Dow Jones 10390.19 +160.24 11:55 am PST, October 28, 2005  NASDAQ 2086.47 +22.66 For info, visit access.smallcapnetwork.com S & P 500 1196.04 +17.14 Change your subscription status here Russell 2000 633.27 +9.24 VOLUME 05: ISSUE 83  Feature: Housing & Energy - Living La Vida Loca? Over the 25-plus years I've watched the markets, I am always amazed at where the money comes from for consumers to continue buying stuff, given the economic stats and rising prices. Especially with the rampant inflation in energy, healthcare, housing and education costs. We'll likely find that the savings rate is actually negative by the time the following chart figures are updated Is anyone saving any money? Apparently not. Consumer debt is rising--it now averages $8600 per household--and mortgage debt has also climbed precipitously as folks suck every cent of equity out of inflated housing values as the bubble expands to fuel continued consumption. Sure, household net worth is up big-time, but that's a result of unrealized gains due to rapid housing price appreciation. The dilemma is that if you sell, the new digs will destroy the equity you had in your old house--unless you move to a trailer park in rural Iowa. If you don't sell and the market backs up, you may be underwater vis a vis your home value versus mortgage debt. There will be a nasty increase in foreclosures as rates rise and prices fall or at least moderate. Factor in virtually no rise in incomes and the stage may well be set to turn home ownership dreams into a nightmare for many. Prices in the major housing markets are already off 13 percent, supply is rising, houses are on the market way longer and with Fed Funds rates looking like they could hit 5 or even 6 percent, those snazzy creative interest only, no down, negative amortization mortgages loans/mortgages will undoubtedly rise up and bite those who have them firmly in the derriere. Let's peak at the housing index chart as there is a bit of good news... Interesting to note that when Ben Bernanke was announced as new Fed chairman, the stock market rallied nicely. Not the housing stocks. With the specter of more of the same as he espoused following Greenspan's inflation fighting policies, both the DJ USHB Index and the Philadelphia Housing Sector Index (AMEX: ^HGX) both got pounded. That said, the housing sector does look on the threshold of a decent tradeable rally. We suspect that the index will find support at 433 (currently 472). There's little doubt that Greenspan wants to diffuse the housing price incline, as presumably does Bernanke. All we can say is that the next few months will be critical; however the time of goofy increases in housing prices and housing stocks is likely over or will moderate to a more acceptable pace. We realize that our stance isn't a popular one, but reality seldom is. Nothing goes up forever. Review the real estate portion of your portfolio for ways to lower your risk to higher rates and lower prices. You've got gas...or oil. Back in early September, we noted the pending pullback in housing and oil. In our last piece we noted a looming decline in natural gas prices. All have come to pass. For example natural gas has dropped markedly all week to trade at just below $13 today.  We'd like to see the price drop and break through $12.75 to confirm a further drop to fill in the previous gap below $10.50. The range for NG has widened to between $12.50 and $14.60. A break through either would continue that respective price direction. As well, the longer the price stays within that range the better the chance for a new up-leg, which would be bad all around. The first fuel bills are arriving and with costs up 30 percent or better, there is already shock and awe.  I still submit that all fuel prices will moderate somewhat soon or you can kiss any growth in the Holiday shopping season goodbye--something we can ill afford given the crappy summer. Moderation of retail energy prices may not help this season, but the perception that prices are lowering would do a lot to restore consumer confidence, which has seen a reasonable decline in the last months. Further, if one looks at the energy futures, the long dated contracts out until late 2006 don't show prices much higher than those currently. As well, if one extrapolates the p/e's of major energy companies, they reflect oil prices somewhere between $40-$50 a barrel. So, one of two things has to happen: either oil prices must drop or energy share prices must rise. The former seems more likely unless there is some extraneous systemic shock. So where are we? Rates will continue to rise and there will likely be market anxiety as the sun sets on Greenspan's long tenure and the new regime under Bernanke begins. Energy prices will likely moderate and become less of a factor as investors and markets come to terms with higher--although, we believe, lower than here--energy prices. Housing prices have and will continue to decline or moderate as supply increases and we move into winter, a historically slow time for home sales. All of these eventualities will add to the volatility in the markets and likely increase the fear factor, which tends to be good for stock prices. As monies come out of the housing market, the equity market could benefit nicely. Accumulation by the smart money has been underway for a while now. The retail investor has yet to be a factor. As I mentioned, housing prices are a major concern and best to ensure that you have your real estate financing in a form that won't nail you as rates rise or that you end up with more mortgage than equity. Investing Rule Number One: Markets always correct. Investing Rule Number Two: Read rule number one.     We Value Your Feedback Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402  San Diego, CA 92130 Subscribe Information is power and timely information is profitable. Become informed and profit from SmallCapDigest Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. Add your email address below and make sure to check your email inbox and confirm your opt-in request to start receiving the SmallCapDigest Email Newsletter on a regular basis. 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