Check out the news on Kingsgate and Sino Gold, two recent additions (albeit repeat buys) to the Red-Hot Global Small-Caps portfolio …

Kingsgate Jumps Most in 10 Years After Winning Approval for Thailand Mine Kingsgate Consolidated Ltd., owner of Thailand's biggest gold mine, rose by the most in a decade in Sydney trading after receiving final ministerial approval for the Chatree North mining lease next to its existing operation.

Sino Gold 2nd-Quarter Output From Jinfeng Mine Rises More Than Threefold Sino Gold Mining Ltd., owner of China's second-largest gold mine, said second-quarter output at the Jinfeng operation rose more than threefold as a greater volume of ore was mined.

And here's my latest interview with Phil at HoweStreet.com ...

http://tinyurl.com/6cc7qb

In Other News …

Just how much money does China have? How fast are China’s foreign assets growing? And how much is hot money?

XX Sean’s note – this post at Brad Setzer’s blog is well worth reading. The numbers on China may shock you. And the charts, well …

ECONOMY

The global economy is at the point of maximum danger

It feels like the summer of 1931. The world's two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution.

The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7pc to 4.1pc growth, whilst warning of a "chance of a global recession". Plainly, the IMF cannot or will not offer any useful insights.

Its "mean-reversion" model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True "mean-reversion" would imply debt deflation on such a scale that would, if abrupt, threaten democracy.

FANNIE MAE-FREDDIE MAC MELTDOWN WATCH

Pimco's Gross Says Fannie, Freddie Need Treasury

Bill Gross, who manages the world's biggest bond fund, said it's not possible for government sponsored mortgage-finance companies Fannie Mae and Freddie Mac to raise capital without the Treasury Department's support.

``Let's be blunt: to the extent the Treasury suggests they'll never have to use their authority, that's a sham,'' said Gross of Pacific Investment Management Co. ``It's fallacious to suggest that the agencies could issue capital, preferred stock, without the co-participation of the Treasury. I don't think that's possible.''

Fannie, Freddie May Record More Losses on Subprime, Alt-A Debt, Ofheo Says Fannie Mae and Freddie Mac may need to record more writedowns after they expanded their purchases of non-guaranteed subprime and Alt-A mortgage securities just as other investors fled to safer investments, their regulator said

Measures to avoid the worst recession in 30 years

Ben Bernanke, Federal Reserve chairman, this week alluded to an economy facing “numerous difficulties”. In fact there are only two, but each alone is cause for genuine concern over the US economy’s prospects: first, an implosion of the financial system triggered by the teetering housing market; and, second, record prices for oil and other commodities that are largely driven by events abroad. … It is time to devise a programme to promote overall economic recovery by fighting for the economy’s future on both fronts simultaneously.

ENERGY

Goldman Sachs Group Says Energy Stocks Are a `Buy' After Shares Retreated Investors should buy energy stocks, which fell the most last week in six months, as oil prices will rebound, Goldman Sachs Group Inc. said.

OPEC Must Increase Oil Output to Lower Prices, Promote Growth, CGES Says OPEC needs to raise oil production to reduce crude prices and help global economic growth, the Centre for Global Energy Studies said.

IEA warns non-Opec oil could peak in two years

Oil production in non-Opec countries is set to peak within the next two years, leaving the world increasingly dependent on supplies from the cartel of exporting nations, according to one of the world's leading energy experts.

Fatih Birol, chief economist of the International Energy Agency (IEA), said that falling production from key regions such as the North Sea and the Gulf of Mexico would leave international oil companies such as Shell and BP increasingly sidelined at the expense of national oil companies, such as Saudi Aramco.

The National Development and Reform Commission reported that the average price of a Chinese home in China's 70 largest cities increased by 8.2% on a year-over-year basis.

That is below the heady double-digit rates that Chinese real estate rose the last few years, but it is indicates a very healthy real estate market.

Don't overlook the Chinese real estate developers and brokers (E-House) as investments.

A few late-breaking developments worth noting:

Shares of Home Depot just broke below their January spike low. If you're a technically inclined type, you might remark that there doesn't appear to be much in the way of support until the bear market low (around $20 way back in January 2003).

Meanwhile, Fortune Brands just warned about the deteriorating earnings outlook. The company makes everything from Titleist golf balls to Jim Beam bourbon to Moen faucets. I've included an excerpt from the company's release, with my emphasis of certain comments in bold. What jumps right out at you is the striking admission that business deteriorated throughout the quarter, with April good, May worse, and June worse still …

“The environment has become more challenging for our brands and the second quarter is shaping up to be more difficult than we had anticipated,” said Fortune Brands president and chief executive officer Bruce Carbonari. “April was a solid month that tracked with our expectations, followed by softer-than-anticipated results in May. We’ve seen continued softness in June and it’s now clear that we will not make up the May shortfall.

“With the rapid spike in gasoline prices and the decline in consumer confidence, we’re seeing American consumers pull back. At the same time, the correction in the U.S. housing market has intensified. Together, this means that home improvement purchases and homebuilding remain soft, that many golfers are deferring ‘big ticket’ purchases of golf clubs, and that trading up to premium spirits brands continues in the U.S. but at a more moderate pace,” Carbonari continued. “Meanwhile, higher costs for commodities such as petroleum-based materials, glass and steel are adding to the pressures facing manufacturers.”

We just got May existing home sales data from the National Association of Realtors. Here's what the numbers looked like ...

* Sales climbed 2% to a seasonally adjusted annual rate of 4.99 million in May from 4.89 million in April. That was slightly better than the average forecast of 4.95 million home sales. Sales were down 15.9% from the year-earlier reading of 5.93 million.

* By region, sales rose 4.6% in the Northeast, 5.5% in the Midwest, and 2% in the West. They fell 0.5% in the South. By property type, sales climbed 1.6% in the single-family market and 5.5% in the condo arena.
 
* The supply of homes for sale dipped 1.4% to 4.49 million units in May from 4.55 million in April, but climbed from 4.378 million a year earlier. On a months supply at current sales pace basis, inventory dipped to 10.8 months from 11.2 months in April, but rose from 8.9 a year earlier.

* Median home prices rose 3.7% to $208,600 in May from $201,200 in April (previously reported as $202,300). But they fell 6.3% from $222,700 a year earlier.

The May existing home sales figures were a bit better than expected. Sales improved modestly, the supply of homes for sale shrank a bit, and median prices increased on a monthly basis.

The problem: I think the improvement will prove short-lived. The existing home sales figures track closings, not contract signings. So they're a bit of a lagging indicator. In fact, they just confirmed what we already knew from April's pending sales data and April's new home sales figures (which track signings) -- namely that the market ticked higher that month.

Since then, it appears the housing market has downshifted again. New home sales dipped in May ... the NAHB index tagged its cycle low in June ... and the Mortgage Bankers Association's purchase applications index just sank to its lowest level since February 2003. None of that is encouraging. Neither is the commentary from key home builders. Lennar, for one, said just this morning that "the housing market has continued its downward trend throughout out second quarter."

Finally, there's the deteriorating broad economy. Gas has climbed above $4 a gallon. The unemployment rate is rising. Lenders are tightening mortgage standards. Consumers are the gloomiest about the economy's future that they've been in the past four decades. And house prices continue to decline in broad swaths of the country.

All of these factors suggest housing will remain weak for the balance of 2008 -- and that a longer-lasting recovery remains over the horizon.

The big story over the last couple of days continus to be oil.  Yesterday, oil prices tanked by more than $5 after China raised the domestic price of refined products (gasoline, diesel, etc.). Why would that matter? The idea is that if more consumers have to pay the "real" price of energy (China, Malaysia, Venezuela, and other countries subsidize or cap the price of energy products for their citizens), energy use will fall and so will energy prices. Today, oil prices have come bouncing right back (+$3.50 or so as I write) amid reports that Israel is contemplating an attack on Iran's nuclear facilities. That kind of volatility really gets the market's blood pumping.

The other big news of the week? Many companies in the financial sector continues to plumb new depths. Almost every day, we hear about fresh losses, more capital raisings, and more regulatory trouble. The regional banks have been the latest firms to take their lumps, as covered in the New York Times yesterday. An excerpt:

"For the banks’ shareholders, the numbers tell a sad story: Wednesday’s decline brought the loss for the S.& P. bank index to 39.3 percent so far this year. Fifth Third’s odd name almost seems like a bad joke. Fifth Third has lost two-thirds of its value this year. Shares of two other banks based in Ohio, the National City Corporation, of Cleveland, and Huntington Bancshares, of Columbus, have suffered similar declines.

"Banks based in the Southeast are hurting, too. The Regions Financial Corporation, the biggest bank in Alabama, has lost half its value. Standard & Poor’s predicted this week that Regions would cut its dividend to conserve its capital in the face of rising losses on real estate loans. The share price of SunTrust Banks, which operates across the Southeast, has fallen almost 41 percent.

"Small and midsize lenders are in far less danger than they were during the 1980s and early 1990s, when about 1,600 federally insured institutions failed during a savings and loan crisis. But the breadth and depth of the current troubles have caught bank executives by surprise. Federal regulators are particularly concerned about the exposure of smaller banks to the commercial real estate market, which has softened in some parts of the country.

"But another worry is that raising money will become increasingly costly for banks that need capital. In a report issued this week, analysts at Goldman Sachs said banks might need as much as $65 billion on top of the $120 billion they have already raised."

I especially like the part about bank executives being caught by "surprise." How could so many of these guys NOT see this coming? How could they NOT realize the housing and mortgage markets were swept up in a gigantic bubble, one that would result in one of the worst downturns in decades ... and the biggest threat to the financial system since the S&L crisis? Plenty of observers, myself included, began warning about the dire risks of just such an outcome years ago, and turned up the "heat" on those warnings within the past 12 months.

Yet regulators and bankers continue to be surprised at virtually every step of the way. Remember it was only about a year ago that officials were giving speeches about how the problem was "contained" to subprime mortgages. I'll never forget this March 28, 2007 excerpt from Mr. Bernanke's testimony before Congress:

"Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."

As for all those "bottom fishers/value destroyin ... er ... creating" funds that keep buying into every new bank/broker/insurance company sale of common and preferred shares, warrants, bonds, and so on? The Times sums it up this way:

"So far the vast majority of investors who bought into financial companies in the hope that the industry was out of the woods have lost, and lost big."

China Construction Bank raised its mortgage rate by 10 basis points to 2.5%.

Hongkong and Shanghai Bank, Standard Chartered Bank, Hang Seng Bank (0011.HK), Bank of East Asia (0023.HK), Chong Hing Bank (1111.HK), ICBC Bank (0349.HK) and CITIC Ka Wah Bank said they do not plan on following suit.

Do you think this small rise will kill the red-hot Chinese real estate market? I sure don't.

With nothing but negative news about the U.S. housing market, it would be easy to assume the rest of the world is suffering from a similar slowdown.

Not so. The ratio of household debt to gross domestic product in the BRIC (Brazil, Russia, India, and China) countries ranges from 5% to 10%, well below the 100% in Britain and 90% in the United States.

The real estate and construction business is very healthy in those countries and very worth your investment consideration.

The high end real estate market in Hong Kong is still booming.

A record $57 per square foot was paid for a luxury high-rise condo near Victoria Peak earlier this week. Yes, $57 a foot!

That makes the $200 a foot price for real estate in Montana look like peanuts, doesn't it?

Gome Electrical Appliance is the largest appliance retailer in China and business is booming.

Gome reported a 203% increase in year-over-year profits.

Connect the dots, folks. If Gome is selling a mountain of appliances, what does that tell you about the health of the Chinese real estate market. What does it tell you about E-House, the Century 21 of China?

We just got April existing home sales data from the National Association of Realtors. Here's what the numbers looked like ...

* Sales dropped 1% to a seasonally adjusted annual rate of 4.89 million in April from 4.94 million in March (previously reported as 4.93 million). That was a bit better than the forecast of 4.85 million home sales. Sales were down 17.5% from the year earlier reading of 5.93 million, and they matched the cycle (and record) low of 4.89 million units in January.

* By region, sales dropped 4.4% in the Northeast and 6% in the Midwest. Sales were unchanged in the South and up 6.4% in the West. By property type, sales dropped 0.5% in the single-family market and 5.2% in the condo arena.

* The supply of homes for sale shot up 10.5% to 4.552 million units in April from 4.118 million in March (previously reported as 4.058 million) and 4.22 million a year earlier. The absolute number of homes for sale is just shy of the 4.561 million peak, set last July. Single-family home only inventory rose to 3.9 million homes, the highest I can find on record (my data goes back to 1982 -- chart above).

On a months supply at current sales pace basis, inventory jumped to 11.2 months from 10 months in March (previously reported as 9.9) and 8.5 a year earlier. That is a new record, though the data for SFH+condos+coops only goes back to 1999. The SFH-only data (10.7 months) shows this is the most oversupplied the market has been since 1985.

* Median home prices rose 1.1% to $202,300 in April from $200,100 in March (previously reported as $200,000). They fell 8% from $219,900 a year earlier, however, the eighth month in a row of year-over-year declines.

The headline writers are probably having a tough time coming up with new ways to say "The housing market stinks." But that's clearly what the latest numbers show. Home sales dipped again in April. Home prices took the eighth year-over-year tumble in a row. Most importantly, the inventory of homes for sale surged. We're now the most oversupplied since the mid-1980s.

The only way we're going to clear this supply glut is through lower prices. Some markets -- specifically, those with the most aggressive price cutting going on -- appear to be making some progress on the inventory front. Traditional sellers, lenders loaded down with REO property, and home builders in those markets are doing what they need to do to attract buyers. Others aren't making as much progress because sellers there are just too stubborn.

Bottom line: The 2008 spring selling season will go down in the books as another disappointing one, just as I expected.

We just got a look at the latest National Association of Home Builders survey. Here's what the May numbers looked like ...

* The overall index slipped to 19 this month from 20 in April. Economists were expecting an unchanged reading. The cycle low (so far) was 18 in December.

* The sub-index measuring current home sales fell 1 point to 17, a fresh cycle low. The sub-index measuring expectations about future sales dropped 3 points to 27. And the sub-index measuring prospective buyer traffic slumped 2 points to 17.

* Regionally, we saw declines in three of four tracked areas. The index fell 4 points to 18 in the Northeast, 3 points to 12 in the Midwest, and 2 points to 22 in the South. The index climbed 3 points to 20 in the West.

If you're looking for positive housing news, you're not going to find it in today's report. NAHB figures show the housing market continues to struggle, with builder confidence broadly slumping and buyer traffic cooling. The causes are well-documented: Tighter lending standards, rising unemployment, and a lack of confidence among potential home buyers.

That said, lower home prices are starting to work their magic in select locales. They are enticing some bargain hunters off the sidelines, and helping us chip away at the mountain of inventory for sale. It will take quite some time for supply and demand to come back in line. But at least it's a start.

Keep your eye on agriculture. For one thing, I guess they're talking about different areas of Australia, but it's interesting to see these two bits of news ...

Australia May Produce Biggest Canola Crop in Nine Years as Drought Eases Australia, the world's third-largest canola exporter, may produce its biggest crop in nine years as growers seek to benefit from higher prices and weather conditions improve.

Drought Conditions Spread in New South Wales Before Plantings, State Says Drought conditions spread in Australia's New South Wales state, usually the nation's second- largest grain grower, as farmers prepare to sow the coming crop.

In the US, farmers are praying for a "window" so they can plant their corn crops. Will they get it?

Corn May Extend Record as Rainfall Cuts U.S. Planting; Soybeans May Gain Corn may rise from last week's record high on speculation that wet, cold weather will delay U.S. planting, reducing yield potential. Soybeans may gain on speculation a farm strike in Argentina will boost U.S. sales.

China is dealing with the aftermath of a devastating earthquake. Meanwhile, its economic juggernaut rumbles on ...

Yuan Gains After Central Bank Chief Says China Needs to Cut Trade Surplus The yuan traded near the highest since a dollar-peg was scrapped in 2005 after central bank Governor Zhou Xiaochuan said China needs to cut its trade surplus to prevent excess cash from stoking inflation.

China May Boost Power Capacity 40 Percent Over Three Years as Demand Rises China, the world's second-biggest energy consuming nation, may increase power-generating capacity by 40 percent in three years as demand of electricity rises.

US DOLLAR

Almighty Dolor

the dollar has had its ups and downs, but its ultimate dominance as a global currency has been in place, and taken for granted, for generations. “People have started to think, Maybe it’s not inevitable.”

Dollar Bulls Gain Control as Futures Signal High-Flying Euro Close to Peak For the first time since December 2005, futures traders are turning bullish on the dollar.

HOUSING MARKET

California Man Losing 9 Homes in Mortgage Mess

A California man who has defaulted on nine homes and expects banks to foreclose on all of them, forcing him into bankruptcy, says he now considers it a mistake to have invested in the real estate market.

Forgaard bought a house in Santa Cruz, about 60 miles (100 km) south of San Francisco, in 2000. Four years later, using $800,000 in stock options, he began snapping up investment properties, putting 10 percent to 40 percent down on negative amortization loans -- in which payments do not cover the interest so that a borrower's balance grows over time.

US ECONOMY

April retail sales barely budged

Retail sales barely rose in April, as a relentless surge in gasoline prices made consumers cut back other types of spending.

I came across an article on Yahoo Finance this morning, talking about how buyers should approach the current real estate market. In short, it pointed out that buyers have more negotiating power now, and that offers that were once considered "lowballs" are now more likely to get real consideration from sellers. Gee, thanks for the newsflash! 

But my favorite part of the article is this tidbit:

"[Florida realtor] Monsour says she encourages buyers to offer at least 85 percent of the asking price because anything lower than that is 'an insult to the seller.'"

I'm galled every time I'm reminded of how some people -- sellers and realtors alike -- were (and continue to be) so darn sensitive about the market.
 
Don't offer less than 85% of the asking price? Please! I have personally seen some individual asking prices drop 25% to 50% in the last year here in South Florida!

I would never use a realtor who told me how low my offer could be. Instead, I'd move on to a realtor who was willing to present MY offer in the best light possible.

Imagine what the stock market would be like if traders were so ridiculous ... thank goodness they're not!

I never understood why Wachovia bought California-based Golden West Financial after the housing market was already showing signs of topping out. Golden West's star product is the option ARM, or "pick a payment" mortgage. A large percentage of those loans were made in California, one of the states with the most bubbleicious housing markets. But acquire GDW it did ... and now, it's paying a heavy, heavy price. Because of problems at the former GDW, and its own credit issues, Wachovia announced today that:

* It would lose $393 million, or 20 cents per share, in the first quarter. That's a gigantic swing from the year-ago period, when Wachovia earned $2.3 billion, or $1.20 per share. It's also well below the 40 cents in earnings per share that analysts were expecting. The firm increased its provision for credit losses to $2.8 billion from $408 million a year earlier.

* Net charge-offs jumped to 0.66% of average loans from 0.15% from a year ago. Nonperforming assets as a percentage of loans, foreclosed property and loans held for sale quadrupled to 1.7% from 0.42% in Q1 2007.

* Wachovia is also slashing its quarterly, per-share dividend to 37.5 cents from 64 cents. And it's hitting the market up for about $7 billion by selling common and convertible preferred shares.

I don't worry (too much) about the subprime credit crisis at Merrill Lynch, Goldman Sachs and others. Sure, it could total $600 billion, but these are smart people who will figure a way out of the the problem they created. If they don't, these companies will go bankrupt. Life will go on.

But the crisis in the municipal bond market is scaring the bejeezus out of me. Let's look at this mess.

As Forbes explains ...

Municipal bond insurance got its start as a way to protect investors if their bond issuer defaulted. After starting in 1971 ... The invention of municipal bond insurance revolutionized the public debt markets over the next 36 years.

The U.S. municipal bond market grew steadily over several decades to about $2.6 trillion in value as of year-end 2007, according to the Securities Industry and Financial Markets Association (SIFMA).

$2.6 trillion is about as much as the US will spend on the Iraq War. It's a heck of a lot of money. But this is basically how states and cities function now. They issue debt for projects at very low interest rates because the bonds are insured. But that insurance may turn out to be a mirage, or at least, it may no longer be available.

Bloomberg explains ...

Yields on top-rated 30-year bonds rose to 4.99 percent today, the highest in almost four years, as U.S. state and local governments plan to sell $20 billion of new bonds in the next 30 days, the most since December.

The biggest buyers of variable-rate notes, tax-exempt money-market mutual funds, are avoiding issues backed by insurers and local governments whose own rating is less than AA, said Joe Lynagh, who manages about $2 billion of tax-exempt money funds.

New York state paid rates ranging from 2.80 percent to 10.94 percent on seven-day variable-rate demand notes sold Feb. 27, the most recent data available. Bankers set interest rates of 5 percent or higher on six of the 18 issues sold that day.

Now, the market is actually seizing up.

Reuters explains ...

Two of these markets, auction rate and variable demand note obligations, have frozen because investors fear some bond insurers that backed this debt are no longer credit-worthy as a result of their bad bets on subprime mortgage investments.

This couldn't come at a worse time for municipalities. Their tax revenues are drying up due to the implosion of the housing market. Suddenly, it turns out that many municipalities may not be able to make good on their debt payments.

And that brings us to the next logical step -- municipal bankruptcy.

As the LA Times blog explains ...

The city council of Vallejo, Calif., had planned to vote late Thursday on whether to file for bankruptcy protection because its employee-benefit costs are soaring even as tax revenue declines. The vote was put off after officials said they had reached a tentative deal with their major unions.

Is the problem snowballing? In a word, "yes."

Even high-quality muni issuers that have no credit problems may pay more if they borrow soon, simply because of the heavy supply of bonds expected to hit the market.

This is absolutely the worst time to bring debt to market. Naturally, states and cities aren't changing their plans at all ...

In Sacramento, state Treasurer Bill Lockyer intends to proceed with next week's planned sale of general obligation debt, said Paul Rosenstiel, head of public finance.

Although the state may have to pay higher yields on the bonds than it would like, "we have a need to get into the market because we have a lot of projects to build," Rosenstiel said, noting the numerous infrastructure programs approved by voters in recent years.

"We have a schedule, and we're probably going to stick with it," he said.

And now Bloomberg explores the crisis of cities forced into loans with "predatory yields" ...

U.S. municipal borrowers from Camden, New Jersey, to Sacramento, California, might face a third week of higher interest costs as failures in the auction- rate bond market persist.

How bad will the crisis get? On Minyanville, Professor Bennet Sedacca takes a guess ...

Net asset values of all sorts of municipal mutual funds, both closed end and open end will likely get smashed. How badly? It depends on the quality but I am guessing anywhere from 5-20%.

Forbes says the municipal bond market is worth$2.6 trillion, but Sedacca's estimate is closer to $3.5 trillion. 20% of $3.5 trillion would be $700 billion. And as with all of these credit crisis estimates, they usually go much higher.