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www.charlestonmarketreport.com “The pessimist complains about the wind; the optimist expects it to change; the realist

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“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” William Arthur Ward

September 2009 Edition In This Issue:

eCONomic Decession US Dollar and Deficit US Housing Market Commercial RE Stock Market Rally

eCONomic Decession US Dollar and Deficit US Housing Market Commercial RE Stock Market Rally www.charlestonmarketreport.com

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eCONomic Decession

eCONomic Decession I am dedicating this month’s version of the CMR to what I would call

I am dedicating this month’s version of the CMR to what I would call an eCONomic Decession. I came up with this word or slang to put into perspective where our economy is at the present time. I would define an eCONomic Decession as the evolution of an economy into a stage somewhere between a severe recession and depression due to poor government oversight and outright fraud by many players in the public and private sector. The eCONomic Decession could get much worse if our fearless elected leaders in Congress, the President and his Administration, the Federal Reserve and the private sector do not develop a more free market mentality before a genuine economic collapse does occur. This will be difficult to attain with a president who has socialistic tendencies, a bunch of idiots in Congress and a serial money printer running the Fed.

The question I want all you to think about since the Credit Meltdown in September 2008 is the following:

What has really changed in our financial industry to prevent another bubble from forming?

Except for a few trillion dollars on a bunch of acronyms created by the Fed and Treasury Dept. such as TARP, TALF, Stimulus, etc. to plug some holes in major banking institutions from failing nothing has really changed.

Has our country re-examined economic and financial theory taught in university and graduate schools? Nope.

Has the typical response by the Fed to manipulate interest rates by lowering them to zero helped? Nope.

Have chartered bank institutions across the country received an epiphany and become experts at risk management and improved banking practices? In most cases….Nope.

Have the toxic financial products, such as Credit default swaps (CDSs) and credit debt obligations (CDOs) that were never truly regulated by our government and directly responsible for this mess been eliminated or re-engineered? Nope.

Do bankers and other lenders have any perspective of past bubbles such as the Tulip Mania of 1637 or the collapse of Long Term Capital Management? Nope.

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Do the banks truly understand how to perform internal stress tests, diversify and manage the portfolio risk of their real estate portfolios? Nope.

The root of this eCONomic Decession is real estate that was securitized and recklessly lent out in the form of residential and commercial mortgages by many different institutions around the country and the world. At the end of the day credit was being extended without collateral beyond the actual cash reserves of the institution in question. If the banks and Wall St. firms had just followed this simple rule over the past couple of years then we would not be in the mess we are today. Unfortunately, these institutions were allowed to lend to individuals and companies without any money down for residential/commercial properties and land or collateral to back the loans in case of default while the Fed aggressively pushed rates down for years. Why? To help provide the mirage of a booming economy by flooding the market with liquidity?

Irrationality, fear and greed are all behavioral states of the mind that we all fight on a day to day basis and the trick is to know when to stop. Easier said than done right? Too many people in our society turn on news and believe the chatter from people like Ben Bernanke, Alan Greenspan, President Obama, Tim “Tax Cheat” Geithner, Hank Paulson, Jim Cramer, Lawrence Yun, etc. If individuals and many of the leaders in our government have “monkey brains” that take them into the realm of irrational behavior on a daily basis what makes you believe that the financial industry will suddenly learn its lesson and avoid another bubble down the road? Just remember that the media and so called experts chatter are not based on thorough research and is typically noise.

When Bernanke says “the recession has ended” it does not mean that:

The economy has recovered to previous production levels.

Jobs have stopped disappearing and hiring will immediately begin.

Interest rates will suddenly begin to rise.

Total credit market debt to GDP in the US is a record 373% as of June 30th. In the UK it is 233%. In Japan it is 225%. We have become the most profligate borrower of the large countries in the world. We are undisciplined credit addicts!

Private sector and household debt is not the problem. In the last two months the household debt declined by a huge $37 billion. Non-financial corporate debt is also not the problem. It is barely increasing. The problem simply is government. It is borrowing at all levels and without restraint. From Japan we learned that increasing borrowing can continue for a very long time. And that we can get it without much inflation and with persistent very low interest rates. The reason is that borrowing is a way of loading a debt burden on the economy. The larger the debt burden the slower the economy will grow. This is especially true when the borrowing is for consumption purposes. That is the current condition of the United States.

We borrow from ourselves when we have savings. That is the case today as the savings rate has risen due to an after shock of the financial crisis.

We borrow from others when they are willing to lend to us or when they are motivated by other than economic returns. The Chinese loan to us because that is the way they can maintain their currency peg. They need to do that in order to keep their export prices very low. We buy the stuff cheaply and trade our debt to them in return for their cheaply produced goods.

On July 28, 2009 you read where I presented the case for deflation and the many similarities the U.S. faces that are similar to what Japan has experienced since the 1990s. Since this date many very well known economists and investors have begun to come to the same conclusions. I am not saying they are reading the CMR to come to these conclusions but they are looking at similar data that I analyze to strategically target investments based on existing conditions. They are just a bit late on their analysis versus the CMR.

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The chart below really says it all when comparing what has happened to the velocity of money during the Great Depression and the current eCONomic Decession.

the Great Depression and the current eCONomic Decession. Case in point: 1. Pimco’s Gross Buys Treasuries

Case in point:

1. Pimco’s Gross Buys Treasuries Amid Deflation Concern (September 29, 2009)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aEHQiqgK1vdQ

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he’s been buying longer maturity Treasuries in recent weeks as protection against deflation.

“There has been significant flattening on the long end of the curve,” Gross said in an interview from Newport Beach, California, with Bloomberg Radio. “This reflects the re- emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth.”

2. Stiglitz Deflation Threat Pushes Fed to Stay at Zero (October 2, 2009)

http://www.bloomberg.com/apps/news?pid=20601068&sid=ame31IjWda6w

The U.S. faces the possibility of deflation for the first time since the Eisenhower administration, a threat that may prompt the Federal Reserve to keep interest rates near zero through next year.

3. Deflation Taking Root in Global Economies (October 2, 2009)

http://www.theglobeandmail.com/report-on-business/crash-and-recovery/deflation-taking-root-in-global-

economies/article1306056/

“We are certainly in a deflationary state,” said David Rosenberg, chief economist and strategist with Gluskin Sheff and Associates in Toronto. “Of that, there's no doubt. I think people still have no clue as to just how weak the economy is,” Mr. Rosenberg said.

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David Rosenberg, summed up the differences between recession and depression quite well. Recessions are typically characterized by inventory cycles – 80% of the decline in GDP is typically due to the de-stocking in the manufacturing sector. Traditional policy stimulus almost always works to absorb the excess by stimulating domestic demand.

Depressions often are marked by balance sheet compression and de-leveraging: debt elimination, asset liquidation and rising savings rates. When the credit expansion reaches bubble proportions, the distance to the mean is longer and deeper.

1. A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.

2. The effects of this depression have been lessened by economic stimulus and government support.

3. Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.

4. In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized

5. Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.

De-leveraging of debt is the main culprit behind the nastiness of the Credit Meltdown. The U.S. Government is pulling out every trick in the book to try and reduce the pain from de-leveraging, which includes:

1. Purchasing falling assets from banks via TARP and TALF.

2. Eliminating mark to market FASB accounting rules so banks can hide the true nature of how much their balance sheets have declined to the public.

3. Manipulating interest rates by keeping them historically low to prevent more defaults as mortgages reset.

US Dollar and Deficit First, when about 40% of the world’s wealth collapsed in a few months in the last year, there was every possibility that the US was in for deflation. But the US has nearly $11.8 trillion in debt and about $107 trillion in unfunded future obligations. When the Federal Reserve Bank of St. Louis published an article in mid 2006 claiming that the US was bankrupt, the total debt at that point was only about $67 trillion. But since then, the total debt has gone up $40 trillion.

The US Dollar has gone down 12% in the last six months which is a huge move for a major currency.

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I have been saying that the current credit crisis will eventually become a currency crisis
I have been saying that the current credit crisis will eventually become a currency crisis

I have been saying that the current credit crisis will eventually become a currency crisis for so long that I can't remember when I first laid out the case. For months, the warning signs have been apparent in dollar rebalancing pronouncements by central bank leaders, but the effects have been muted, as the dollar decline has been slow enough to avoid panic.

Here’s a quote from the story, from the Independent of Britain…

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the

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Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co- operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil, will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

but it also augurs an extraordinary transition from dollar markets within nine years. www.charlestonmarketreport.com
but it also augurs an extraordinary transition from dollar markets within nine years. www.charlestonmarketreport.com

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… The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

Bud Conrad from Casey Research writes:

The story in the Independent points to a more serious development, as it revolves around the sellers of oil to the U.S., who are apparently looking to avoid having to accept dollars up front in their transactions. The problem of finding a satisfactory alternative for these sellers of oil is that the obvious alternatives, the euro and the yen, are also flawed. I don't see SDRs issued by the IMF coming to the forefront, as there is no ready market for them, and the Chinese renminbi is government controlled and has a link to the dollar. More importantly, the track record of communist countries on honoring their obligations over time is poor. The article mentions gold, but there isn't enough gold.

Rather than relying on reports of secret meetings, we need to keep an eye out for other evidence confirming that trading around the dollar system is becoming reality. I don’t think we’ll have to look very hard, as I believe confidence in the dollar will continue to erode. Remember, the dollar is an abstraction representing a debt owed by a bankrupt government. As such, it has an intrinsic value of zero. Once it becomes obvious that the emperor has no clothes, we could see a serious loss of confidence that feeds back on itself, and the dollar, at least in its current form, could dry up and blow away.

From the Financial Times:

Central bankers and finance officials across the Asia-Pacific region have signaled their concern about the appreciation of their countries' currencies against the dollar, write FT reporters.

"If the symptoms behind the trend [of won appreciation] do not improve, we will come up with necessary measures with the government," Ahn Byung-chan, director-general of the Bank of Korea, told state media yesterday. The South Korean won has gained 25 per cent against the dollar since hitting an 11-year low of 1,574 to the greenback in March, closing yesterday at 1,174.

As the yen rose above Y90 to the dollar last week, Hirohisa Fujii, Japan's finance minister, suggested Tokyo might act against "irregular" currency movements, in comments seen as a change of tack after he had said recent currency movements were "not abnormal" and that he was opposed to intervention "in principle".

The New Zealand dollar has risen by almost a quarter against the US dollar this year. Bill English, finance minister, yesterday said Wellington had limited tools to do more than "lean" against the rise. He indicated the government hoped to bring the kiwi back to 50-55 US cents from 72 cents yesterday.

Taiwan's central bank usually avoids commenting on currency but said last month it was prepared to intervene if flows of speculative "hot money" made the rate too volatile. Traders say they see signs of attempts by the central bank to stop the currency overheating, pointing to swelling foreign reserves and sudden fluctuations in the intraday rate.

In other words, in exactly the same way that the U.S. Treasury and Fed are pursuing domestic priorities by debasing our currency, other nations are trying to look after their own interests by doing much the same.

But I think the leaders nestled in their leather chairs in capital cities around the world haven’t yet acknowledged the fact and, instead of redoubling their efforts to open up new markets, are looking to reduce the value of their own currencies so as to better compete for U.S. business.

As the citations above point out, this could very well lead to a race to the bottom for the fiat currencies – a race in which the ultimate winners will actually be gold, silver, and other tangibles. And, just maybe, the Australian and Canadian dollars, both considered “resource” currencies.

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While gold’s sharp rise of the last few days gives me some concern that it’s moving too fast, I think the run is far from over. In fact, I think the best of the show is still ahead. And that goes double for gold stocks, which will benefit from the leverage they offer to the underlying commodity. To be simplistic, to a company sitting on one million ounces of gold that are already economical to extract, a $100 price increase translates to an additional $100 million to the bottom line.

As investors, it’s important to pay attention to the race to the bottom, by watching for continued signs from the U.S. administration that it is not interested in protecting the dollar, and by watching how other countries respond. Or you can save yourself the trouble by watching the price of gold.

CMR readers, unfortunately the writing is on the wall. The fiscal deficits are projected to be about 11% of nominal GDP, which is now roughly $14.3 trillion. The Congressional Budget Office currently projects that deficits will still be $1 trillion in ten years.

According to the current Office of Management and Budget (OMB) projections, US federal expenditures are projected to be $3.653 trillion in FY 2009 and $3.766 trillion in FY 2010, with unified deficits of $1.580 trillion and $1.502 trillion, respectively. These projections imply that the US will run deficits equal to 43.3% and 39.9% of expenditures in 2009 and 2010, respectively. To put it simply, roughly 40% of what our government is spending has to be borrowed.

At some point, the consequences will be significant and put even more pressure on an already fragile economy. There are two scenarios that could play out.

First, we might see inflation kick in and actual rates rise. Since so much of our national debt is short-term debt, that means yet another rise in the deficit as rates rise. Mortgage rates rise, putting pressure on the housing market. There will be even more pressure on commercial mortgages. Consumer debt will be harder to get and cost more. It will mean funding costs for businesses will rise, and that hurts employment. It would be a return to the 1970s of high interest rates and stagnant growth in a very slow-growth environment.

Second, we could see deflation kick in and, even though rates stay more or less where they are, real (after-deflation) rates could rise as they did in the ’30s and in Japan. Then the deflation morphs into hyperinflation.

There are no real good scenarios for this economic pickle. It is getting tougher and tougher to write these CMR reports when I know the unfortunate economic truth as to what reality really is in the U.S. and other areas around the world. Currently, the bond market is telling us that deflation is the problem which I agree with.

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Due to the fact that the US Government’s mentality is to spend, spend, spend without

Due to the fact that the US Government’s mentality is to spend, spend, spend without making the hard choices to reduce the deficit is cause for alarm and the reason the rest of the world wants to push the sell button on the US Dollar. The next leg down in the US economy may be the straw that breaks the camels back.

US Housing Market

Sales of U.S. Existing Homes Unexpectedly Decrease (Update1) By Bob Willis Sept. 24 (Bloomberg) -- Sales of existing U.S. homes unexpectedly fell in August for the first time in four months, signaling the housing recovery will be slow to gain speed.

This comes on top of the news that a record 7.58% of all U.S. homeowners were a minimum of 30 days late on their August payments. The number for sub prime is even worse. Actually, catastrophic, at 41%. That is not a typo, but it is a disaster.

According to a story in Reuters“August marked the fourth consecutive monthly increase in delinquencies and the report showed an accelerating pace. By comparison, 4.89 percent of mortgages were 30 days past due in August 2008, while in August 2007, the rate was 3.44 percent, Equifax data showed.

The rate of sub prime mortgage delinquencies now tops 41 percent, up from about 39 percent in each of the prior five months.”

http://www.reuters.com/article/ousivMolt/idUSTRE58K29E20090921

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Existing Home Sales declined 2.7% month over month. They improved 3.4% above the August 2008

Existing Home Sales declined 2.7% month over month. They improved 3.4% above the August 2008 levels, as the national median existing-home price fell to $177,700 in August — down 12.5% from year ago levels.

to $177,700 in August — down 12.5% from year ago levels. New Home Sales also disappointed

New Home Sales also disappointed — coming in at 0.7% gain from the prior month, about half of consensus expectations. Again, sales disappointments took place despite a record drop in prices. Median new house price dropped 9.5% in August from July — the biggest decrease since records began in 1963. New Home Sales were off 3.4% from a year earlier, as prices fell 12% from August 2008.

Beyond the seasonal observations, consider the implications of such weak sales accompanying a “record drop” in prices. That suggests that 1) demand is not strong; 2) credit for purchases is limited in availability; 3) prices are still too high; 4) all of the above.

So to conclude: Sales have stopped free-falling year over year; The were improving, in part due to foreclosure driven bargains, and in part due to first time tax credits. We now enter the weakest stretch of the year for monthly sales — expect them to continue sliding until January.

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Forbes lists eight reasons to "remain worried about housing": The federal tax credit, worth $8,000,

Forbes lists eight reasons to "remain worried about housing":

The federal tax credit, worth $8,000, is set to expire at the end of November. That will make housing $8,000

more expensive for first-time buyers. The Fed is also ending its $1.45 trillion shopping spree. It has been supporting housing by buying mortgage-

backed derivatives. What will happen when it stops? Mortgage lending standards are tightening up generally.

Houses are still not cheap. Forbes cites Shiller's numbers, putting the average house 41% higher than it was in

2000. Incomes did not increase during that period; ergo, houses are still too expensive. Damaged psychology. It will take time for potential homeowners to get over the shock of a bear market.

The end of summer has arrived. Housing sales always go up in the summer. People relocate in summer, when

school is out. Then, sales fall with the autumn leaves. There are still huge numbers of houses that will be foreclosed. Forbes says only 12% of option ARMs have

been reset. More foreclosures will increase the supply of desperate sellers and decrease prices. There's a 'shadow inventory' hanging over the housing market; it could be vast. Everyone knew it would be hard to sell a house in 2009. Many potential sellers held back, waiting for the market to stabilize. As they put their houses up for sale, that too will hold prices down.

The Housing Market is about to Become Even More Oversupplied

While both the media and stock investors believe that housing has bottomed, they are unaware of the massive

supply of homes that are already in the foreclosure process that will certainly drive home prices down even

further when they are sold.

government intervention that will take place.

The shape of the second leg down is almost completely dependent on the level of

For a number of reasons, banks have not been aggressively taking title to homes and selling them, which has resulted in very few distressed sales in comparison to the actual level of distress in the market. This delay in REO sales, along with historically low mortgage rates and an $8,000 tax credit, has helped to stabilize the housing market - temporarily.

It is very clear that price stabilization is temporary unless something is done. Here are some facts to help project what housing will be like in 2010:

• 13.54% of the 44.7 million mortgages tracked by the Mortgage Bankers Association are delinquent.

• 7.57 million homeowners are delinquent, applying the same percentage to the 11.2 million mortgages not tracked

by the MBA (55.9 million total mortgages in the U.S.). That means that 10% of all homeowners in the country are delinquent.

• Based on historical trend analysis by Amherst Securities, 6.94 million homes that are already delinquent will be

liquidated, which is more than a one year supply of distressed sales poised to hit the market sometime in 2010 and

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2011. During Q1 2005, that figure was only 1.27 million.

• Defaults continue to grow at the rate of approximately 300,000 per month, assuring that the number of distressed sales will grow and will continue through 2012. Source: John Burns Consulting

Commercial Real Estate is in Terrible Shape Most commercial real estate is now deeply underwater and has just about zero hope for a turnaround at any time in the foreseeable future. Yet the banks are not foreclosing, because they don’t want to have to write off the losses.

The problems associated with the multi-trillion-dollar commercial loan market are a tsunami headed for the American economy, a fast-moving wave that threatens to wipe away any thoughts of green shoots in the first or second quarter of next year.

Trillions of dollars are involved in commercial loans. The roll over of those loans in the next 5-7 years is going to happen and the money just isn't there for refinancing. There's a total amount of $3.4 trillion in commercial loans that needs refinancing, and many local banks are holding those loans.

Stock Market Rally The stock market rally from the March S&P 500 low of 666 has been powerful in the form of the return yet typical in a structural bear market. Unfortunately, this equity rally masks the continued economic weaknesses and the stock market is not always rational and has been known to be a bit schizophrenic. Remember, the stock market (and the Fed) misunderstood the excess liquidity before problems at Bear Stearns, Lehman and AIG were exposed.

In my opinion the next 6-12 months represent risk for another major sell-off in the stock market. The bear conditions are not flashing yet but the market may gradually move into a riskier position in time.

The Bullish Percent of the NYSE is currently at the second highest level in the past 15 years.

currently at the second highest level in the past 15 years. Point & Figure Technical Analysis

Point & Figure Technical Analysis

CausesCauses ofof PricePrice MovementMovement

Market

cause 80% of the price movement in a

Market and sector forces together typically

Stock
Stock

stock. That means the company

together typically Stock stock. That means the company fundamentals usually account for less than 20% of

fundamentals usually account for less than 20% of a stock’s price movement. This is

the reason a company’s stock price

sometimes seems to move independently

of the fundamentals!

Source: “The Latent Statistical Structure of Securities Price Changes”

Sector

Benjamin F. King

www.dorseywright.com

© Dorsey, Wright & Associates 2002

If you focus on stocks from a market and sector perspective then technically they are oversold and the risk remains higher than in March. We are currently still in a bull market rally within a structural bear market (which typically last

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20 years and started in 2000) means that current economic conditions and current stock market position could change to the downside in the next year.

conditions and current stock market position could change to the downside in the next year. www.charlestonmarketreport.com

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Disclaimer The research done to gather the data in The Charleston Market Report involves examining thousands of listings. With this much data inaccuracies will occur. Care is taken in gathering and processing the data and information within this report is deemed reliable. IT IS NOT GUARANTEED. The real estate market is cyclical and will have its ups and downs. Past performance cannot determine future performance. The purpose of the Charleston Market Report is to educate you on current and consistent market conditions by reporting leading market indicators with the support of traditional real estate data.

This information is offered with the understanding that the author is not engaged in rendering legal, tax or other professional services. If legal, tax or other expert assistance is required, the services of a competent professional are recommended. This is a personal newsletter reflecting the opinions of its author. It is not a production of my employer. Statements on this site do not represent the views or policies of anyone other than myself.

Investing in real estate is not a get-rich-quick scheme nor is there any guarantee you will make a profit. Every effort has been made to make this report as complete and accurate as possible. However, there may be mistakes. Therefore, this report should be used only as a general guide and not as the ultimate source for making money in real estate.

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