile sensible people have agreed that while there is certainly no one solution to the energy problem, everything that we do have needs to be thrown at it. That includes a much bigger role for nuclear energy in the years to come and the power of enriched uranium.

Before I get into the investing in uranium side of things, let's delve a little deeper into the debate...

McCain Powers up with Nuclear Energy

John McCain, of course, is nuclear power's biggest champion this fall. He's the best thing to happen to the industry since E=MC2.

During a campaign stop at a nuclear power plant in Michigan on Tuesday, McCain said, "If I am elected president, I will set this nation on a course to building 45 new reactors by the year 2030, with the ultimate goal of 100 new plants to power the homes and factories and cities of America."

That is pretty heady stuff for a guy that finished last in his class at the Naval Academy. Even still, at least McCain was on target. Nuclear power is one of the ways forward.

Even Barrack Obama agrees saying recently, "I think nuclear power should be part of the mix when it comes to energy."

That is a stunning reversal for an industry that had to fight tooth and nail just to survive over the last 20 years. But like I said earlier, people want real answers this time.

Enriched Uranium: America's "Other" Energy Crisis

However, one of the biggest misconceptions about nuclear power at the moment is this: It will end our energy dependence foreigners. The truth is it will not. That's the dirty little secret most people don't know about nuclear power in the United States these days.

You see, while everyone knows we have become virtual slaves to foreign crude, only a few know we also import 92% of the enriched uranium necessary to run our nuclear plants. That is even worse than our predicament with oil where 70% of our supply is now imported.

That's why I call enriched uranium America's "other" energy crisis. Because if nothing else changes we could conceivably exchange one set of shackles for another if we are aren't careful.

And it will likely only get worse when a 20 year program with the Russians called Megatons to Megawatts runs its course in 2013 since almost 43% of what we use comes from dismantled Soviet warheads. After that supply runs dry, it is not inconceivable we could be completely on our own, unable to meet our own needs.

That's a current danger that we can ill-afford and Washington knows it. Over time, those potential shortages will only be exacerbated as more and more nuclear plants here and abroad begin to come online and demand skyrockets.

According to the World Nuclear Association, there are 439 reactors operating globally, with 36 under construction. Moreover, there are also 93 new reactors on the drawing board, with another 219 proposed.

Investing in Uranium: Enriched Uranium Demand Skyrockets

And should all of the planned and proposed reactors be built, the world total will be more than 787, or almost a 79% increase over the current level—-the vast majority of which will be fueled with—you guessed it— enriched uranium.

So at some point in the future, enriched uranium could be no different than oil—sold off in a tight market to the highest bidder. Sound familiar?

Meanwhile, the price of uranium is headed higher since falling off its $136/lb. peak in 2007. Its current spot price is roughly $64/lb, which is a slight recovery from the $59/lb recorded only weeks earlier. In fact, Goldman Sachs analysts now see uranium rising to over $90/lb in the near future. For reference, uranium went for as little as $10/lb. only 6 years ago.

Higher future demand will only push the price of the commodity even higher.

Unfortunately, nuclear energy is just another area where we have been caught footed again. That's because while America allowed its nuclear industry to wither on the vine out of fear, the rest of the world moved on.

While we dithered, everyone else kept building...and building...and building. The good news though is that the process of rebuilding our nuclear industry began with the passage of the Energy Policy Act of 2005.

In it, the seeds of the industry's rebirth were sown. Specifically, the 2005 act provided the nuclear industry the following:

$3 billion in research subsidies
Over $3 billion in construction subsidies for new nuclear power plants

Nearly $6 billion in operating tax credits

Over $1 billion in subsidies to decommission old plants

A 20-year extension of liability caps for accidents at nuclear plants

Federal loan guarantees for the construction of new power plants

However, as important as the legislation has been to the industry, it is just the start. After all, rebuilding an entire domestic industry takes time.

Until then, Americas "other' energy crisis is one that we can't afford to ignore. Our leaders need to lead.

By the way, if you think McCain's talk of 100 new reactors is a bit unrealistic consider this. There is company in Arizona that is ramping up to produce 4,000 smaller sized reactors that are so small they can be shipped by rail and set up on site. And they are not the only ones headed in that direction. But that is a topic for next week.

Your keeping-an-eye-on the-future analyst,

Steve Christ

Investment Director, The Wealth Advisory

PS. There is one company that is working overtime to head off this shortage of domestically produced enriched uranium before it becomes a crisis. In fact, you could almost say that it's a monopoly at this point. The best part is it's heavily undervalued. To learn more about this company click here

The Credit Crisis Enters the 3rd Inning

I've never been a big fan of the New York Yankees, but if there is one Bronx bomber you have got to love it's Yogi Berra. After all, Berra could do it all in his day and and he certainly had a way with words.

In fact, if he were asked about it today I'm sure he would have something funny to say about the absurdity our current economic mess.

But since he's not taking my calls, I thought I would put a few of his famous words in the mouths of some other famous people. I hope he doesn't mind.

Here they are:

Something Ben Bernanke would say:

"It's tough making predictions, especially about the future"

Something Toll Brothers CEO Bob Toll would say:

"If they don't want to come, you can't stop them"

Something General Motors CEO Rick Wagoner would say:

"If you don't know where you're going, you'll wind up somewhere else"

Something former Bear Stearns CEO Jimmy Cayne would say:

"The future ain't what it used to be"

Something short seller William Ackman would say:

"You can observe a lot by watching"

Something Bank of America CEO Ken Lewis will say to his shareholders one day:

"We make too many wrong mistakes"

A conversation between Richard W. Fisher and Fed Chief Ben Bernanke:

Phil Rizzuto/Fisher: "I think we're lost."

Yogi/Bernanke: "Yeah, but we're making great time."

Something Economist Nouriel Roubini would say:

"It ain't over til it's over."

Of course, there is just one more:

"This is like deja vu all over again."

That's is what the rest of us say every three months when banks release their earnings.

By the way, according to an article in Bloomberg bank losses have now passed the $500 billion mark:

"Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.

The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.

The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half its forecast of $1 trillion for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini predicting losses to reach $2 trillion.

``It just keeps spreading from one asset to another, so it's hard to know when these writedowns will stop,'' said Makeem Asif, an analyst at KBC Financial Products in London. ‘The U.S. economy needs to stabilize first. But even then, Europe could lag and recover later. There's still a lot more downside.'"

I guess that makes it about the 3rd inning now. Let's hope it doesn't go extra innings.

Paulson's Freddie and Fannie Hangover

In the annals of "too big to fail", there have only been two companies in my mind that had to be bailed out.

They are Freddie and Fannie, even though longer term they should be broken up into several much smaller pieces.

However, letting them go under in the blink of an eye would simply be unthinkable.

Without them, the housing market would go into a total deep freeze—-10 times worse than it is right now.

After all, Freddie and Fannie are the mortgage business these days with over 70% of the market. Besides if we stiff China on the $400 billion they have wrapped up in these two companies, they might cut us off completely. Oh my...now that would be unthinkable.

But despite the government's now explicit backing of these two miscreants, neither one of them is even close to being out of the woods yet—not by a long shot.

So when I heard Hank Paulson tell Tom Brokaw this weekend that ""We have no plans to insert money into either of those two institutions", I had to laugh. It's preposterous on the face of it.

That's because what's going on at Freddie and Fannie is just like the rest of mortgage mess: It is a slow-motion train wreck that can't be stopped. And while Freddie and Fannie might not need any "money injections" today, at some point they surely will.

Here's why.

What first started with sub prime has now worked its way fully up the value chain. Alt-A is toast and now even "prime" mortgages are defaulting at an alarming rate.

That means that the worst is yet to come for Freddie and Fannie and Paulson knows it.

Beacuse when "primes" begin to default in unexpected numbers, the results will push these two companies even deeper into the pit, since these will be new "unexpected" losses. The numbers of which will be staggering.

Unfortunately, that is exactly what is happening.

From CNNMoney by Les Christie entitled: The next wave of mortgage defaults

"Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.

The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American CoreLogic that compiles and analyzes residential mortgage statistics.

Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.

And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.

"The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm.

Washington Mutual CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005.

Also last month, JP Morgan Chase CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier.

Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income.

Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport.

"Home prices will drop for quite a while - maybe several years," he said."

Paulson, by the way, also ruled out the idea he was going to stick around for another tour of duty.

He also told Brokaw, "I am very focused on getting everything done I can get done between now and January 19^th. I look forward to doing other things next year."

Stimulus Fails to Excite

Oil is down.

The dollar is up.

The stock market is rallying.

So what's not to like?

Well, for one there is the consumer. They have one foot in the grave and the other on a banana peel.

Of course, it wouldn't be that big of deal if consumer spending didn't make up over 70% of U.S. GDP, but it does.

That is going to make for one rough fall in retail—-especially now that those stimulus checks have already been spent.

Here's the skinny in that regard from MSNBC. The gov't crack hand out has run its course.

It's in a story by John W. Schoen entitled: Stimulus spent, retailers face tough rest of the year

"With the bulk of some $100 billion in tax rebates now deposited in American consumers' bank accounts, the hoped-for boost in spending has proved disappointing for the nation's retailers. As chain stores reported July sales figures on Thursday, there are signs cash-strapped households may cut back even further in the second half of the year.

When the economic stimulus package was enacted in February, analysts debated just how much of the money would translate into new spending. Now that most of the money has been distributed, it appears that much of it went to pay down credit card bills or beef up savings accounts.

"We expected that as the checks fade, so would sales," said Goldman Sachs retail analyst Adrianne Shapira. "(Consumers are) filling up their SUVs, their home equity values are plummeting, and they're feeling a lot of pressures."

Those pressures may explain why the $100 billion worth of tax rebate checks didn't give retailers a bigger lift in July. Some 28 percent of consumers surveyed in July by market researcher TNS Retail Forward said they used the money to pay off credit cards; 27 percent said they used it to pay for everyday expenses like groceries and gasoline, and 20 percent said they put the check into a savings account. Only 11 percent said they used the rebate for discretionary purchases like a new TV or a vacation.

Now, with those rebate checks spent, retailers are warily looking toward sluggish sales through the rest of the year. Back-to-school shopping is already off to a slow start, especially for new clothes.

On Wednesday, MasterCard reported that sales of clothing and shoes fell in July, as consumers stretched to keep up with rising prices day-to-day staples like food and gasoline.

"We're continuing to see a divergence here in where the retail dollars are flowing," said Michael McNamara, an executive with SpendingPulse, MasterCard's retail data service. "They really seem to be flowing into the nondiscretionary areas like drugstores, food and gasoline, and it's really coming at the expense of some of these retailers such as apparel and electronics and appliances."

That doesn't bode well for the holiday shopping season, when many retailers look to make the bulk of their sales and profits for the year. With wages rising more slowly than inflation, consumers will have an even harder time making ends meet after their rebate checks have been spent.

"We think that when the stimulus checks end, which is this quarter, we're going to hit an air pocket and disposable income will take a negative hit relative to what we saw in the second quarter," said Brian Bethune, an economist with Global Insight."

So much for the escape from reality.

Now its time to wake up and smell the coffee.

The Lenders Sober Up

Here's is a great story about what is going on in the "real world" of mortgage banking these days.

The lenders have sobered up and put away the booze.

From the USA Today by Anna Bahney entitled: Mortgage rules changes skewer some sales

"The deal was to close on June 27.

Drake Paul, a pediatrician, entered into a contract at the end of May to sell his two-bedroom, one-bath newly renovated house in Sparks, Nev., for $170,000. The buyer had lender approval, the appraisal was done, and the inspection checked out.

Then the lender called: Mortgage requirements had tightened, and the buyer no longer qualified for the 5% down payment for which he was approved. Only 48 hours before he was to sign the papers and get the keys, the buyer learned he would need to put down 20%, jacking up the initial payment from $8,500 to $34,000.

"Who can afford that?" asks Paul, 37, whose property is now back on the market after the deal collapsed. "A person that can afford a $170,000 house does not have $34,000 in cash. It just doesn't work that way."

Both buyers and sellers, such as Paul, are being caught off guard by a rippling wave of mortgage changes. Lenders are responding to the crisis in their industry by suspending mortgage products, raising required down payments and imposing a premium on loans in regions they deem to be "declining" markets. Even when they announce the changes, the message sometimes doesn't get to the mortgage broker until nearly the last minute."

"The underwriting has really tightened up," says David Olson of Wholesale Access Mortgage Research and Consulting. "Before, if you could fog a mirror, you got a loan. Now, that's not the case."

In Olson's estimation, at the peak of the housing boom, roughly 20% of the mortgage market was subprime, and nearly 20% was "Alt-A loans" - or "A-minus" loans, typically for those with good credit but with high debt-to-loan ratios or little or no proof of income. Both categories are now nearly extinct. That means about 40% of the residential mortgage market has all but disappeared.

"I don't have the hours in the day to read all the changes that come in every day," Olson says.

"Buyers come in with confidence, and once they have talked with a lending practitioner, it's like they've been hit over the head with a ton of bricks," says Dean Moss, an agent at Keller Williams Fox and Associates Realty in Chicago.

The result? Some buyers who planned to take the plunge and buy are heading back to the sidelines.

Moss says that an increased down payment on a typical $400,000 house in Chicago gives buyers significant pause: "Now, you have to put down $60,000. Buyers are like, 'I was scraping to get the $40,000. How am I going to come up with another $20,000?' "

"In my opinion," Moss adds, "the only people who have a shot in this market are those with no house to sell, who have a good income - maybe two professionals - and have a good down payment. They can name their own ticket. That's a small percentage."

So why am I so negaive on housing? It's simple.

People that can't borrow money don't buy homes.

This is one party that won't be repeated.

Biotech Investments

If you ask any CEO of a major pharmaceutical company about generic drugs they will gladly tell you that cheap knock offs are a four-letter word. That's how much they dislike them.

After all, generics generally cost 70% less than their bigger brand-named peers-competition the big boys would rather not have.

The result is that cash strapped consumers now save over $10 billion every year at pharmacies across the country with the lower priced copies.

That's why as a group generic drugs are expected to wipe out $67 billion in revenues from the major pharmaceutical companies between now and 2012 as even more big named drugs go generic.

That just crushes revenues at companies like Merck, Pfizer and the the rest of the Big Pharma.

But as big as those lost sales are for Big Pharma, those declines are turning out to be nothing but a big boon for biotech investments.

The reason for this is simple. The drug market is changing rapidly and Big Pharma knows it.

So faced with shrinking pipelines and falling revenues, the old way developing drugs through chemistry alone is giving way to the modern technologies of gene sequencing, protein analysis, and nanotechnology. In these areas, biotechs dominate.

And without the cutting edge research and development that the biotechs offer, revenues at the Big Pharma level will likely hit a wall. Again, part of it has to do with generics.

Shrinking Big Pharma Revenues

Here's why.

Patent protection in the U.S. grants a company the exclusive right to a drug for 20 years. However, the problem is that it usually takes about 10 years to actually bring a drug to market. That leaves the company only about 10 years to exclusively market a new drug.

Of course, once the patent has expired, anyone can sell a generic version of the drug with FDA approval which is practically a given these days. And without all of the costs that were necessary to bring it to the market in the first place, generic companies can easily sell the identical drugs at much lower prices.

That's one of the big reasons that Big Pharma has been turning to both acquisitions and partnerships with upstart biotechs companies. Because unlike traditional drugs, many of these new biologics are not yet vulnerable to generic competition since the FDA hasn't decided how to regulate them.

So instead of having only ten years of exclusivity to a particular therapeutic, many of these new classes of drugs are currently protected indefinitely. That offers a much better return on investment.

But that is only part of the story.

The other is that faced with the shrinking pipelines and diminishing returns from their own research and development, the truth is that these mergers and partnerships just make good business sense.

In fact, last year was a record year for biotech mergers & acquisitions, according to Ernst & Young, with closed deals worth potentially $60 billion in the United States. European deals meanwhile contributed another $34 billion.

Of course, numerous other drug makers are also looking to fill their pipelines and are paying ever larger sums to biotech companies for access to their cutting-edge developments.

That was the story at least in these recent buyouts as the bigger names worked to gobbled up the smaller in the race to enhance their own their pipelines:

Last week, Bristol-Myers Squibb Co.(NYSE:BMY )announced that it is currently trying to acquire ImClone Systems Inc. for $4.3 billion.

In July, Roche Holding AG offered $43.7 billion to acquire total control of biotech pioneer Genentech Inc. (NYSE:DNA) Roche, which owns 55 percent of the company, offered $89 per share for the rest

In June, GlaxoSmithKline (NYSE:GSK) completed its acquisition of Sirtris Pharmaceuticals, Inc. for approximately $720 million or $22.50 a share. That was nearly double it previous share price.

Bullish on Biotech Investments

Naturally, that type of activity has caught the eye of the markets, as biotech has suddenly become the hot sector of late as money rotates out of commodities.

Take a look at the chart of the BBH. It is the popular Biotech HOLDRs ETF and it is on a tear ever since energy began to pullback.

But as has always been the case with biotech/drug stocks, single stock plays are as risky as it gets. The rewards can be huge, but so can the losses making them the truly some of the most speculative plays on the books.Exchange traded funds are the better bet.

Keep that in mind before you invest.

Your bargain-hunting analyst,

Steve Christ

Chief Investment Analyst

The Wealth Advisory

PS. Making money in a bear market is tough, but it can be done. Since the first of the year The Wealth Advisory is 11-5 in its closed positions with a cumulative gain of 290% vs losses of only 55%. That is a net gain of 235%.

To learn more about The Wealth Advisory click here.

Fed Leaves Rates Unchanged

This one was baked in the cake, but the Great Oz has spoken.

Tough talk on inflation....no movement on rates....and the lone dissenter was Richard W. Fisher.

Go figure.

The good news is the markets liked it and the dollar has rallied of late.

Of course that doesn't mean that Dorothy is out of the wood yet..not by a long shot.

Even so, it beats a down market any day of the week.

From the Federal Reserve:

"The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting."

WCI Turns to Bankruptcy

There is more bad news for the builders.

Florida-based builder WCI Communities filed Chapter 11 today as a desperate effort to restructure $1.8 billion in debt went unfulfilled.

WCI shares dropped 60 cents on the news as the market opened to reach a new 52-week low of 66 cents before trading was halted.

Since peaking in July 2005 near $35, shares of the company have fallen 98%.

Not even Carl Icahn could save this one.

"This will be the largest homebuilder bankruptcy so far this year, and one of the biggest ever. It seems that [Carl] Icahn couldn't pull any more rabbits out of his hat, especially after the board terminated the special company committee to consider purchase offers last month," said Jack McCabe, CEO of Deerfield Beach-based McCabe Research & Consulting, referring to the company's chairman.

This one, however, won't be last....not by long shot.

By the way...

Here's a great story on the home building business from the Wall Street Journal.

It is by Alex Roth entitled: After the Bubble, Ghost Towns Across America

"Dennis Pflueger and his wife won a rent-free year in a nice new house in an expensive subdivision not far from the headquarters of Wal-Mart Stores Inc. As part of the prize, they then have the option to buy the four-bedroom home for $452,000.

Mr. Pflueger, a telephone-cable installer who describes himself as an "old redneck," is in the middle of his free year. But the Pfluegers are a bit lonely. Just one other family lives in any of the 28 new or unfinished houses on Foxboro Court. Up the street, a sign announcing "Elegant Homes" sits on a lot choked with weeds. The block is as quiet as an old ghost town.

Since real-estate tanked, many new planned communities across the country are half-empty, with for-sale signs outnumbering residents by a large margin.

Some of the projects abandoned by bankrupt developers are in places that were hotbeds of new housing construction: Southern California, Atlanta, Las Vegas, Phoenix. As of July, the percentage of vacant housing stock available for sale or rent stood at 4.8% nationally, the highest figure in at least 33 years, according to Zelman & Associates, a real-estate research firm.

Daily life in these developments seems a bit post-cataclysmic. Children play on elaborate but empty playgrounds. They walk their dogs past rows of shiny houses that have never been lived in. Voices echo up and down the block. Unfinished houses and vacant lots strewn with construction debris clutter the horizon.

Robert Waltenspiel lives with his wife and two daughters in a unfinished subdivision in Auburn Hills, Mich. Standing in front of his house, he can see more than 30 weed-choked lots where new houses were supposed to go. The developer halted construction more than two years ago.

"As far as working on my yard and saying, 'Hey, neighbor, want a beer?,' that's not going to happen," says Mr. Waltenspiel, an account manager for Hewlett-Packard Co.

The hot tub at the community center doesn't work. The communal fountains are dry. Mr. Waltenspiel's kids have no one in the subdivision to play with, so he has to take them to a nearby park for social interaction. His 4-year-old "will walk up to strange girls in the park and say, 'Hey, will you be my friend?' " he says. "A, it's adorable. B, it's sad."

In the past year, roughly 15% to 20% of residential developers have gone out of business, suspended operations or changed their line of work, according to an estimate by the National Association of Home Builders."

Investing in Financial Stocks

For the average investor, the urge to buy low is practically etched into their DNA. That's why anything they find on the bargain rack is just too tempting for most retail buyers to ignore.

But as wise as that strategy obviously is, it is often a temptation that leads to disaster—particularly when buying in the universe of fallen but can't miss high flyers.

That's because when a stock has fallen heavily from a very high price to a much lower price, some investors just can't seem to help themselves.

"It's an absolute bargain," they say to themselves as they "scoop up" what they are convinced are great values.

But more often than not those former big winners turn out to be nothing more lead weights around their ankles as the shares of those companies continue to get "cheaper". In short, they are not values, but value traps.

That, of course, is one of the big dangers these days when it comes to investing in financial stocks, even though most of them have fallen as much as 50% or more off of their highs.

The challenge then for all "value" investors is in determining if a company's misfortune is either temporary or if it reflects protracted problems with the business itself.

That's what makes financial stocks so difficult to buy these days even at these levels, because the banks can't really recover until the housing market bottoms. And until that begins to happen these institutions face the types of write-offs that make things like book value and earnings as elusive as the Loch Ness monster.

So in these circumstances you have to ask yourself, how exactly can you arrive at a "true value" with wildly squishy numbers. The short answer, of course, is that you can't. That means you need to check emotions at the door before you decide to pick up one of these "values."

Financial Stock Investing....No Bargains Here

Of cousre, that was easier said than done for Richard Bove, the famed banking analyst at Punk Ziegel & Co.

In March, Bove just couldn't help himself as the financials melted down. In fact, he even went so far as to call Citigroup a generational buy.

"I think the stock will be trading at $55 in the next 3 years, concluded Bove, "which is double from where it is at the present time. You only get a once in a generation chance to buy a stock like this at this price."

"This is it," he said.

But the markets only shrugged and sent Citigroup Inc.( NYSE:C) even lower. Since then the financial powerhouse is down another 20%. Some value.

According to the International Monetary Fund (IMF) that is a trend that will likely continue as the mortage crisis digs deeper into the balance sheets.

The fund warned on Monday, that while likely losses on US subprime mortgages have "largely been acknowledged" in the form of writedowns, financial institutions faced a second wave of losses on other loans. Think Alt-A and prime here.

As a result, credit quality "across many loan classes has begun to deteriorate with declining house prices and slowing economic growth." The toxic stew, in other words, continues to grow putting balance sheets were under "renewed stress" making it more difficult for the financials to raise new capital without massive dilution.

Moreover, the IMF reaffirmed its controversial earlier estimate that total losses in this cycle could total $945 billion - a number that combines mark-to-market losses on subprime-related securities and estimates of likely losses on loans.

That put the game roughly in the 4th inning since financial institutions globally have written off about $400 billion in losses since the crisis began last August. But the truth is the losses are going to be much higher than that so this is a game that could easily go extra innings.

And needless to say, the longer the game goes on the deeper and deeper the financials will fall into the pit. Some simply won't live to the see the end. Is that a chance you are willing to take?

Even still, some investors are still taking the value bait hook, line, and sinker.

Are You Getting Lucrative Canadian "Energy Stimulus Checks?"

More than $95.9 million worth of these "Energy Stimulus Checks" were cashed last year. And the number's rapidly growing. But in spite of these startling, monthly payouts, most investors still don't know this program exists...

And amazingly, this little-known Canadian "check" is NOT a one-time payment like the recent economic stimulus plan. It's not even an annual payment like a U.S. federal income tax refund.

Instead, you can legally receive Canadian "Energy Stimulus Checks" -- even if you're a U.S. citizen -- as often as every two weeks. This report has all you need to start getting a steady stream of checks right to you mailbox.

Merrill's Little Game

Take Merrill Lynch & Co. Inc. (NYSE:MER) for example. It's the financial value scam Du Jour.

Shares of the company traded above $30.00 a share 12 sessions ago when the brokerage announced one of its worst quarters in history, losing $4.65 billion, or $4.95 a share.

But that clearly wasn't everthing going on at Merrill—-not by a long shot.

Just 10 days later, Merrill...Ahem...coughed up some "new" news revealing a massive dilution of the shareholders, an $8.9 billion capital raise, and $5.7 billion in further losses on its vanishing CDO portfolio.

All told, the company sold 380 million shares for $22.50 each diluting shareholders by 36% since June. That, of course, was a 26% haircut vs. only 2 weeks ago. Shareholdes should be outraged.

Nonetheless, the stock actually traded over 3% to upside on Tuesday. It is absolutely insane.

However, the truth behind Merrill's little shell game was more onerous for the rest of the financials.

Here's why.

Merrill took a marked-to-market loss of 78% on the super senior CDOs it dumped in Lone Star Capital Management for 22 cents on the dollar. Even worse, Merrill had to finance 75% of their own deal meaning the real price is possibly on the order of 5 cents on the dollar.

That means that the value of every slice of those CDOs below the "super senior" level is worthless. In Merrill's case, a $30.1 billion asset was dumped for a measly $1.6 billion. Nice job fellas.

Those are marked-to-market realities that every other financial that is still holding this toxic garbage will have to take. When they do shareholders will be crushed. In other words,this wasn't an end, but a beginning.

So the advice here is simple: Never try to guess the value of a moving target even if it looks "cheap."

The financials are on the bargain rack for a reason. Leave them there for someone else.

The shorts aren't evil. They are right.

By the Way, here's the running commentary out of Merrill since the first of the year. Keep in mind that Merrill was a $57.00 stock in January.

Source: Bespoke Investment Group

It's nothing more then a shell game.

Until next time....

Your bargain-hunting analyst,

Steve Christ

Chief Investment Analyst

The Wealth Advisory

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The Commercial RE Drag

The slide in commercial real estate continues as both Bennigan's and Mervyn Department stores both filed for bankruptcy this week.

That's the story in general on the commercial side as the CB Richard Ellis reported this week. The results, needless to say, were below expectations.

Here's the skinny:

From Reuters entitled: CB Richard Ellis 2nd-quarter profit falls 88pct

"CB Richard Ellis Group Inc, the world's largest commercial real estate brokerage, said quarterly net income plunged 88 percent, partly on lower brokerage fees from sales that have all but dried up due to the severely constrained global credit markets.

Excluding one-time charges Los Angeles-based CB Richard Ellis would have earned $33.2 million, or 16 cents per share, compared with $157.3 million, or 66 cents last year, still far from the 44 cents analysts on average had expected, according to Reuters Estimates.

"As we had anticipated, the leasing business turned down from the strong first quarter, especially in the Americas and the UK, reflecting weak economic activity and decreasing business confidence," Brett White, chief executive, said in a statement.

"Investment sales activity remained quite soft due to a broadening of the credit market turmoil and a continuing gap between buyer and seller expectations of property values. Decreased investment volumes have now become evident in all parts of the world."

Revenue fell to $1.3 billion from $1.5 billion and behind the $1.42 billion analysts had expected, according to Reuters Estimates.

The commercial real estate market has been hampered by the broader tightness in the credit markets. The company's two biggest markets, the United States and Britain have seen a dramatic fall-off in commercial real estate sales and a slowdown in demand for space."

Here's a great story on the Ebbing Retail Tide.

Case-Shiller Index Marks Record Declines

Here's the lastest on the housing crash where home prices continue to free fall.

Where they stop nobody knows, but anyway you slice it the numbers are ugly and getting worse.

That's more bad news for the banks since they can't can't begin to recover until housing bottoms.

Moreover, with declines now 20% or more in some of the biggest markets, a huge percentge of 2^nd mortages and HELOCs have been completely wiped out.

The next stop is bigger losses in first mortgages as the average declines dig deeper into the 80% equity levels that were supposed to be "safe."

The toxic stew grows.

Here's the skinny.

From CNN Money by Les Christie entitled: Homes prices decline record 15.8%

"May home prices dropped a record 15.8% from a year ago, according to the S&P/Case-Shiller Home Price Index of 20 cities. It was the 22nd consecutive month of decline recorded by the index. Prices fell 0.9% from April to May.

Each of the 20 metro areas covered by the index posted annual declines; nine posted record lows and 10 cities recorded double-digit drops.

The Case-Shiller 10-city Index posted a year over year decline of 16.9%, and a 1% month over month dip. Both the 10-City Composite Index and the 20-City Composite Index are reporting record annual declines.

"Since August 2006, there has not been one month where we have seen overall price increases, as measured by the two Composites," said David Blitzer, Chairman of the Index Committee at Standard & Poor's.

Case-Shiller has been tracking the 20-city index for 19 years, while the 10-city index is 21 years old. The current price decline streak has been unprecedented in both length and depth. Starting in April 1990, the 10-city index streaked down for 10 consecutive months. But that total loss was just 6.5%.

Since the 10-city index peaked in July 2006, it has plunged 19.8%. The 20-city is down 18.4%."

Here are the cities with the largest annual declines in prices:

Las Vegas -28.4%
Miami -28.3%
Phoenix -26.5%
L.A. -24.5%
San Diego -23.2%

The bottom in housing is nowhere in sight. All of the housing gains from 2003 and beyond are going to wiped out before its over.

By the way.....a few readers we a bit appalled yesterday when I said that the U.S. has become a banana republic. So just for kicks I looked it up to make sure I wasn't going overboard.

According to Wikipedia a "Banana Republic" is one that typically has large wealth inequities, poor infrastructure, poor schools, a "backward" economy, low capital spending, a reliance on foreign capital and money printing, budget deficits, and a weakening currency.

That about sums it up doesn't it?

Banana Republic Bail Out

Easy Money.... Speculation..... And Fraud.

You can't have a bubble without them.

But when it all collapses under the weight of its lies, the aftermath is lot less fun than the run up.

Fortunes are lost.

Lives are ruined.

The over leveraged system falls apart. The center cannot hold.

And when it all begins to come crashing down, we get the greatest lesson of them all—-The Free Market Doesn't Exist.

The Bail Out isn't for you silly. It's for the big boys. We are no better than a banana republic.

Here's a great video on the topic.

Foreclosure Picture Worsens...Up 121%

I'll admit I am beating a bit of dead horse here but when data points like these come in they need to be noted.

The foreclosure picture is getting much worse.

From CNNMoney by Les Christie entitled: More foreclosure gloom

"As foreclosures continue to soar, 220,000 homes were lost to bank repossessions in the second quarter, according to a housing market report Friday issued by RealtyTrac.

That's nearly triple the number from the same period in 2007.

A total of 739,714 foreclosure filings were recorded during that three-month period, up 14% from the first quarter, and 121% from the same period in 2007. That means that one of every 171 U.S. households received a filing, which include notices of default, auction sale notices and bank repossessions.

"Most areas of the country are seeing at least some increase in foreclosure activity," said James Saccadic, CEO of RealtyTrac, an online marketer of foreclosed homes. "Forty-eight of 50 states and 95 out of the nation's 100 largest metro areas experienced year-over-year increases in foreclosure activity."

Because foreclosure filings are growing so quickly, RealtyTrac will have to reevaluate its foreclosure forecast for the year, according to spokesman Rick Sharga.

"We've been saying foreclosures will total 1.9 million to 2 million this year," he said. "But midway through the year, we're already at 1.4 million so we're going to be raising our projections."

And there is more bad news: Bank repossessions are up as a proportion of total filings, representing 30% of the notices issued during the quarter, up from 24% a year ago.

"I don't think that's a surprise if you look at the general conditions out there," said Brian Bethune, chief financial economist for Global Insight. "There have been six straight moves of weaker employment this year. The ongoing problems in the housing market are compounded by a generally weaker economy. Foreclosures won't go down until we start to see employment move up again."

Meanwhile, there are 2.2 million vacant homes for sale and that figure doesn't include rentals.

Ouch.

The Bottom of the Housing Market

Shill: (slang)-verb: to advertise or promote a product as or in the manner of a huckster.

Lawrence Yun is at it again and this time it's even more embarrassing than the last.

But I guess when you are the paid mouthpiece of the National Association of Realtors (NAR), you don't really have much of a choice. Either you climb to the top of the trench and make a mad dash into the machine guns or you take one from your own side. Anyway you slice it it's a no-win situation.

Nonetheless he was out again today for his monthly trip into the fifth dimension declaring once again that the phoenix was about to rise from the ashes. "I think," said Yun, "we are very near the end of the housing downturn."

More Housing Bubble Pain

Meanwhile his own statistics betrayed him as the fallout from the housing bubble grinded on.

According to the NAR, existing home sales fell by 2.6% in June to a seasonally adjusted annual rate of 4.86 million units from 4.99 million in May. That current sales pace falls 15.5% below those from June 2007 as transactions continued to shrink dramatically from their bubble peaks.

Prices, according to the group also suffered falling a whopping 6.1% over last June. As a result the national median existing home price was $215,000 for the month vs. $229,000 a year ago.

The reason for Yun's optimism? It is the latest housing "rescue"-read bail out—- making its way through Congress.

According to Yun, a tax credit provision within the bill of $7500 for first time homebuyers will be enough to end the slide, finally drawing in all of those mysterious people he insists are just hanging out on the sidelines.

Of course, the bill is full of all kinds of other goodies courtesy of the U.S. taxpayer because the list of things "too big to fail" is growing. Because when all else fails it is up to the taxpayers to socialize the losses. So much for the free markets.

But the darker truth behind cheers is no different than it was six months ago when I wrote the 6 Reasons why the Bottom on the U.S. Real Estate is Nowhere in Sight

International Companies are Dominating the Cleantech Space

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Learn more.

6 Reasons There's No Housing Bottom Here

In fact, just to review here are the six solid reasons why those all of those rescue plans will end up long on rhetoric and short on substance.

Together they add up to a market that just can't be fixed—or jawboned for that matter. They are:

1. Macro-Economic Decline - For years now those who have been housing's biggest bulls have cited a growing economy, low interest rates and low unemployment as the reasons why real estate couldn't possibly decline. Nonetheless, after peaking in 2005 housing did fall, completely blind to those same conditions.

However, some three years later, the macro-economic conditions have dramatically changed, led not coincidentally by the bursting bubble. That sets up the real estate market for its fatal blow as both a weakening economy and now job losses are beginning to accelerate. That's a nasty brew that not even historically low rates can fix. These factors alone are enough to send housing lower in the year ahead.

Mortgage rates, by the way, are actually headed higher-not lower. U.S. 30-year mortgage rates rose to an average of 6.63 percent from 6.26 percent a week ago, while 15-year mortgages averaged 6.18 percent, up sharply from 5.78 percent a week ago.

When they hit 7% it's going to be lights out.

2. The Credit Crunch - When the money to lend was sloshing all around the globe, rising real estate values were a no-brainer. In fact, those excesses were so large that they helped to turn a normally illiquid asset into a liquid one practically over night.

But with the foreclosures and defaults now off the charts in the U.S., that same pool of liquidity has suddenly gone dry. And as one lender after another has to drain their cash reserves to cover those mounting losses, their pool of deposits to lend against has dropped dramatically.

That means that what each of them can lend in the future will now fall exponentially—to the tune of 10 to 1. That's the downside of fractional reserve lending. So for every dollar that each lender sets aside for losses that's $10 that now cannot be loaned out.

It is, in short, the workings of banking leverage in reverse. In fact, according to a forecast by Washington Mutual at the end of last year, the credit crunch will lead to 40% fewer mortgage originations in 2008 as the dollar volume falls to $1.5 trillion this year from $2.4 trillion in 2007. That's huge.

3. The Fed is No Savior - A 1% Fed funds rate for over a year may have started the epic bubble, but this go round lower rates have done nothing to stop its slide. That's because try as they may, the Fed can't add any air to market, no matter how low rates go.

The reason? Lower prices now and in the future make today the worst to time to be entering the housing market—no matter what your realtor may tell you. In fact, according to a recent report by Goldman Sachs, home prices will likely decline by 15 percent nationwide from their peak. But if the United States enters a recession home prices could fall as much as 30 percent nationwide. Those aren't exactly the types of declines that will be luring buyers off the sidelines anytime soon.

Moreover, price declines approaching 20% will completely wipe out the second mortgage market. And when that happens, the mortgage market will be changed in ways that lower rates will never be able to compensate for.

Higher mortgage insurance and heftier down payment requirements as a result will further limit the ability to qualify.

4. Tougher Lending Standards - Back in the day when anyone and everyone could qualify for a loan, keeping home prices down was nearly impossible. Because when lending standards became as loose as they did, anyone and everyone that wanted to buy home did. And using a mix of option ARMs, interest -only loans, sub prime teasers, and liars loans, borrowers flooded the markets with a level of demand that will never be seen again.The result was a doubling of home values.

But as the absolute foolishness of those days has been exposed, lenders have gone completely in the opposite direction, turning back the mortgage clock a good ten years. That has made borrowing money considerably tougher, even for "good" borrowers.

In fact, according to a recent study by the Federal Reserve, banks are now raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed's quarterly survey of senior bank loan officers. That means that an entire level of would-be borrowers has been locked out of the market for good, further weakening demand.

Simply put, people that can't borrow money don't buy homes.

5. Massive Oversupply - When home price appreciation was at its peak demand was so great that on average there was a 4 month supply of homes on the market. That skinny supply scenario helped to push the market into another level.

But with demand having peaked in 2005, not even good economic times could stop or slow down the build up of inventory nationwide. In fact, according to today's numbers from the NAR existing homes have grown to a 11.1 month supply. Those are figures that will continue to grow as demand shrinks and mounting foreclosures pour onto the markets.

That will push prices lower in the years to come as the laws of supply and demand continue to work in reverse.

6. The Affordability Gap - When liar's loans and outright fraud disconnected a person's ability to borrow from their income, chasing home prices beyond real affordability was easy. But now that a persons ability to actually make their payments has suddenly become the rage again (go figure), home prices will return to their traditional anchor. That is income.

The result will be lower values across the board. That's because historically, median home prices and median income have always shared a pretty consistent relationship. In fact, from the 1970's until 2001 the historical ratio between median home prices and median income was between 2.6 and 3.0.

So where are we today? Well with the median home price at $208,400 and median income at about $49,000 that leaves us at a ratio of 4.25—more than 30% beyond the historical norm. That means that in order to return to a historical level of affordability either incomes have to rise significantly or values have to fall by as much as 30% on average nationwide.

That's a gap that's hard to finesse. Here's a bet on falling values rather than rising incomes.

So it looks like Mr. Yun will be at it again next month.

By the way, if you are wondering what ever happened to our old pal David Lereah, he slipped out the back door over a year ago.

But now that he is now longer shilling for the National Association of Realtors, Lereah has changed his tune entirely. In fact, in many ways he has finally come clean.

Housing Lereah says now is not at the bottom after all.

Last month he told Newsweek, "We're not at the bottom. People want it to be near the bottom, but we're not there yet. The leading indicators are still very bad. Pending home sales are still in bad shape. Mortgage applications are low ... There's still supply out there in abundance ... This thing is going to get worse before it gets better."

Your bearish-analyst,

Steve Christ

Chief Investment Analyst

The Wealth Advisory

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Wachovia's Option ARM Debacle

As the ultimate showman of his time, P. T. Barnum sure knew how to draw a crowd.

In fact, as he lined his pockets with their dough time and time again he also became famous for that quip that "there's a sucker is born every minute."

But while Barnum profited from this time-tested truism, those words never actually left his lips. The famous phrase was said by one of his competitors—-a banker named David Hannum, which seems fitting given the current state of the lending business.

One of the biggest lending scams, of course, was the Option ARM.

It was pushed by these wolves not only because it was easy to qualify for but also because it's low initial payments were the ultimate bait. That's the reason they call them "teaser rates" to begin with.

But while these initially enticing rates were quite marketable to the "monthly payment nation" that bought them, it doesn't take long before the payments on these loans nearly double.

When that happens, it nearly buries many of the people that got them with no clear understanding of how they worked in the first place.

And to make matters worse, even if these troubled borrowers are able to make the higher payments, they often do so at the "minimum payment" amount, which adds the uncollected interest to their loan balance, driving them deeper and deeper in debt.

Nice trick huh?

But the truth is that is was a little too clever. These loans are blowing up left and right. That's the next stage of crisis as these loans go bust too in numbers much larger than the estimates.

A big player in these loans was Wachovia. They stumbled into this abyss when they bought Golden West for $2.6 billion in 2006.

Of course I'm just guessing but I'd bet that is one decision Wachovia would like to take back.

Here's the skinny on Wachovia from The Charlotte Observer.

It is by Rick Rothacker entitled: Wachovia aims to unravel Pick-a-Payment problems

"Amid ballooning loan losses, Wachovia Corp. is taking more steps to unwind its troubled $122 billion Pick-A-Payment mortgage portfolio. But it's not going to be a quick fix - or a cheap one.

Wachovia last month said it would stop offering a minimum payment option that causes a borrower's loan balance to increase, essentially eliminating the Pick-A-Payment product. Now it's taking more steps to refinance existing Pick-A-Pay customers into traditional loans, including reassigning 1,000 employees to contact customers.

In some cases, borrowers will be offered a reduction in their principal owed as part of a refinancing, the bank said. In other cases, troubled borrowers may be encouraged to sell their homes at a loss to avoid foreclosure.

These loans, which give customers monthly payment options, were the core product the Charlotte bank inherited in its 2006 acquisition of California-based Golden West Financial Corp. But the huge plunge in U.S. housing prices, particularly in California and Florida, has sent many of these borrowers spiraling into default.

Meanwhile, the losses emerging in the portfolio are staggering. The bank said it now expects cumulative losses of 12 percent over the lifetime of the portfolio, with most coming in the next three years. In April, the bank had estimated total losses of 7.5 percent.

The bank's models have it setting aside $8.7 billion in 2008 to cover Pick-A-Payment losses and expected losses, followed by another $5.6 billion in 2009. The bank's calculations are based on housing declines bottoming out in 2010.

At the end of the second quarter, about 5.8 percent of the Pick-A-Pay loan book was considered nonperforming, compared with less than 1 percent of the bank's traditional mortgages. Pick-A-Pay loans are plagued by their concentration in dismal housing markets. Borrowers also can elect to pay less than the interest owed, inflating their balances owed. About 65 percent of Pick-A-Pay customers selected this option in May.

With Pick-A-Pay curtailed and the mortgage market remaining sluggish, Wachovia plans to dramatically restructure its mortgage unit. The bank said Tuesday it plans to cut about 4,400 mortgage jobs, about 38 percent of the current mortgage work force of 11,500.

As part of the ongoing reorganization, two top mortgage executives who joined the company from Golden West, Rich Fikani and Tim Wilson, will no longer report to mortgage head David Pope, spokesman Don Vecchiarello said.

The company 'hasn't reached a conclusion on what new roles they will have, if any,' he said."

Those guys from Golden West must be laughing themselves silly.

I guess there really is a sucker born every minute.

Pickens: Oil is Headed to $300 in 10 Years

In case you haven't heard, T. Boone Pickens is a worried man when comes it comes to the energy situation these days. America, according the legendary oilman, is in a heap of trouble-and it's only going to get worse.

And with the election season looming, he is quickly becoming the energy equivalent of Ross Perot, complete with charts, graphs and white board presentations delivered with a familiar Texas drawl.

But unlike that other famous Texas billionaire whose was long on talk and short on action, Pickens has put his money where his mouth is and has a plan to fix it all.

In fact, he even calls it the PickensPlan, and he has budgeted $58 million of his own to market the idea to an America caught up in the grips of a second energy crisis.

That put the Texas-sized salesman up on Capitol Hill today to brief members of Congress on his plan to dramatically reduce oil imports.

Without it, he said oil could go as high as $300 a barrel by 2018.

Here's the skinny on Boone's sales call to D.C.

From Reuters by Timothy Gardner entitled: Pickens sees $300 oil unless U.S. cuts crude imports

Oil prices will hit $300 a barrel in 10 years if the United States fails to reduce its dependence on foreign imports, billionaire oil investor T. Boone Pickens told U.S. lawmakers on Tuesday.

The United States imports nearly 70 percent of its oil and Pickens said the world's top petroleum-consuming nation would import 80 percent in a decade if it does not aggressively tap its own natural gas and renewable resources.

"If we continue to drift, oil will hit $300 a barrel in 10 years," Pickens testified at a hearing of the U.S. Senate Homeland Security and Governmental Affairs Committee.

He testified as the Senate planned to debate energy legislation amid calls for more oil drilling to help lower oil prices which hit a record this month of over $147 a barrel.

Pickens has been touring the country pushing a plan under which domestic natural gas supplies would be used to power cars instead of electrical power plants. The federal government and private investors would build a massive wind farm system in the middle of the country from Mexico to Canada to provide electricity.

Pickens, who heads the hedge fund BP Capital, stands to benefit from such a program. He's building a 4,000 megawatt, $10 billion wind farm in northern Texas that should start generating power in 2011.

Industry group the American Wind Energy Association (AWEA) has said the Pickens plan could work if the government renews the production tax credit for renewable energy, preferably for longer than a year or two.

Growth in U.S. wind power has been dramatic. Preliminary figures show the United States in July may have surpassed Germany as the world's largest generator of wind power, AWEA said.

"We're on track to doing that, if it hasn't happened already," said an AWEA spokeswoman.

Wind could generate 20 percent of U.S. electricity by 2030, only slightly less than natural gas currently fires, the Department of Energy said in a report."

Of course, it is going to take a lot more than windmills to pull this off, but at least Boone is a man with a plan.

That put him at least 10 steps ahead of the fine folks in Congress that he went to enlighten.

The Fallout Continues

Here's a mainstream media clip on the economy that about sums it all up. Of course, since nobody really watches them anymore you might have missed it.

It's from CBS News.