Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Tuesday, June 10, 2008, at 6:00 p.m. EST.

Falling oil prices lifted stock prices today. At the closing bell, the Dow rose 9 points, closing at 12,289, while the Nasdaq fell 10 points, closing at 2,448. The S&P 500 closed 3 points lower at 1,358. Oil closed $2.68 lower at $131.67 per barrel, while gold closed $28.70 lower at $869.70 an ounce.

There is increasing evidence that an abundance of liquid cash is chasing oil futures and the energy ETFs, which is pushing oil prices higher. At the moment, oil supply and demand is balanced. However, we continue to use more oil than we are finding. Hence, oil prices will continue to move higher until the global economic boom peaks in late 2009 or 2010.

Interest rates have bottomed; hence, bond prices are falling. Market interest rates will be rising in 2008 because of inflation. The Fed Funds rate will be rising in 2009 because of rising inflation from the oil bubble and the commodities boom. There is no reason to own bonds today.

Let's continue to avoid the housing sector. Also, I would not purchase residential nor commercial real estate. The housing market will not bottom this year while housing prices are still falling and "for sale" inventories are still rising. Worse yet: Because of foreclosures, bank-owned homes are not included in the record number of "homes for sale" inventories, indicating that the true inventory of homes on the market is much greater than we're being told.

Let's also avoid the financial stocks and the banking stocks. And be sure to keep a 15 percent stop-loss on all positions. Rumors could sink Lehman Brothers in much the same way that rumors caused the failure of Bear Stearns.

Stay close to our Tuesday/Friday Hotline Updates. I will continue to trim our global/international holdings because of the dollar and I will also be adjusting our portfolio of recommendations to capture maximum profits from an eventual stock market rally.



The next Hotline Update will be on Friday, June 13, 2008, at 6:00 p.m. EST.

Housing Pain Hits Prime Borrowers

Housing Pain Hits Prime Borrowers
Foreclosures Increase
As Troubles Worsen
Outside of Subprime
By RUTH SIMON
June 6, 2008; Page A5

Mortgage delinquencies and foreclosures continued to surpass record levels in the first quarter, as the prolonged decline in home prices and shifting economic conditions trapped a growing number of prime borrowers.

Delinquencies and foreclosures increased at the fastest pace for borrowers with prime adjustable-rate mortgages, according to the Mortgage Bankers Association, though borrowers with subprime ARMs still account for the largest share of troubled loans. The number of new prime ARM foreclosures increased by 29,000 to 117,000 in the first quarter, while the number of new subprime ARM foreclosures increased by 20,000 to 195,000. This is the first time prime foreclosures have grown faster than subprime foreclosures, the MBA said.

The increase in delinquencies has been highest in states where there has been a lot of overbuilding, said Jay Brinkmann, the MBA's vice president for research and economics. New subdivisions in those states have seen the biggest price drops, he said, as builders have cut prices to reduce inventories. That has made it more difficult for borrowers in the same or nearby subdivisions to sell or refinance if they get into trouble. About 10% of the homes built after 2000 are now vacant, according to the Census Bureau, compared with roughly 2% of homes built earlier.

Nationwide, roughly 1.3 million homes were in foreclosure at the end of the first quarter, according to the MBA. The foreclosure rate increased by 0.43 percentage point in the first quarter to 2.47% on a seasonally adjusted basis, while the number of loans that were at least 30 days past due climbed by 0.53 percentage point to 6.35%.

The increases "are clearly being driven by certain loan types and certain states," said Mr. Brinkmann. Four states -- California, Florida, Nevada and Arizona -- accounted for 89% of the increase in foreclosures, he said.

The number of new foreclosures dropped slightly in Michigan, Ohio and Indiana, where delinquencies have been driven by a weak economy, though overall delinquency rates in those states remain high. The slowdown in foreclosures there may reflect increased efforts by mortgage companies to work with troubled borrowers, Mr. Brinkmann said.

Still, the rise in past-due loans was widespread, with delinquencies up year over year in every state except Louisiana. Thirty-nine percent of subprime ARMs and more than 10% of prime adjustables are at least one payment past due. Option ARMs, which carry a low introductory rate but can lead to a rising loan balance, account for much of the rise in delinquent prime ARMs, Mr. Brinkmann said.

The data provide little evidence things will improve soon. Mark Zandi, chief economist at Moody's Economy.com, notes credit-bureau data from April show delinquencies have become "measurably worse" in the second quarter. "The problem now is negative equity combined with a weakening job market," he said, rather than resetting adjustable-rate mortgages.

Falling home prices have exacerbated the problems in the mortgage market by making it more difficult for borrowers who run into trouble to refinance or sell their homes. "The only alternative for them is foreclosure," says Paul Willen, a senior economist with the Federal Reserve Bank of Boston. "That accounts for a lot of what we are seeing."

As the downturn in the housing market deepens, more borrowers who had higher incomes and good credit are getting swept up by the undertow. "Usually these people have things they can draw on that let them hang on longer," such as savings and 401(k) accounts, says Gabe del Rio, vice president of lending and homeownership for Community HousingWorks in San Diego, which provides foreclosure counseling. Many of the more-affluent borrowers coming for help previously worked in the mortgage or real-estate industries, he says.

Falling home prices are also making it more difficult for borrowers to tap their equity to pay bills. At LSS Financial Counseling Service, based in Duluth, Minn., the average borrower seeking foreclosure counseling had nearly $17,000 in credit-card debt, compared with about $13,000 two years ago.

With fuel prices and property taxes rising, "the total household debt is incredible" for many borrowers, says Michael van Zalingen, director of homeownership services at Neighborhood Housing Services of Chicago.

Write to Ruth Simon at ruth.simon@wsj.com

A chilling global warming forecast

New reports about climate change should have us all sweating about the future.
June 2, 2008

There's always a new report about global warming, but the one released by the U.S. Department of Agriculture, with its charts on optimal temperatures for soybeans and peanuts, is downright creepy in its detail. This isn't your usual futuristic fodder, with vague but dire predictions. The USDA report is more frightening because it states matter-of-factly the practical changes in farming, forestry and water that are transforming the landscape now and will do so again over the next few decades.

The Senate is scheduled to vote this week on a sweeping bill that would require carbon emissions to be slashed 70% by mid-century. Its chances for passage are slim; President Bush opposes it, as he has opposed all meaningful attempts to curb global warming, on the grounds that it would harm the economy. He ought to read the USDA study, along with a similar but more comprehensive report released last week by his science advisors, which specifies the effects of global warming and its very real costs.

The USDA analysis points out the quandary we're already in after decades of inaction: The impacts during the next few decades are unavoidable. "Much of this change will be caused by greenhouse gas emissions that have already happened," the report says. In other words, we have to plan for adjusting to climate change, as well as preventing it from spiraling into a crisis in this century and beyond.

Though the report stops short of making recommendations, it implies the need for major shifts in agriculture. And there was some good news, though not as much as the bad. Northern latitudes will experience milder winters -- good for cattle -- and longer growing seasons, but also longer lifetimes for harmful pests. The South might grow too hot for traditional crops such as peanuts and watermelon. The eastern United States will get more rain, but weeds, flourishing in the presence of increased carbon dioxide, will migrate north. Crops that require cold snaps are in trouble.

The prognosis for California is especially discouraging. With a smaller snowpack and less rain, the state will experience longer and more severe droughts. Some crops in the San Joaquin and Salinas valleys might find higher temperatures intolerable, threatening the state's status as a food bowl for the nation. California, though stymied by federal regulators, has led the nation in trying to combat greenhouse gases. But it has been slower to take practical steps to adapt to the warming it can't prevent. The state cannot put off water conservation measures, and with longer and more dangerous fire seasons, it cannot afford to permit increased sprawl into forests and brush areas.

At the national level, the report should awaken the agriculture sector to the disruption ahead. If the farm lobby, which is powerful enough to continually win wasteful subsidies even though they benefit only a tiny minority, were to team up with environmentalists, imagine what they could do to fight climate change.