Market Pulse: bonds & gold, Saudi oil outlook, collapse in home sales from Brookfield Homes

by: Tony Sagami

When I woke up this morning, Dow Jones futures were down by more than 200 points. The reason, of course, was the terrorist attacks in London, writes Tony Sagami, owner and founder of Harvest Advisors. The market did indeed open sharply lower, but never approached the dire reaction of the pre-market futures trading.

As the day wore on, the bulls decided that a bombing across the
Atlantic Ocean wasn�t so bad after all and actually pushed the Dow
Jones into positive territory by the time the market closed.

The Dow Jones ended the day with a 31-point gain and the Nasdaq
tacked on a 7 points. To me, that shows just how oblivious the bulls
are to risk. The bulls truly snatched victory from the jaws of defeat.

I got to hand it to the never-say-die bullish crowd. Who else
could turn a hideous terrorist attack into a buying opportunity?

Call me old fashioned, but watching the bulls send stock prices
higher on such horrible news is simply a mind-boggling act of ignorance
to me.

That lack of fear is just more evidence to me that the drop is
going to be further and more painful than the we-love-stocks crowd can
imagine. While I don�t have a specific downside target, I would expect
at least a low double-digit drop.

The S&P 500 is sitting right on top of a very critical
support area of 1,190. Any meaningful drop below that should be the
start of very long and slippery slide.

Of course, you should remember that you�re hearing that
forecast from a person who is 100% short the market. While I certainly
have a personal ax to grind, I have put my money where my mouth is.

Flight to safety boosts bonds and gold. One
of the financial results of the bomb blasts was a drop in the price of
oil as the world anticipated a global travel slowdown. While there may
a knee-jerk falloff in travel, this terrorist attack doesn�t change the
growth in Asia or the growing demand for oil.

Traders spun the drop in oil as a huge positive for the economy
and therefore idiotically treated the attacks as an overall positive
for the stock market. Talk about dumb!

Additionally, there were a handful of predictable market
reactions to the bombing news. Investors seeking a safe haven sent gold
and bond prices higher for the day, defense and security stocks caught
a bid, and airline stocks were all lower.

Saudi officials paint a dismal picture of the future.
When Saudi Arabia talks about oil...you better listen. I say that
because Saudi Arabia has the world�s largest reserves of oil at 25% and
accounts for roughly one-third of OPEC�s total production.

Well, Saudi officials warned G-8 officials that the OPEC would have an "extremely difficult time" to meet the global demand for oil in 10 to 15 years.

According to the International Energy Agency, OPEC will need to
boost production from 30 million to 50 million barrels a day by 2020 to
meet demand. Saudi Arabia estimates that there will be a shortage of
4.5 million barrels a day between demand and what OPEC can provide.

That shortfall means one thing: higher oil prices.

Of course, 10 to 15 years is a long ways away, but like I�ve
said many times in this column, the trend is definitely higher.

Brookfield Homes reports 22% drop in 2Q home sales.
Brookfield Homes (BHS - NYSE) builds and sells luxury homes in San
Francisco, Los Angeles, San Diego, Sacramento, and Washington D.C., all
of which have been red-hot markets.

According to Brookfield, those markets aren�t so hot any more.

Brookfield reported this morning that Q2 home sales dropped by
22% compared to last year. And Brookfield warned that it expects
falling sales for the rest of 2005.

The culprit? Slowing sales in California.

While every individual market has its own characteristics and
supply/demand dynamics, news -- like this from Brookfield -- tells me
that we�re approaching the peak of the real estate mania.

Tony Sagami is the owner and founder of Harvest Advisors,  an investment research and money management company. « Opinions expressed at ETF Investor are those of the individual  authors and do not necessarily represent the opinion of SeekingAlpha or its  management. »