May 25, 2007 by Addison Wiggin & Ian Mathias

• “2007 is going to suck…” Who said it… and why?
• $103 million for 40 acres and a mule…
• Buyout bust on the way: Gordon Gekko, eat your heart out!
• Small caps outperform the WSJ monkey every time…
• “Filthy” food imports from China… and why food prices are soaring this year
• Yoga doggy-style, warm beer and a line at the Rolex store… What’s your economy say about you?

Good news… and bad… for those calling for a bottom to the housing bust.

First, the good: The Census Bureau reported sales of newly constructed homes rose over 16% last month to 981,000 homes. That’s the largest monthly increase in new home sales in 14 years.

Now the bad: The report also shows median prices dropped nearly 11% to $229,100. “Builders are offering deep discounts and other incentives just to move their inventory,” reports the WSJ.

Some “investors” think this inventory clearance sale is a sign that the bottom is in.

Perhaps…

But let’s see what a few bigwigs down in the trenches think:

“I would say that we have not got the bad times behind us yet,” said Toll Brothers CEO Bob Toll yesterday. (Fairly calm for a guy whose company just reported a 79% drop in second-quarter profits.)

“2007 is going to suck, all 12 months of the calendar year,” said D.R. Horton’s CEO Donald Tomnitz.

“When homebuilders blow out inventory at steep discounts,” opines Strategic Investment’s Dan Amoss, “it’s not good for an economy so addicted to housing ‘wealth.’”

We wonder what Ron Baron of Baron Funds would think. Yesterday, Baron dropped $103 million for a residential property in East Hampton, N.Y. -- a record high.

Here’s the amusing part: That $103 million didn’t include a house. Just 40 acres of grass.

Location, location, location.

“In the early ’80s,” writes Chris Mayer, “‘buyout’ deals regularly closed at a reasonable 8.5 times earnings. By 1989, prices had risen to what corporate finance guru Louis Lowenstein called ‘a perfectly absurd 16.6 times earnings.’”

Look what’s happening today. This chart shows 2007’s biggest deals and the multiples paid for them: (left)

Keep in mind; these are at peak earnings, not at the bottom of the business cycle.

“If you remember the ’80s buyout bust, you may recall a wave of defaults and broken businesses and freshly minted villains for the movies to box around. Think Gordon Gekko: ‘Greed is good!’” Chris reported.

What’s Hollywood going to do when this bigger, more bloated wave comes crashing down?

“8 out of 10 of 2006’s best-performing stocks were small caps,” gleams our Craig Walters. The WSJ released its annual “Best on the Street” report yesterday, highlighting the year’s biggest gains and smartest sells.

Of the 45 industries examined, here are the best of the best:

“Small caps tend to have less analyst coverage than larger stocks,” Craig told The 5. “These companies also tend to have fewer moving parts, giving the analysts who do cover them a good chance of calling them correctly.

“With the exception of loans to small businesses, small caps have been the best place to invest for most of the 20th century.”

That and investing alongside that monkey The WSJ cajoles into throwing darts at the wall every year.

The solar energy industry is now worth over $15 billion. And it’s growing 40% annually.

“Public concern over global warming, the environment and rising electric bills,” reports Fast Company magazine, “as well as government tax credits and better technology are projected to drive that market as high as $75 billion by 2010.”

“There really isn't a national brand,” gushed Elon Musk, founder of the online payment service PayPal. “So there's a tremendous opportunity. This is bigger than the Internet.”

Hmmm… We like alternative energies as much as the next guy. But can you say… “speculative bubble”?

Retail food prices are about to see their largest increase in 30 years.

“The rush for biofuels is driving up food prices across the board,” reports the omnipresent Chris Mayer. As energy producers look to corn, soybeans, sugar and palm oil for energy, food producers must compete.

Hormel, the big meat maker, says every 10-cent increase in the price of corn costs the firm $3.5 million.

In the U.S., food prices are up nearly 7% (annualized) since the beginning of 2007. Beef and chicken are up nearly 5% each.

And according to the FT, the Food Commodities index will show a 21% increase this year. That would be the largest increase since the Bernstein, the U.S. research firm, created the index a decade ago.

“In the past year, the FDA rejected more than twice as many food shipments from China as from all other countries combined,” reported NPR this morning.

“China's less-than-perfect sanitation policies and an increasing U.S. dependency on Chinese imports have mixed to form a deadly cocktail of unsafe food and goods arriving in U.S. ports.”

In April alone, the FDA blocked 257 food shipments from China. Included on that list were “filthy” dried fruits, rubber exam gloves with holes, salmonella-infested frozen fish and more...

Before James Boric, former editor of Small-Cap Strategy Report, left for the clergy, he suggested searching for a small-cap company with serious irradiation technologies... a high-tech method for cleaning contaminated food.

We haven’t followed up yet. Do you know of any companies that can clean “filthy” food quickly? They might prove to be a viable investment opportunity… let us know.

Last item for today: If your dog can strike yoga poses on command, chances are your economy is overheating.

Analysts at SEB Merchant Banking suggested to Bloomberg that the budding “dog yoga” industry is the most egregious evidence that the skyrocketing Swedish economy may be about ready to return to Earth.

Runners-up were a Rolex repair shop too busy to take calls, and a popular pub in the Stockholm financial district that’s been selling warm beer… they claim there’s not enough time to chill the beer.

Enjoy your warm beer this weekend,
Addison Wiggin

P.S. We're raffling off a great set of gold standard coins at our Vancouver conference. Working with our friend Nick Bruyer, we created a set of coins - Swiss dollar, US liberty, British Pound sterling and Russian ruble - all minted in 1913, the last year of the gold standard. It's a beautiful set, mounted and framed in an elegant picture box.  It's as intrinsically valuable as it is ascetically pleasing.  If you join us, it could be yours.  Hope to see you there.

The Agora Financial Wealth Symposium