…wait until you see what’s in the cards for commercial real estate.

That’s right, the next train wreck will be in commercial real estate. Couldn’t be worse than last year’s residential market crash? That remains to be seen. But it’s coming soon, probably as early as the second quarter of next year, and there’s nothing that can prevent it. The government will intervene, trying desperately to delay the day of reckoning, and may even succeed. For a while. But make no mistake about it, that train is going off the tracks no matter what.

Every part of the sector – from multifamily apartment buildings to retail shopping centers, suburban office buildings, industrial facilities, and hotels – has accumulated a huge amount of defaulted or nonperforming paper. It’s an impossible, swaying structure that cannot long stand.

Just ask Andy Miller.

Andy is one of the most knowledgeable people around when it comes to commercial real estate. Co-founder of the Miller Fishman Group of Denver, he has spent twenty years buying and developing apartment communities, shopping centers, office buildings, and warehouses throughout the country. He’s also worked extensively – especially lately – with asset managers and special servicers (those who handle commercial mortgage-backed securities, or CMBS) from insurance companies, conduits, and the biggest banks in the U.S., advising them on default scenarios, helping them develop realistic pricing structures, and making hold or sell recommendations.

It isn’t easy. Commercial real estate sales are off a staggering 82% in 2009, compared with 2008, and last year was worse than ’07. No one is selling at depressed prices, but it hardly matters as there are no buyers, either because they’re afraid of the market or can’t meet more stringent loan requirements. Two years ago, the value of all commercial real estate in the U.S. was about $6.5 trillion. Against that was laid $3-3.5 trillion in loans. The latter figure hasn’t changed much. But the former has sunk like a bar of lead in the lake, so that now between half and two-thirds of those loans will have to be written down, Andy estimates.

“If the banks had to take that hit all at once, there wouldn’t be any banks,” he says.

And it’s actually worse than that. As even average citizens became aware during the subprime meltdown, loans in recent years were bundled into exotic financial vehicles that could be sold and resold, a class generically known as conduits. These commercial mortgage-backed securities, while less well known than their cousins built upon home loans, are nonetheless ubiquitous.

Three guesses who were among the significant buyers of CMBS. If you said banks, banks, and more banks, you got it. Thus these folks are sitting not only on their own malperforming loans, but on a whole lot of everyone else’s toxic junk, too.

This is how bad conduits are: A 3% default rate last year jumped to 6% in 2009 and is expected to double again, to 12%, in 2010. An entity that takes a 12% hit to its portfolio – and this includes countless banks, pension and annuity funds, international institutional investors, and others – is in deep, deep trouble.

The real tsunami is coming, probably in the second quarter of 2010, Andy estimates. Because that’s when banks will have to start preparing for the wave of mortgages that were written near the market top and are maturing in 2011-12. Unlike home loans, commercial loans tend to be relatively short-term in nature (average 5-7 years), because – outside of apartment building loans backed by Fannie or Freddie – there are no government programs to subsidize longer-term ones. These guys mature in bunches.

According to a recent Deutsche Bank presentation, the delinquency rate on commercial loans as of the end of 2Q09 was greater than 4%. Of these, they expect that north of 70% will not qualify for refinancing. Imagine what will happen to the estimated $2 trillion in commercial mortgages that mature between now and 2013.

And even that is not the end of it. There’s a second huge wave on the way in 2015-16.

Problem is, instead of trying to meet this inevitable challenge head on, asset managers have decided to believe in such phantoms as the tooth fairy, honesty at the Fed, and an economic turnaround powerful enough to bail them all out. De Nile is not just a river in Egypt.

To be fair, it’s difficult to envision what an intelligent, aggressive response would look like, given the breadth and depth of the crisis, and the lack of resources available to deal with it. Miller recently met with a group of asset managers from a number of different, prominent banks. They reported that they’re completely overwhelmed and can’t even begin to cope with the sheer volume of problem loans on their calendar. It’s so bad that they’re now dealing with some borrowers who haven’t paid a cent in a year and a half.

What do you do if, as Andy thinks is the case, 85-90% of the entire commercial real estate market is under water relative to its financing? What happens to a property when its value drops way below the loan, a seller can’t get enough money to get out, a buyer can’t raise enough money to get in, and the bank can’t afford to foreclose? Simple. It just sits there, carried along on the bank’s books at some inflated “mark to fantasy” price that makes the institution’s balance sheet look passable. The industry even has a catchphrase for the situation: “A rolling loan gathers no moss.”

In the case of a retail store, a bankrupt tenant walks away. Andy looked at just the part of Phoenix where his firm does business and found 90 vacant big box stores, with an aggregate floor space of 8 million square feet. If Christmas season is as lackluster as cash-strapped consumers are likely to make it, there will be many others to follow.

The hotel business is terrible. Overbuilding based upon travelers who went into debt to finance lavish vacations is taking its toll on tourist destinations. At the same time, business travel has seriously contracted. Flights into Las Vegas, which caters to both, have been slashed so much that even if every seat on every remaining flight were filled and visitors stayed for an average number of days, the hotels still couldn’t break even. In industry parlance, banks are now engaged in “extend and pretend,” i.e., giving hotels three- to six-month loan extensions in the hope that things will somehow improve in the near future.

Office space is doing okay in central business districts, but not faring well elsewhere. Some estimates tab the national office vacancy rate at over 16.5%, compared with 12.6% in January 2008. It exceeds 20% in parts of Atlanta and San Diego, and in many places in between.

Multifamily apartment buildings – and the very creaky Fannie and Freddie are carrying a load of them – may be the next to topple. As values deteriorate and landlords are faced with loans coming due, there is no incentive to fix whatever goes wrong. If, for example, you have a $10 million loan maturing in two years, and the property value has declined to $6 million, why would you spend half a million to fix leaky roofs? The question answers itself. Yet, as capital spending needs are not attended to, the apartments deteriorate. Which leads to working-class tenants replaced by meth labs. Which leads to even lower property values. And so on. In the end, when the banks are forced to take possession, they will be left with either expensive repair jobs, or the cost of demolition and a total write-off.

As the overall commercial real estate crisis escalates, the banks will do the same thing they did last year: run to the government, palms outstretched.

How will Washington respond? Good question. On the one hand, further bailouts will further infuriate the public. But on the other, the political sentiment will be that allowing the banks to fail will have even more dire consequences.

The Fed has already tried to let some of the relentlessly building pressure out of the balloon through TALF (Term Asset-Backed Securities Loan Facility). But that hasn’t worked, because TALF only backs the most senior, creditworthy bonds in a CMBS pool. Those aren’t the problem. The problem is the junior notes no one wants.

In order to increase market liquidity and get conduits moving again, the government will likely be forced to create a guarantee program similar to the FHA, Miller thinks, whereby short-term money (on the order of 5-7 years) is made available. Will that just push our problems five to seven years down the road? Quite possibly. But what is being purchased is time, the only thing left to buy. The hope, of course, is that it’s enough time – for the real estate market to stabilize, prices to return to more “normal” levels, and the world to turn all hunky dory.

Rock, meet hard place. Let all the troubled banks fail, and the consequences will range from some excruciating but short-term pain, to a plunge into full-bore depression. Prop them up with yet more newly printed fiat money, and anything from high to hyperinflation will inevitably result, along with the possibility of extending the problem well into the next decade.

Both are frightening prospects. We don’t want either, but realistically, we’re going to get one or the other. Let’s be clear, it won’t be the end of the world. However, it will be the end of the world as we know it. That makes it imperative to prepare for the new one that’s coming.

The editors of The Casey Report, supported by real estate pro Andy Miller, have been warning of the coming commercial real estate debacle since September 2008. This one’s rather easy to time – because they know when the loans will come due. And as subscribers can testify, accurately predicting big trends is the forte of Doug Casey and his expert team. To learn how you can profit from making the trend your friend, click here.

With the global economy taking off without us and foreign interest rates already on the rise, the Fed is desperate to look bullish while acting bearish.

Anybody that has ever tried to prove the existence of Santa Clause or the Tooth Fairy to a six year old knows what Bernanke is trying to do. At this point, he’ll do anything to change the subject and focus the attention on something else.

With all of this talk about an increasingly deadly carry trade bubble, it is beyond obvious that American interest rates need to rise. If it doesn’t happen, soon enough all of America’s money will be invested in some high rise in China’s Guandong province… or Saudi oil.

But we all know Bernanke would commit career suicide by lifting a headliner like short-term rates even by a quarter of a percent. The blame for any upcoming financial downturn will be squarely on his shoulders.

For the youngsters in the room, he’ll be blamed for outing Santa Clause.

So what’s the guy to do? He’s already doing it.

The Fed is unraveling its plans to buy a whopping $1.25 trillion worth of mortgage-backed securities and $200 billion worth of other mortgage-related notes.

By March, the Fed’s massive buying spree will be over, once again letting the markets deal with a massive amount of very “un-transparent” securities. The same lion that brought the bull down is once again about to be un-caged, hungrier than ever.

If you thought the market had a hard time swallowing so many mortgage defaults, wait until $1.45 trillion dollars runs straight into 10% unemployment and a real estate market worth a fraction of what it was even a year ago.

And here’s the kicker, just by refraining from hitting the “buy” button, Bernanke effectively raises mortgage rates by as much as 100 basis points.

Let’s see… 10% unemployment, a weakened currency, deflating home prices and inflating borrowing costs. It’s a recipe for disaster.

At least Bernanke gets to keep his job and he gets the keen realization that he would not be in this bind if he never would have meddled with the markets in the first place.

We all knew the day would come when the Fed had to clean up its mess. That day has come.

***As if the markets have not shown enough contempt for government intervention, Uncle Sam is once again trying to throw sand into the gears and cogs of American business.

This time they want us to pay workers for not showing up to the job.

Thanks to a representative from California (there’s a surprise), legislation is working its way through Capitol Hill that would force employers to pay an employee for up to five days worth of sick leave if the worker is diagnosed with ANY infectious disease.

The rational side of my brain says there is absolutely no way this is going to make it the White House. The harm it would do to production is simply too immense to deny, even by politicians.

But the irrational side of me can already imagine the last-minute phone calls. “Sorry boss. I can’t flip burgers today. Got herpes. See you on Friday to get paid.”

Gotta love where we are headed.

With the “not-as-bad-as-expected” news surrounding the economy and the initial government stimulus measures have been priced in to the market, we are moving into a period of profound uncertainty. With the release of Alcoa Inc.’s (NYSE: AA) earnings report, earnings season has officially begun.

In most cases each company’s own “easy” restructurings are also behind us.  They have resorted to massive lay-offs and inventory liquidations to bring costs down to the bare minimum required to run their respective businesses.  Those cuts and gained efficiencies also have been priced in.  Now, it is time for these companies to show what they can do organically.

Energy companies appear to have hit a wall now that China has run out of space to store oil. And other commodities businesses are suffering, too, as the U.S. Federal Reserve seems to have found religion and veered toward a much more prudent monetary policy.

After its last meeting the Federal Open Market Committee (FOMC) signaled the end of quantitative easing, at least for the foreseeable future.  This is of paramount importance, because it seems to be a concession to those who worried that the Fed might debase the U.S. dollar with by over-expanding its balance sheet and fanning inflationary forces down the road.

The Fed has done a tremendous job of first restoring some sense of “normalcy” and confidence in the core markets, like interbank lending and money markets, and then proceeding to work outwards to U.S. Treasuries and mortgage-backed securities.  This later step towards more prudent actions is welcome and you are seeing it in the U.S. dollar and renewed confidence in Treasuries.  The latter have been received extremely well by investors and yields have started to move down, reflecting not only the lack of current inflation, but also the confidence that the Fed will not go bananas with quantitative easing.

So, ahead of a very difficult earnings season, I am not going to try to out-predict the market.  The experts have been going around for a couple of months trying to just that by using expensive consultants that do channel-checking and by contacting the companies themselves to clarify statements made under full disclosure.

But the earnings season has extraordinary challenges to surmount, that are deriving from the uncertainty that is hanging over the markets like the proverbial sword of Damocles.

General Motors Corp. (OTC: GMGMQ) and Chrysler Group LLC are emerging from bankruptcy in record time and their costs, debt and massive corporate restructurings will probably make them internationally competitive once more.  But there are still questions about how these companies will cope with the still dormant auto market.

The outlook for the large financial behemoths that are due report earnings is equally uncertain. We still need to see how these institutions play around with their toxic asset valuations, their loan loss reserves and their predictions for the future, particularly given the potential stumbling blocks on the road to recovery.

The three obstacles that I find especially troubling are:

1. The spike in credit card delinquencies.
2. The outlook for commercial real estate.
3. And the pending second wave of residential foreclosures, now in the prime and option-ARM sectors.

But do not discount the possibility of seeing mark-ups in toxic asset valuations that might favor some financials strongly.

Now, with the Fed seemingly on hold and the U.S. government’s stimuli only 30% deployed and showing little traction, where is the growth going to come from, especially since unemployment blew right through the promised 8% peak to the current level of 9.5%? On top of that, last week’s rise in continuing jobless claims and Friday’s drop in consumer sentiment offered little solace.

The good news in all of this is that savings rates spiked to 7% as consumers used their money to pay down debt.  Even though this improvement in consumers’ balance sheets does not show in immediate sales growth, it bodes very well for the future.  And this savings trend, which translates into reduced demand for imported consumer products, together with rising exports, resulted in the lowest trade deficit in nearly a decade.

We are making the difficult progress that we need to make in order to restore the U.S. economy to financial health, and that, in turn, is helping the dollar and Treasuries in the short term.

So, based on these massive uncertainties, waiting to be played out, the best risk-reward ratio appears to be in bonds.  With a massive U.S. Treasury supply well absorbed, we are going to jump into long term U.S. Treasuries for a conservative upside, while we keep waiting for resolution on the healthcare reform, social security, and corporate earnings.

Recommendation: Buy the iShares Barclays 20+ Year Treasury Bond ETF (NYSE: TLT) (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in the iShares Barclays 20+ Year Treasury Bond ETF.

Source: Buy, Sell or Hold: Buy iShares Barclays 20+ Year Treasury Bond ETF For Solid Profit at a Time of Great Uncertainty ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-buy-ishares-barclays-20-year-treasury-bond-etf-for-solid-profit-at-a-time-of-great-uncertainty/19017/feed 0 http://www.contrarianprofits.com/articles/are-banks-really-coming-back/18791 http://www.contrarianprofits.com/articles/are-banks-really-coming-back/18791#comments Tue, 07 Jul 2009 15:20:59 +0000 Andrew Gordon http://www.contrarianprofits.com/?p=18791 First-quarter earnings reports for the big banks weren’t bad on the surface. But banks had to pull some rabbits out of the hat to do it. For example, Goldman Sachs skipped December in order to post improved numbers.

And Bank of America arbitrarily assigned a higher value to its Merrill Lynch assets. Earnings reports this quarter may also impress investors. Trade revenue is up on the big spread between treasury and other bonds. And the banks earned fees in May helping each other raise capital.

Since then, it has been known as “The Friedman Effect.”

It’s important to understand the Friedman Effect because it can have dramatic impact on your investment decisions and your portfolio…

Milton Friedman & The Friedman Effect

Basically, Milton Friedman found that if the Fed switched from tight money to easy money, or vice versa, it would take about six months before you would see any change in the direction of the economy or Wall Street.

The Friedman Effect worked like clockwork during the financial crisis of 2008. In late 2007 and early 2008, the Fed decided to squeeze the money supply and impose a credit crunch on the financial markets to slow down the real estate boom. The Fed got more than it bargained for. Its tight-money policy had a dramatic impact – the real estate market crashed and took the financial markets with it.

The Fed panicked and in September, 2008, Ben Bernanke & Co. reversed course and injected billions of dollars into the marketplace. The Fed’s balance sheet (see chart below) doubled in a few months as the Fed acted aggressively. Among other bold efforts, the Fed bought Treasuries and mortgage-backed securities directly in an effort to stem the tide of a deflationary collapse.

As you can see from the above chart, the Fed’s bank account (Adjusted Monetary Base) doubled in short order in 2008-09.

The Friedman Effect – Pinpointing The First Signs of Recovery

According to the Friedman Effect, that means the first signs of a recovery and stock market rally would occur six months later. Sure enough, in March, 2009, Wall Street bottomed out and roared ahead in one of the strongest rallies in Wall Street history. The S&P 500 Index has climbed an incredible 34% from its lows of March 8.

Moreover, we’ve seen sure signs of stabilization in the financial markets and the economy. The Libor rate – the interest rate banks charge each other to borrow short term – has fallen sharply, an indicator that the financial crisis is ending.

Many economic indicators have also turned positive. On Thursday, the Labor Department announced that the total number of people filing for unemployment insurance fell by 148,000 to nearly 6.7 million in the week ending June 6. That was the largest drop in more than seven years, and snapped a streak of 19 straight record-highs.

The best overall indicator of a possible recovery is the U.S. Index of Leading Indicators published monthly by the Conference Board, a private research group based in New York. The Ten Leading Indicators are designed to forecast the economy in the next three to six months. Most of the indicators are business related, such as new orders for capital goods, building permits and unemployment claims – and, I might add, the stock market and real money supply growth. The Conference Board also surveys the leading economic indicators for 10 other countries around the world.

The Board reported that the U.S. Leading Indicators fell sharply over the past year, and finally bottomed out – in March of this year! The leading indicators have now risen two months in a row. And on Thursday, the index rose 1.2%, the biggest gain since March 2004.

• In short, the good news is that the U.S. economy is slowly but surely on the road to recovery.
• The bad news is that the Fed has apparently decided to step on the brakes again, reversing course in its monetary policy. The days of quantitative easing are apparently over. As the graph above indicates, the Fed has stopped adding to its balance sheet – the adjusted monetary base has stopped growing.

The broader-based money supply (M2) was growing at double-digit rates until a few months ago. Now’s it’s growing at only 2% or less.

This tight money policy could spell trouble down the road if it continues. The stock market will probably continue to push higher for now, due to the lag time in the Friedman Effect. The Dow might even reach 10,000 by the end of this year. But if the Fed maintains this new tight money policy, we could be in for another rough period and a return of the bear market.

Source: The Friedman Effect: Is Another Bear Market Around the Corner?

After yesterday’s major Social Security and Medicare announcement, today we have to ask (again): Can the U.S. hold onto its AAA credit rating?

“The U.S. government has had a triple-A credit rating since 1917,” answers former U.S. comptroller general and I.O.U.S.A. protagonist David Walker, “but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

“First, while comprehensive health care reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”
Of course, we must note that the whole credit rating biz is… well… corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage-backed securities get a AAA… housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can too.

But even Moody’s is starting to hedge their bets. They recently created three subdivisions within their AAA rating: resistant, resilient and vulnerable… a corporate way of saying the good, the bad and the ugly. While the U.S. isn’t in the worst of the bunch, it’s certainly not the best.

Not the best time to be Ireland or Spain, eh? S&P has already downgraded both nations, and just this morning Spain unveiled its worst recession in over 40 years. GDP shrank 1.8% there in the first quarter, after a 1% drop in the last three months of 2008. From a year earlier, GDP is down 2.9%, the worst annual contraction since at least 1970, when Spain’s National Statistics Institute started keeping track.

Since we started today’s issue with a tough question, how about another: How much further can Spain and Ireland fall (Greece too) before the euro enters crisis mode?
Stocks suffered Wednesday, as the Dow shed 2.2% and S&P 500 lost 2.7%. Traders looking for a reason to take profits found their excuse in the worse-than-expected retail sales number.
“I’m very encouraged by this pullback,” our resource trader Alan Knuckman told CNBC this morning. “We’re coming back to a breakout point in the S&P 500. 875 is a pretty important level. Once we got through that, we had a nice acceleration, so we’ll see if that can hold.

“Regardless, the pullback is healthy for the overall market. It’s something that markets often do. It’s important to see how we recover after a big sell-off, which we haven’t really had yet. I need to see a day where everyone has negative opinions again. I want to see how the market reacts to a BIG push to the downside….”

When that big sell-off comes (and believe us, it will), Alan says, “Watch the next day or two. Will that pessimism overwhelm people again, or will people look at that as a buying opportunity? That will be more of a (market) indicator than anything.”

To get Alan’s full take on today’s market, you can check out his CNBC interview here. But for his priceless trading advice, there’s only one place to look — Resource Trader Alert.
Buyers are drifting back into the market today after yesterday’s decline. The Dow and S&P opened up about 0.5%.
Two worse-than-expected data releases have tamed today’s equity buyback.

First, producer inflation inched up 0.3% in April, says the Dept. of Labor. Contrary to everything you might have heard from the Federal Reserve, inflation can exist in this market.

Second, unemployment claims rose by 32,000 last week, to 637,000, about 20k more than Wall Street was anticipating. Continuing claims, people filing for unemployment for more than one week, climbed 6.56 million. That’s the 15th consecutive week of record highs.
Financials beware: The Obama administration formally announced its intention to regulate the derivatives market today.

“The financial crisis was caused by — and exposed – significant gaps in oversight,” opined Treasury Secretary Geithner. “We are committed to working with Congress to create a more comprehensive system.”

No firm plans yet, but at the core of the government’s scheme is the creation of a centralized clearinghouse for derivatives. Credit default swaps and other derivatives are very much an over-the-counter matter currently, and the Obama team wants to, essentially, create an NYSE for these complicated contracts. We’ll let you know if it comes to fruition.
“Sell Chinese banks, buy Chinese commodities,” declares Chris Mayer, armed with your pair trade of the day.

“China’s banks are hiding more bad loans than the Appalachian Mountains hide moonshiners. Yet the stock prices seem to say Chinese banks are perfect. China’s banks make up 18% of the market of global banking stocks, but hold only 5% of the assets. Further, as a percentage of deposits, the market caps of Chinese banks are four times higher than Japan’s and 60% above the global average.

“As economic woes continue to linger, these outliers won’t likely hold up. Chinese bank stocks are for selling at today’s prices. ‘When these banks crack and come clean,’ says Chris Burn of Goshen Investments, ‘it will be one of the last phases of the [current] cycle.’

“On the other hand, there’s China’s massive urban migration. I can’t emphasize this enough. There is a migration of hundreds of millions of people from China’s rural areas to its budding cities. Just within the next 15 years, China will add some 60 new cities with between 1.5-5 million people. The U.S. doesn’t even have 10 cities today with a million people in them.

“The financial crisis will not undo this migration. It is bigger than that. It is a history-making event and the world will probably never see anything like it on this scale again. As China builds out these cities, it will consume great amounts of commodities — for roads, power systems, houses and more.

“Don’t let the nasty crater that was 2008 take you off the scent of commodities. China is still as big and voracious as ever in the commodity world. There is certainly a pause here, just as that old Chinese saying points out that every meal must end. But every ending also has a new beginning. China will be back for lunch, so to speak.”
Commodities are starting to feel the pinch of the recent stock decline. Oil had been holding steady, but over the last 24 hours, it has succumbed to renewed pessimism on Wall Street. The front-month contract fell from a 2009 high of $60 a barrel to $57 today.

Copper has it even worse. It fell through the $2 mark early this morning, and now at $1.96 a pound, it’s down almost 10% from last week’s high.
Gold is the exception (heh, isn’t it always?). The spot price hit $925 Tuesday and has flat-lined since. That’s a six-week high.
After a nearly full-point rise yesterday, the dollar index is holding steady at 82.8, waiting for the market’s next move. The euro dropped a penny Wednesday, and rests at $1.35 as we write. Ditto the pound, at $1.51.

The yen is the outlier of the bunch, growing stronger all week long as the world’s appetite for risk fades away. It’s at 95 today, nearly a two-month high.
“Do you remember when the Internet was viewed as interesting, but with little financial potential?” asks our technology adviser, Patrick Cox. “That’s where the robotics industry is now.

“Already, low-end robots like Roomba are exploding into new markets. Even as consumers cut back dramatically last quarter, Roomba sales were up 69% compared with the first quarter of 2008. This trend will continue. Within a few years, truly sophisticated consumer robots will be common in high-income households. Before you know it, incredibly capable general-purpose robots will be seen as essential appliances.

Don’t snicker… fortunes have been made with far less

“Moreover, military spending on robotics continues to expand and buoy the industry. The proposed Obama budget increases funding for the DoD programs that move robotics forward. The trend toward unmanned robotic weaponry is unstoppable. Military conflict will not go away, and robots offer many developed nations a way to reduce battlefield casualties.

“As Moore’s Law continues to improve computer technologies, the decision to risk robots, rather than humans, will be easier and easier to make. Regardless of consumer spending trends, we will see far more advanced robots in the battlefield and on crime scenes. Those advances will, in turn, accelerate the domestic and industrial robotic industries.

“Believe me. You want to own robots.”

Of course, Patrick’s readers have a robotics play, which you can get here. That’s just one of the transformational opportunities he’s expecting soon… for more, be sure to check out today’s P.S.
“Let’s see,” a reader begins, “we can put billions toward shoring up banks, stock brokers, auto companies and their suppliers, but there’s no money for Social Security or Medicare??

“What does that say about our government’s concern for the ‘common man’? I thought Obama was a man of the people.”
“Isn’t government, especially Social Security” a reader asks, “the biggest Ponzi scheme of all time?”

The 5: No. In a scheme, the victim has to choose to hand it over. SS is more like a Ponzi stickup.
“All the focus on Social Security and Medicare shortfalls,” writes the last, “has allowed another ‘balance of payments’ issue to slip under our radar. What will happen to the stock markets as the same baby boomer generation draws down their collective 401(k)s and the like without a countering infusion from new investors? I’m definitely out of that trust-the-market-to-make-you-a-million-for-retirement fraud!

“Thanks for the great insights!”

Source: The Mighty AAA, A Pair Trade, More Gov. Intervention, Buy This Future Tech and More!

Waite is the publisher of the Personal Real Estate Investor, a glossy magazine that focuses on investors who buy houses or condos to manage for income or to fix up and sell for a profit. But he’s not some industry cheerleader whose statements are nothing but spin.

He’s a true expert on the U.S. housing sector who goes out of his way to “educate” journalists about the true state of the American housing market, and who criticizes most of the “indicators” in use as useless and irrelevant. Plus, as a onetime Wall Street venture-capitalist who subsequently joined Silicon Valley’s Sand Hill Road private equity crowd, Waite really understands how the Wall Street investment game is played – and, in the case of the U.S. housing market, the missteps Wall Street made and why.

“Wall Street analysts and economists do not understand the housing industry,” Waite told Money Morning in a recent interview. “While stocks and bonds are relatively simple to analyze, housing is anything but. Unlike stocks, housing is a non-tradable asset.”

But through the creation of mortgage-backed securities, Wall Street tried to transform housing into a tradable asset. That lack of understanding set the stage for the housing bubble. And it’s the same miscalculation that is keeping the big-money crowd from understanding that the housing market may have already bottomed – and may well be on its way back up.

Let’s look at both miscues.

Building a Bubble

Stocks and bonds are “tradable assets.” They trade on central exchanges – in a very efficient manner – and play well into the kind of mathematical averaging that paves the way for all sorts of indices (the Standard & Poor’s 500 Index), and sub-indices (the Dow Jones Transportation Index).

That’s not the case with housing, which is very granular in nature – meaning how housing does in one neighborhood differs greatly from how it does in another. Housing is a “non-traded” asset because it is hard to trade – and when it does trade does so in a highly inefficient market.

As Waite says, housing is referred to as “real” property for a reason: Unlike stocks or bonds, which are paper representations of the underlying asset, housing is the asset itself. People live in houses, and most don’t buy them as investments – they buy them to live in. The typical house is owned for five to seven years, and only about 5% of the U.S. housing stock turns over in a single year. In a “normal” period – by that, I mean a stretch that’s not artificially souped up by the unrealistically loose credit that led up to the subprime-mortgage debacle – prices escalate perhaps 3% to 4% annually. And there aren’t the whipsaw pricing patterns that we see with stocks.

Even so, as part of its mission to transform housing into a tradable asset, Wall Street designed a reporting system that, true to form, was badly flawed, Waite says. The measures applied to the market – sample size, methodology, and statistical presentation – work well for assets that are dynamically traded, as stocks are. But they don’t work for housing:

• Stocks are analyzed by looking at the underlying company’s fundamentals, meaning the conclusions reached are very much tied to the specific earnings power of that firm.
• Housing, by comparison, is analyzed make “illogical” generalizations about the market that fail to reflect reality.
• Stocks are analyzed in a forward-looking fashion, being all about earnings projections and expectations.
• Housing analysis ends up being backward looking (45 days to 180 days), meaning the conclusions that are reached are likely outdated by the time we see them.
• Housing ends up being treated like a commodity, with “five-star” neighborhoods (where sales are brisk and the asking price is now being exceeded as prospective purchasers bid the values up in hopes of landing the house) being “averaged in” with “disastrous” one-star neighborhoods.

Says Waite: “Housing indexes and statistics emanating from Wall Street take a cynical view of housing … and they misrepresent the actual value of housing by ignoring the critically obvious point – most housing purchases are ‘buy, occupy and hold’,” and aren’t a speculative play aimed at short-term profits.

By misfiring so badly, Wall Street established an environment in which housing prices were expected to escalate at better-than-their-historical norms, fanning the speculative flames. The easy credit made available by the mortgage-backed debt market only made matters worse. Banks made loans, and Wall Street bundled those loans into an asset-backed security – giving the banks back the cash that they could then use to make their next round of loans. Because the loans were “averaged” out, the resultant securities were given the highest credit ratings by the ratings agencies – which was more than the securities deserved.

It was a recipe for disaster – or, at least, for a bubble.

Wall Street never saw it coming.

Anatomy of a Rebound

Wall Street has also failed to understand the dynamics of a housing market recovery – which is already in the works, Waite says.

And he should know. The portion of the real estate market that Waite’s magazine caters to – the real estate investor – is significant. In fact, a groundbreaking study commissioned by the magazine, and conducted by real-estate researcher REALTrends Inc., in concert with Harris Interactive, found that real estate investors account for 22% to 28% of all home sales (existing and new) each year – a total of 1.5 million to 1.64 million houses each year. That’s a big piece of a $300 billion industry, so it provides a very solid sample.

According to Waite, the housing market bottomed last year. But that bottoming takes place in stages. Housing values continue to decline. But values can’t bottom, solidify, and then head north until sales volumes increase, Waite says.

“First you get volume, and then you get valuations,” Waite says.

And it doesn’t get better across the board all at once: Sales will improve in a “predictable sequence” that start with the very best neighborhoods, work their way down to the really good neighborhoods, and finally reach the plain old good developments.

As noted, Waite says the very best neighborhoods are already seeing strongly improved sales, with actual bidding battles taking place as prospective buyers willingly pay more than the asking price in order to land the choicest properties.

As those markets sell out, and the credit spigots open, demand will move from the very best neighborhoods down to the “pretty good” residential properties, Waite says.

Three reports released over the course of three straight days the last week of March seem to support Waite’s view.

Sales of new homes rose 4.7% in February – the first increase in seven months, the U.S. Commerce Department reported March 26. The day before that report came out a government gauge of home prices posted its first gain in almost a year. And the third of that “hat trick” of upbeat reports issued that same week said that sales of previously owned homes – the biggest share of the market – also increased in February.

The plunge in housing prices is also starting to have an effect. In a second report issued March 26, the California Association of Realtors said that existing-home sales in the state were up 83% in February from the previous year. The reason: The median home price was down roughly 40%, which is helping shrink inventories to about a six months’ supply from 15 months in 2008.

If Waite’s theory is correct, as sales of new and existing homes pick up on a month-to-month basis, prices will follow.

But true to form, Wall Street is demanding proof.

The data “have allayed some fears that the housing market would continue to freefall,” Omair Sharif, an economist with RBS Greenwich Capital, told The Wall Street Journal. “But it’s way too early to say if we’ve hit bottom.”

But Waite fervently believes that bottom has already been hit and that it’s all uphill – over the long haul – from here.

“Wall Street would have you believe that putting money into a house is as sophisticated as putting money in a mattress,” he said. “But as it continues to prove, nothing could be further from the truth.”

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Source: Why Wall Street is Missing the U.S. Housing Recovery

]]> http://www.contrarianprofits.com/articles/why-wall-street-is-missing-the-us-housing-recovery/15462/feed 0 http://www.contrarianprofits.com/articles/fed%e2%80%99s-1-trillion-debt-buying-plan-loosens-lending-and-drains-the-dollar/15142 http://www.contrarianprofits.com/articles/fed%e2%80%99s-1-trillion-debt-buying-plan-loosens-lending-and-drains-the-dollar/15142#comments Fri, 20 Mar 2009 14:30:04 +0000 Jason Simpkins http://www.contrarianprofits.com/?p=15142 While the U.S. Federal Reserve’s plan to buy more than $1 trillion in debt has helped unfreeze the credit markets, it has also effectively capped U.S. Treasury yields and undermined the dollar.

And that’s caused commodities to soar as currency speculators and safe-haven investors head for higher ground.

At the culmination of the policymaking Federal Open Market Committee’s (FOMC) two-day meeting Wednesday, Fed Chairman Ben S. Bernanke revealed that the central bank would purchase up to $300 billion in longer-term Treasury securities, as well as an additional $750 billion of mortgage-backed securities. The central bank also said it would buy debt issued by government-sponsored agencies such as Fannie Mae (FNM) Freddie Mac (FRE).

“To provide greater support to mortgage lending and housing…

• The U.S. Federal Reserve said yesterday (Thursday) that it will purchase up to $300 billion of longer-term Treasury securities over the next six months. The Fed will also purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities.  The announcement accompanied its decision to keep interest rates at historically low levels.

• Sources told The New York Times that IBM Corp. (IBM) is in talks to buy Sun Microsystems Inc. (S) for at least $6.5 billion, which would be twice the value of Tuesday’s closing price of Sun’s shares. If a deal if reached, it would be IBM’s largest acquisition and one that would bolster the company’s standing among high-end computer server companies.

• About 1,471 hedge funds shut down last year, exceeding the previous record of 848 by 70%. In the fourth quarter alone, more than half of those hedge funds bellied up. “It’s been a great culling of mediocre managers,” Tammer Kamel, president of Toronto-based Iluka Consulting Group Ltd., which advises clients on hedge-fund investments, told Bloomberg. “Those funds that will be around this year are the ones with the right skill set.”

• Minnesota-based Food maker General Mills Inc. (GIS) posted fiscal third-quarter earnings of $288.9 million, or 85 cents a share. The numbers were below its expectations and caused by the effects of a strong dollar and high costs, Reuters reported.

• The World Bank said that China’s economy is showing “early signs” of stabilization, while forecasted the nation’s economic growth at 6.5%, Bloomberg reported. “The government’s stimulus is working,” said Louis Kuijs, a senior economist at the World Bank in Beijing. “China’s fundamentals are strong enough to ride out this storm.”

• Edward Liddy, chief executive of American International Group Inc. (AIG), has asked employees of the bailed out insurer that took home more than $100,000 in bonuses to return at least half, CNN reported. “It was distasteful to make these payments,” Liddy told members of the House Financial Services subcommittee. “This morning, I’ve asked the employees of AIG Financial Products to step up and do the right thing. Specifically, I’ve asked those who received retention payments in excess of $100,000 or more to return at least half of those payments.”

Source: Global Investment News Briefs Thursday, March 19, 2009

Many of the market participants weren’t looking for an announcement or plans from the Fed to buy Treasuries today, but instead, were anticipating further discussions on how to proceed. It appears there has been disagreement on how to provide aggressive actions with interest rates already at rock bottom. The way they saw it, there were three options. One was to increase the TALF to buy frozen assets, another way was to expand purchases of mortgage backed securities and agency securities, or to begin buying long term Treasuries.

The Fed decided to go ahead and buy $300 billion of longer term Treasuries over the next 6 months to help improve conditions in private credit markets. The central bank will begin purchases of the Treasuries late next week and buy them 2 to 3 times a week and concentrate in two-year to 10-year debt. In addition, they said “To provide greater support to mortgage lending and housing markets, the committee decided to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities.” These additional purchases kick the tally for the past year up to $1.15 trillion.

The Fed also said they will consider expanding the Term Asset-Backed Securities Loan Facility (TALF) to include other financial assets. Broadening the TALF to include older, illiquid and lower rated securities could allow investment funds to repackage assets and sell them to a wider audience. In other words, the TALF would provide loans to investors and agree to take this illiquid debt as collateral. The Fed will also increase its purchases of agency debt this year by up to $100 billion to a total of $200 billion.

The 10 year note yields plunged to 2.48% from 3.01% late yesterday and marked the biggest decline since 1962. Since most mortgage rates are based on the 10 year, they are trying to drive rates down as they haven’t been falling with the traditional Fed rate cuts. Former St. Louis Fed president Poole said “We are not even close to the bottom and therefore the Fed is engaging in a massive quantitative easing. We still have a very serious recession in front of us.” Quantitative easing is the injection of funds into the economy as the main policy tool. This type of policy may continue until the Fed feels more comfortable. Oh, and by the way…rates were left unchanged in case you were wondering.

Now, with all of that being said, the dollar sold off quicker than funnel cakes at a state fair as Chuck would say. What we have here is a situation where the printing presses are running so much that they are about to overheat. Generally when we have money thrown from the helicopter and the government buying this much debt, it will ultimately cause inflation to soar. At this point, the only concern the Fed has is trying to stabilize the economy and really isn’t worried about heightened inflation or any other negative repercussions.

As Chuck has said on many occasions, when rates or yields fall, one of two things need to happen in order to attract capital. One is to increase rates, which we know isn’t going to happen, and the other is a general debasement of the currency. Well, the currency markets figured it out right when these moves were announced that a weaker dollar is what will be necessary to make the wheels turn. Not to mention that higher inflation, which is not a positive attribute for a currency, is the end result. It seems what Chuck has been harping on for a long, long time is now coming full circle.

This had to be one of the quickest currency moves that I have ever seen as the euro flew all of the way up to the 1.35 handle before I left for the evening. It was literally like watching the speedometer on your car climb as you push the pedal to the floor. The numbers just kept going and going…blowing past 1.31, then 1.32, and finally up to 1.35. We had the Swedish krona gain over 8%, Norway and New Zealand up around 6%, and the euro up 5% just to name a few.

The Dollar Index fell 2.7% yesterday to 84.595, its largest one day drop since 1971, and increased the dollar’s decline to 5.6% since March 4. As I came in this morning, there hasn’t been any type of sell off and the currencies remain in the same range as where we last left them with the euro holding the 1.35 mark. Gold also joined in on the mugging as it was trading around $940, when just several hours prior it had even dipped below $900. These types of huge movements obviously can’t be sustained so I’m sure we’ll see some type of correction, but remember what happened on the way down. We had a few massive movements downward and then a steady depreciation for several months. I’m not saying this will happen, but its certainly possible to see the currency market appreciate as quickly as we saw it fall.

In the midst of all the action, we did have some economic releases that I’ll mention as well. The second piece of inflation came out today and actually rose more than expected from January by .4% and pushed the annual core inflation rate to 1.8%, up from 1.7%. We also had the 4th quarter current account deficit narrow more than expected to $132.8 following a revision to the previous figure of $181.3 billion from $174.1 billion. Today we have jobs numbers, leading indicators, and the Philly Fed Index which are all expected to fall from previous numbers. On to the Big Finish…

Currencies today 3/19/2009: A$ .6817, kiwi .5461, C$ .8062, euro 1.3519, sterling 1.4314, Swiss .8786, rand 9.6275, krone 6.4437, SEK 8.0576, forint 220.77, zloty 3.3497, koruna 19.8855, yen 95.58, sing 1.5172, HKD 7.7516, INR 50.3112, China 6.8284, pesos 13.9501, BRL 2.2495, dollar index 84.028, Oil $49.70, Silver $12.86, and Gold… 937.17

Source:  Hold on to Your Hat