Friday, February 26, 2010

An Exclusive, Insider View of the Real Estate Market (Hint: It Ain't Pretty)

Is real estate bottoming? Ummmm, I guess it depends what you mean by bottoming...but unless you work for the NAR, probably not!

Here's an exclusive, insider look at the "real estate train wreck" as Casey Research's David Galland sat down with real estate entrepreneur and guru Andy Miller.

This read will make you think twice about "bottom fishing" in real estate just yet!


An Insider’s View of the Real Estate Train Wreck

By David Galland, The Casey Report

The first time I spoke with real estate entrepreneur Andy Miller was in late 2007, when I asked him to serve on the faculty of a Casey Research Summit. And there was no one in the nation I wanted more than Andy to address the critical topic of real estate.

My interest in Andy was due to the fact that he has been singularly successful in pretty much all aspects of the real estate market, including financing and developing large projects – such as shopping centers, apartment communities, office buildings, and warehouses – from one end of the country to the other. His expertise has also allowed him to build an impressive business providing assistance to large financial institutions that need help in dealing with problem commercial real estate loans. As you might suspect, business is booming.

Back in 2007, however, what most intrigued me about Andy was that he had been almost alone among his peer group in foreseeing the coming end of the real estate bubble, and in liquidating essentially all of his considerable portfolio of projects near the top. There are people that think they know what’s going on, and those who actually know – Andy very much belongs in the latter category.

In fact, he initially refused to speak at our event, only agreeing very reluctantly after I had hounded him for several months. The reason for his refusal, I later found out, was that he had spoken at several industry events before the real estate collapse and had been all but booed off the stage for his dire outlook.

The happy ending of this story is that Andy’s speech at our Summit was a rousing success, and he enjoyed it so much that he has now spoken at several, and has kindly agreed to sit for periodic interviews to keep our readers up to date on the latest developments in this critical sector. So far, Andy’s real estate forecasts continue to come true.

As you’ll read in the following excerpt from my latest interview with Andy, who now spends considerable time each day helping the nation’s biggest banks cope with growing stacks of problem loans, he remains deeply concerned about the outlook for real estate.

David Galland

No one has been more right on the housing market in recent years. So, what’s coming next? Some of the housing numbers in the last few months look a little less ugly. Could housing be getting ready to get well?

MILLER: I don’t think so.

For all intents and purposes, the United States home mortgage market has been nationalized without anybody noticing. Last September, reportedly over 95% of all new loans for single-family homes in the U.S. were made with federal assistance, either through Fannie Mae and the implied guarantee, or Freddie Mac, or through the FHA.

If it's true that most of the financing in the single-family home market is being facilitated by government guarantees, that should make everybody very, very concerned. If government support goes away, and it will go away, where will that leave the home market? It leaves you with a catastrophe, because private lenders for single-family homes are nervous. Lenders that are still lending are reverting to 75% to 80% loan to value. But that doesn’t help a homeowner whose property is worth less than the mortgage. So when the supply of government-facilitated loans dries up, it's going to put the home market in a very, very bad place.

Why am I so certain that the federal government will have to cut back on its lending? Because most of the financing is done via the bond market, through Ginnie Mae or other government agencies. And the numbers are so big that eventually the bond market is going to gag on the government-sponsored paper.

The public doesn’t have any idea of the scale of the guarantees the government is taking on through Fannie, Freddie, and FHA. It’s huge. If people understood what the federal government has done and subjected the taxpayers to, there would be a public outrage. But you can't get people to focus on it, and it's very esoteric, it's very hard to understand. But it’s not something the bond market won’t notice. The government can’t keep doing what it has been doing to support mortgage lending without pushing interest rates way up.

Refinancings of single-family homes are very interest-rate sensitive. Consumers have their backs against the wall. They have too much debt. Refinancing their maturing mortgages or their adjustable-rate mortgages is very problematic if rates go up, but that's exactly where they’re headed. So anyone who’s comforted by current statistics on single-family homes should look beyond the data and into the dynamics of the market. What they’ll find is very alarming.

On that topic, recent data I saw was that something like 24% of the loans FHA backed in 2007 are now in default, and for those generated in 2008, 20% are in default, and the FHA is out of money.

MILLER: Fannie Mae had a $19 billion loss for the third quarter of 2009, and they are now drawing on their facility with the U.S. Treasury. We have all forgotten that Fannie and Freddie are still being operated under a federal conservatorship. On Christmas Eve, the agency announced that they were going to remove all the caps on the agencies.

So what about commercial real estate?

MILLER: When I saw what was happening in the housing market, I liquidated all my multifamily apartments, shopping centers, and office buildings. I liquidated all my loan portfolios, and I'm happy I did.

Then it occurred to me in 2005 and 2006 that the commercial world had to follow suit. Why? Because it's a normal progression. Obviously, when single-family homes decline in value, multifamily apartments decline in value. And when consumers hit the wall with spending and debt, that's going to have an impact on retailers that pay for commercial space.

Furthermore, the financing for retail properties had gotten ludicrous. The conduits were making loans that they advertised as 80% of property value when they originated them, but in reality the loan-to-value ratios were well over 100%. And I say that to you with absolute, categorical certainty, because I was a seller and nobody knew the value of the properties that I was selling better than I did. I had operated some of them for 20 years, so I knew exactly what they were bringing in. I knew what the operating expenses were, and I knew what the cap rates were. And, you know, the underwriting on the loan side and the purchasing side of these assets was completely insane. It was ludicrous. It did not reflect at all what the conduits thought they were doing. They were valuing the properties way too aggressively.

I became very bearish about the commercial business starting in late '05. In fact, I think I was in Argentina with Doug Casey, sitting on a veranda at one of the estancias, and he and I were lamenting what was going on in the real estate business, and I said there was going to be a huge adjustment in the commercial market.

Beyond the obvious, that the real estate market has taken pretty significant hits and some banks have been dragged under by their bad loans, what has really changed in real estate since the crash?

MILLER: I think the first thing that changed was that people learned that prices don’t go up forever. Lenders also saw that underwriting guidelines for commercial real estate loans, especially in the securitization markets, were erroneous. They realized that some of their properties had been financed too aggressively, but still, I don't think even at the fall of Lehman, anybody was predicting a wholesale collapse in commercial real estate.

But they did see they should be more circumspect with loan underwritings. In fact, after the fall of Lehman, they completely stopped lending. I think they realized we had been living in fantasy land for 10 years. And that was the first change – a mental adjustment from Alice in Wonderland to reality.

Today it's clear that commercial properties are not performing and that values have gone down, although I've got to tell you, the denial is still widespread, particularly in the United States and on the part of lenders sitting on and servicing all these real estate portfolios. People still do not understand how grave this is.

Right now there are an awful lot of banks that do an awful lot of commercial real estate lending, and for about a year now you’ve been telling me that you saw the first and second quarter of 2010 as being particularly risky for commercial real estate. Why this year, and what do you see happening with these loans and the banks holding them?

MILLER: It's an educated guess, and it hasn’t changed. I still think that it's second quarter 2010.

The current volume of defaults is already alarming. And the volume of commercial real estate defaults is growing every month. That can only keep going for so long, and then you hit a breaking point, which I believe will come sometime in 2010. When you hit that breaking point, unless there's some alternative in place, it's going to be a very hideous picture for the bond market and the banking system.

The reason I say second quarter 2010 is a guess is that the Treasury Department, the Federal Reserve, and the FDIC can influence how fast the crisis unfolds. I think they can have an impact on the severity of the crisis as well – not making it less severe but making it more severe. I will get to that in a minute. But they can influence the speed with which it all unfolds, and I’ll give you an example.

In November, the FDIC circulated new guidelines for bank regulators to streamline and standardize the way banks are examined. One standout feature is that as long as a bank has evaluated the borrower and the asset behind a loan, if they are convinced the borrower can repay the loan, even if they go into a workout with the borrower, the bank does not have to reserve for the loan. The bank doesn’t have to take any hit against its capital, so if the collateral all of a sudden sinks to 50% of the loan balance, the bank still does not have to take any sort of write-down. That obviously allows banks to just sit on weak assets instead of liquidating them or trying to raise more capital.

That's very significant. It means the FDIC and the Treasury Department have decided that rather than see 1,000 or 2,000 banks go under and then create another RTC to sift through all the bad assets, they’ll let the banking system warehouse the bad assets. Their plan is to leave the assets in place, and then, when the market changes, let the banks deal with them. Now, that's horribly destructive.

Just to be clear on this, let's say I own an apartment building and I've been making my payments, but I'm having trouble and the value of the property has fallen by half. I go to the bank and say, "Look, I've got a problem," and the bank says, "Okay, let's work something out, and instead of you paying $10,000 a month, you pay us $5,000 a month and we’ll shake hands and smile." Then, even though the property’s value has dropped, as long as we keep smiling and I’m still making payments, then the bank won't have to reserve anything against the risk that I’ll give the building back and it will be worth a whole lot less than the mortgage.

MILLER: I think what you just described is accurate. And it’s exactly a Japanese-style solution. This is what Japan did in '89 and '90 because they didn’t want their banking system to implode, so they made it easier for their banks to sit on bad assets without owning up to the losses.

And what’s the result? Well, it leaves the status quo in place. The real problem with this is twofold. One is that it prolongs the problem – if a bank is allowed to sit on bad assets for three to five years, it’s not going to sell them.

Why is that bad? Well, the money tied up in the loans the bank is sitting on is idle. It is not being used for anything productive.

Wouldn’t banks know that ultimately the piper must be paid, and so they'd be trying to build cash – trying to build capital to deal with the problem when it comes home to roost?

MILLER: The more intelligent banks are doing exactly that, hoping they can weather the storm by building enough reserves, so when they do ultimately have to take the loss, it's digestible. But in commercial real estate generally, the longer you delay realizing a loss, the more severe it’s going to be. I can tell you that because I'm out there servicing real estate all day long. Not facing the problems, and not writing down the values, and not allowing purchasers to come in and take these assets at discounted prices – all the foot-dragging allows the fundamental problem to get worse.

In the apartment business, people are under water, particularly if they got their loan through a conduit. When maintenance is required, a borrower with a property worth less than the loan is very reluctant to reach into his pocket. If you have a $10 million loan on a property now worth $5 million, you’re clearly not making any cash flow. So what do you do when you need new roofs? Are you going to dig into your pocket and spend $600,000 on roofing? Not likely. Why would you do that?

Or a borrower who is sitting on a suburban office property – he's got two years left on the loan. He knows he has a loan-to-value problem. Well, a new tenant wants to lease from him, but it would cost $30 a square foot to put the tenant in. Is the borrower going to put the tenant in? I don't think so. So the problems get bigger.

Why would the owner bother going through a workout with the bank if he knows he’s so deep underwater he’s below snorkel depth?

MILLER: It's always in your interest to delay an inevitable default. For example, the minute you give the property back to the bank, you trigger a huge taxable gain. All of a sudden the forgiveness of debt on your loan becomes taxable income to you. Another reason is that many of these loans are either full recourse or part recourse. If you're a borrower who’s guaranteed a loan, why would you want to hasten the call on your guarantee? You want to delay as long as possible because there’s always a little hope that values will turn around. So there is no reason to hurry into a default. None.

So that’s from the borrower's standpoint. But wouldn’t the banks want to clear these loans off their balance sheets?

MILLER: No. The banks have a lot of incentive to delay the realization of the problem because if they liquidate the asset and the loss is realized, then they have to reserve the loss against their capital immediately. If they keep extending the loan under the rules present today, then they can delay a write-down and hope for better days. Remember, you suffer if the bank succumbs and turns around and liquidates that asset, then you really do have to take a write-down because then your capital is gone.

So here we are, we've got the federal government again, through its agencies and the FDIC, ready to support the commercial real estate market. They’ve taken one step, in allowing banks to use a very loose standard for loss reserves. What else can they do?

MILLER: Well, obviously nobody knows, but I can guess at what’s coming by extrapolating from what the federal government has already done. I believe that the Treasury and the Federal Reserve now see that commercial real estate is a huge problem.

I think they’re going to contrive something to help assist commercial real estate so that it doesn’t hurt the banks that lent on commercial real estate. It’ll resemble what they did with housing.

They created a nearly perfect political formula in dealing with housing, and they are going to follow that formula. The entire U.S. residential mortgage market has in effect been nationalized, but there wasn’t any act of Congress, no screaming and shouting, no headlines in the Wall Street Journal or the New York Times about "Should we nationalize the home loan market in America." No. It happened right under our noses and with no hue and cry. That's a template for what they could do with the commercial loan market.

And how can they do that? By using federal guarantees much in the way they used federal guarantees for the FHA. FHA issues Ginnie Mae securities, which are sold to the public. Those proceeds are used to make the loans.

But it won’t really be a solution. In fact, it will make the problems much more intense.

Don’t these properties have to be allowed to go to their intrinsic value before the market can start working again?

MILLER: Yes. Of course, very few people agree with that, because if you let it all go today, there would be enormous losses and a tremendous amount of pain. We're going to have some really terrible, terrible years ahead of us because letting it all go is the only way to be done with the problem.

Do you think the U.S. will come out of this crisis? I mean, do you think the country, the institutions, the government, or the banking sector are going to look anything like they do today when this thing is over?

MILLER: I know this is going to make you laugh, but I'm actually an optimist about this. I'm not optimistic about the short run, and I'm not optimistic about the severity of the problem, but I'm totally optimistic as it relates to the United States of America.

This is a very resilient place. We have very resilient people. There is nothing like the American spirit. There is nothing like American ingenuity anywhere on Planet Earth, and while I certainly believe that we are headed for a catastrophe and a crisis, I also believe that ultimately we are going to come out better.

Andy Miller is the co-founder of the Miller Frishman Group (, which includes three companies serving different sectors of the real estate market – from mortgage brokerage and banking, to the building, management, and marketing of commercial real estate across the United States. His firm is currently deeply involved in the distressed real estate business, assisting lenders across the nation with their growing portfolios of non-performing loans.

Real estate crashing, unemployment rising, sky-high government debt – is there any silver lining in all of this? There is, and the editors of The Casey Report are pros in locating it. Analyzing tomorrow’s mega-trends and finding the best opportunities to profit from them is what they do. Learn how these expert trend hunters can help you make money even in the toughest crisis… click here.

Ed. note - I've been a Casey Research subscriber since 2006, and an affiliate since 2008.

Monday, February 22, 2010

One Last Hurrah For This Bear Market Rally

Not too much new here
Just a bear market rally
On it's last hurrah!

One Last Hurrah for the Bull!

Had family in town this weekend, hence the late post, but there's really not much going on anyway. This current rally feels like a last gasp countertrend rally that's just about out of steam.

Where we go from here should be quite instructive. I anticipate we're about to head down, potentially pretty violently, so I remain unimpressed by the move back over 1100 on the S&P. Markets were oversold, and to me, this bounce did nothing more than relieve some short term oversold conditions.

The markets are now short term overbought, so plan accordingly if you have a short time horizon.

Of course a move up to new highs would invalidate my theory here. I don't think it's likely, but it is possible, and we can't be too stubborn if the march higher does continue.

At the very least, I think it's an appropriate time to get a bit more conservative and careful in your trading and investing, as there appears to be a great deal more risk to the downside currently than potential reward to the upside.

In Case You Missed It - Recent Reading

Should be a fun week in the markets, so stay tuned here, and we'll deliver some mid-week updates and musings.

Here's a neat read courtesy of our boy Bob Prechter, as he explains how to act contrary to "market herding". Because Prechter is always aligned away from the mainstream, you'll generally stay clear of trouble following him, even if you take some things with a grain of salt.

And our friends at The Daily Reckoning put together an amusing slide show entitled The Financial Darwin Awards. Definitely worth a perusing.

Finally for those of you wondering how Valentine's Day worked out using a contrarian approach - quite well!

My Trading Activity - Still Short the S&P (Twice)

Still short baby - and for what it's worth, I think this is a fantastic time to initiate a short position.

I'm fully loaded up right now, so am content to hold tight and see which may the markets turn.

Still double short the S&P.

The S&P remains above it's moving average - but for how long?

Have a great week in the markets! Comments are always welcome and very much appreciated.

Thursday, February 18, 2010

Bob Prechter: How to Act Contrary to "Market Herding"

Here's a great guest piece by Robert Prechter, author of what is currently my favorite investment newsletter, the Elliott Wave Theorist. Bob talks about a subject that's probably as near and dear to your heart as it is mine - market herding.

And if you want to read more, at the end of this piece there's an offer from Prechter that'll allow you to check out the entire issue of The Elliott Wave Theorist.


Robert Prechter on Herding and Markets' "Irony and Paradox"

To anyone new to socionomics, the stock market is saturated with paradox.

February 18, 2010

By Editorial Staff

The following is an excerpt from a classic issue of Robert Prechter's Elliott Wave Theorist. For a limited time, you can visit Elliott Wave International to download the rest of the 10-page issue free.

Market Herding

Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do. Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.

Irony and Paradox

To anyone not versed in socionomics, everything the stock market does is saturated with paradox.

  • When T-bills sported double-digit interest rates in 1979-1984, investors saw no reason to abandon their T-bills for stocks; when T-bill rates were low in the 2000s, investors saw no reason to put up with the “low yield” of T-bills and sought capital gains in stocks. The first period was the greatest stock-buying opportunity in two generations, and the second period was the greatest stock-selling opportunity ever.
  • When long-term bonds yielded 15 percent in 1981, investors were afraid of Treasury bonds even though they were about to embark on the greatest bull market ever; in December 2008, when the Fed pledged to buy T-bonds, rising prices appeared so strongly guaranteed that the Daily Sentiment Index indicated a record 99 percent bulls, just before prices started to fall.
  • When oil was $10.35 a barrel in 1998, no one made a case that the world was running out of black gold; but when it was 7-8 times more expensive, some three dozen books came out arguing that global oil production had peaked, a theme that convinced investors to begin buying oil futures…about a year before the price collapsed 78 percent.
  • In the second half of the 1990s, the idea that stocks would always be the best investment “in the long run” became popular just as a long period of superior returns was coming to an ignoble end. A new study... shows that as of today the S&P has underperformed safe, boring Treasury bonds for the past 40 years, since 1969.
  • Just when nearly everyone -- including world-famous investors -- finally panicked and conceded in February-March 2009 that the financial and economic worlds were in dire shape, the market turned around and shot upward in its fastest rally in 76 years.

And so on. The exogenous-cause model fools investors exquisitely. One reason is that rationalization follows upon mood change. Mood change comes first, and attempts at reasoning come afterward. Socionomists recognize that social mood is primary and has consequences in social action, so we never have to wrestle with paradox. This orientation does not mean that we are always right. It means only that we are not doomed to be chronically wrong.

To succeed in the market, you must learn initially to embrace irony and paradox, at least as humans are unconsciously wired to interpret things. Once you get used to the world of socionomic causality, the irony and paradox melt away, and everything makes perfect sense...


Read the rest of this classic Elliott Wave Theorist issue now, free! You’ll get 10 pages of Bob Prechter's unique insights on:
  • Why Finance and Macroeconomics Are Not Subsets of Economics
  • How Correct Are Economists Who Forecast Macroeconomic Trends?
  • The “Beat the Market” Fallacy
  • Stock-Picking Geniuses or Just a Bull Market?
  • Index Funds and Diversification
  • Market Confidence vs. Certainty
  • Observations on Corporate Earnings
  • Why Being a Bear Doesn't Equal "Doom & Gloom"
  • More

Contrarian Valentine's Day Redux

Last Sunday, Valentine's Day, I mused that we knew most readers would no doubt be celebrating the holiday on Monday...or in true contrarian fashion, not at all!

(Ed. note: The "not at all" option was not a politically feasible option for me)

Nonetheless, I strolled into the local Rite-Aid around 6pm on Monday, February 15th, and saw that once again, it indeed pays to be contrary!

Investing 101: Only buy when there's "blood in the streets."

Financial Darwin Awards, Courtesy of The Daily Reckoning

Nice slide show by our friends at The Daily Reckoning - informative, and entertaining!
And a little while back, we reviewed their latest book, Financial Reckoning Day Fallout.

Sunday, February 14, 2010

The Debt Debacle Rolls On: Socialism's Grand Finale

Sovereign debt - all crap
Who could have expected this?
Socialism's toast!

Contrarian Valentine's Day

While I'm tempted to wish you a Happy Valentine's day, dear reader, I have no doubt that you won't be running with the herd tonight for dinner and a dozen roses.

No sir, not here - when my wife insinuated that I'd "better have something planned", I went and booked dinner reservations for tomorrow (Monday) - got last minute reservations at a top restaurant, no problem.

Somewhere, Humphrey B. Neill is smiling - it indeed pays to be contrary!

The Debt Debacle Rolls On

Given that the markets have rallied with record strength over the last 10 months, isn't it amazing at the level of negativity that persists? Kinda confirms my feelings that we're in the eye of the storm here.

While the buoyancy of the markets has brought some good news with it, it's not really been anything to get all that excited about. More relief that the financial world is not ending, than anything else.

I suspect that relief will ultimately prove to be premature.

Like an attractive, but insane, girlfriend, there appear to be some nasty skeletons left in the closet. The credit crisis was cute - like OK, she smokes a pack of cigarettes a day, two on Sundays. Now we're about to find out that this bitch is a full blown heroin addict...

Sovereign Debt: Socialism's Grand Finale

The next "shoe to drop" appears to be sovereign debt. I guess we should have expected this, as the 20th century's infatuation with socialism comes to a head once and for all.

It turns out that Maggie Thatcher was indeed correct when she famously said "the problem with socialism is that you eventually run out of other people's money." But I wonder if Maggie foresaw her United Kingdom, and our United States, continuing along the trend towards greater socialism, and less capitalism.

Yes, the Thatcher/Reagan revolution, whatever effect it had at the time, appears to be as dead as a door nail today. And granted, the size of the US government continued to grow under Reagan, so I'm not sure if we can or should count that time as a countertrend rally.

In any case, government tax receipts are falling around the world, and there is a lot of sovereign debt that is going to go unpaid. This is highly deflationary, because debt that used to exist will simply float away to "money heaven." Creditors will discover that their assets are now completely worthless.

First Dubai, now Greece - the dominoes are starting to topple. Here in the good old U S of A, the bond markets continue to fund record deficits at the federal level, but our two most socialistic states - The People's Republics of California and New York - are toast. Spreads are rising on CA's credit default swaps - the vultures are starting to circle.

The types of budget cuts that each state needs to make are politically infeasible. So, we'll likely see the states get bailed out, but eventually, they'll default on their debt. Poof - off to money heaven.

I work in Sacramento - and yes, I greatly enjoy the irony of being a libertarian/anarchist in this town. A funny thing happened when the Governator started furloughing workers, telling them to stay home 3 days a month - nothing, really. It's dead downtown on Fridays, sure, but if there's any output being missed, I honestly can't tell.

I suspect you could furlough most of the state government permanently, and nothing would really be missed either. Sure you'd have some short term adjustment, but the private sector would step in and perform any services that were seriously needed or missed. I doubt we'd miss much.

Go Long Responsible Governments, Short Socialism

Our friend Brian Hunt pointed out in his always excellent Market Notes that there's money to be made in shorting socialism:

For a picture of this tailwind, let's look at the past year's trading in the iShares Singapore (EWS), a basket of Singaporean stocks. While the high-debt, high-tax, high-regulation economies and stock markets of Europe have suffered major declines in the past month, Singapore's market has declined just a few points. This trend of "Asia up, Europe not-so-much" is going to last the rest of your life.

Source: DailyWealth

The Onion: US Stages Fake Coup to Wipe Out Debt

This is hysterical...

U.S. Government Stages Fake Coup To Wipe Out National Debt

Shout out to my good friend, and past guest author, Jonathan Lederer for sending this along.

Paging Dr. Copper

Another good tip from Hunt - copper is breaking down. He's got a nice chart at the bottom of the page that clearly shows a break of copper's upward trend.

Yes Dr. Copper, the commodity this is said to have a "PhD in economics", is starting to feel under the weather. An ominous sign?

Well if China was doing OK, you'd expect to see copper humming. So we've got Chinese indices breaking down in tandem with copper - uh oh.

Stratfor's Take on Greece and Europe

For the geopolitical take and implications, you can't beat Stratfor's George Friedman. Here's a video they released earlier in the week, discussing the Greek fiasco:

The Funniest Video of the Week Not From the Onion

It's from CNBC, of course!

Perhaps a contrarian take on the Greece situation, this joker says the solution is an "operational one" - Europe should print money and hand it out!

Hat tip to friend and reader Carson for finding this beauty.

My Trading Activity - Still Short the S&P (Twice)

Still short baby - these positions are keepers! Not a bad time to initiate a short position either, I think. Markets were up last week, a nice little countertrend rally.

Go short, or go home!

The S&P turns down.

Have a great (short) week in the markets! Comments are always welcome and very much appreciated.

Saturday, February 06, 2010

Why the "Reflation Trade" is Being Exposed as a Complete Fraud

The "reflation" trade
Just a standard retracement?
The bear may be back!

They Are Still "All the Same Markets"

Like many of our astute readers, I was not impressed by the reflation trade. While the strength of the rally was indeed quite substantial, when you sum it up, it was a mirror image of the rally that occurred in 1930.

We mused on January 3rd of this year that we hadn't yet seen anything to invalidate the "All The Same Markets" hypothesis (which is courtesy of Bob Prechter). And the tailspin that the markets have begun seems to further validate this.

The S&P has dropped nearly 100 points in the last few weeks!


How about gold, everyone's favorite "safe haven"? Since it's December top (marked by it's celebrated status by the Today Show), it's been a safe trade alright - for gold shorts, that is!


How's oil done? After all, the world's running out of it, and China needs it...


As Mark Twain may say, were he an investment blogger alive today: "These charts may not be exactly the same, but they sure rhyme like hell!"

Their inverse? The dollar, of course! In the January 3rd column, we identified the dollar as the linchpin to this whole equation. Since that time, it's looked quite frisky - proving that these other markets can't do "jack" while the dollar is rallying - just like 2008.

Is that a roll of silver dollars in your pocket...or are you just happy to see me?

In summary, all we've seen in the reflation trade was a typical retracement, in which markets usually retrace 50-62.5% of their previous losses.

Why does this happen? Honestly I don't have a clue - it just seems to be the way of the financial universe (and possibly the universe in general).

So where - and when - will this end? Well, if these were in fact mere retracements we've witnessed, then you'd expect that new lows will be registered by the time this swing down is over. Which would translate to the S&P below 600, Gold below $700, Oil below $30, and so on.

Moral of the story, I think the two best moves right now are to: 1) Get safe, and 2) Get short (with speculative capital).

Near term we could certainly see the bounce that started yesterday afternoon continue up - maybe bringing the S&P around 1100 - who knows.

What would invalidate my cheery outlook? New highs in the S&P and other markets would indicate I'm either early in my downtrend speculation, or wrong. But I do think the most probable direction is now DOWN.

What's "The Man" Robert Prechter Saying Right Now?

Last week, CNBC interviewed Bob Prechter - here's the interview:

As I've mentioned before, some regard Prechter as a bit "out there", which is actually a very desirable quality in an investment guru, I think.

I started following him about a year ago on the recommendation of a fellow colleague/investor, because from what I can tell, Prechter is the only guy who nailed the Crash of 2008 to a tee, when most of the rest of the investment world was blindsided.

Some more recent guest articles by Prechter:

Colts -5.5
vs. Saints - Who Ya Got?

It will probably come as no surprise that my philosophy in sports speculation is similar to that in the financial markets - part technical, part fundamental. And like the finance world, I claim no particular skill at all. I cannot claim I've won more than I've lost in sports betting.

I do, though, enjoy the study of sports handicapping, and hope that one day I can develop a system that can make money consistently.

As I pen this column on Saturday, the Colts sit as 5.5 point favorites over the Saints. A decent sized spread but still under the first major point of traditional resistance, 7.

The betting masses like the Colts - with 57% of public bets falling on Indy's side. That's not too surprising, as the Super Bowl is far and away the largest public betting game of the year, and we've got Mr. Manning, a golden boy for public betting. What average Joe would bet against Peyton?

While that may pique our interest, my inner contrarian has been disappointed with the relative lack of homage to King Peyton in the media. Meanwhile, the stories about New Orleans and how the Saints "can actually win this one" may be contributing to the line staying south of 7.

Turning to the "fundamentals" - like evaluating individual stocks and companies, this is more art than science.

I'll make the case that the Colts are the better team, based on a few factors:
  • They have not lost a game they tried to win this year
  • New Orleans barely managed to win the NFC Championship game at home, despite gift wrapped fumble after fumble from the Vikings
  • If Favre carved up the NO defense, Manning could have a field day
That said, is the spread large enough to bet on New Orleans "keeping it close?" I don't think so.
First, you should only bet an underdog if you believe they can actually win the game. I think that is possible, but not likely, in this case. Blowouts occur more often than people realize.

So, the five and a half is not enough to scare me away from the pick. Hence, your official 2010 Super Bowl gambling pick is:

Colts -5.5 over Saints

How'd we do in previous years?

My Trading Activity - Short the S&P, Times Two!

After watching the markets bounce on Monday and Tuesday, I thought it'd be an interesting time to "punt" on one more short S&P position on Wednesday.

My thinking was that, if this was a near term bounce, which I thought it was, it looked to be about finished.

Pyramid time! Fortunate timing on the 2nd S&P short, at least for now.

Well that turned out to be pretty good timing, at least thus far, as markets plunged on Thursday. And yet again on Friday, despite a late rally back up above the even mark for the day.

I'd say I'm more confident than before that the trend of the markets has indeed reversed. So, I'll look to carefully add more positions here as the downtrend continues.

Caution remains the order of the day, though, until we breach the 200-day moving average on the downside. My overall strategy is to cautiously get short during the first half of the bear move, and then ride things when the markets completely capitulate, with a final target below last March's lows.

And on that upbeat note - have a great week in the markets! Comments are always welcome and very much appreciated.

Wednesday, February 03, 2010

Mortgage Lenders Aren't Gonna Take It...Anymore!

Channeling Dee Snyder - Mortgage lenders say they're not gonna take it...anymore.

Here in Northern California, we've been housing outcasts for awhile. We were weirdos for renting throughout the housing boom. Now, we're weirdos for a different reason - we're not walking away from our mortgage.

It's the latest trend, and it's getting hotter. Why make mortgage payments when you're down a cool few hundred grand on your digs?

But now, mortgage lenders are fighting back! From CNNMoney:

As terrible as it is to lose your house to foreclosure, at least it's a relief to put your biggest financial headache behind you, right?


Former homeowners may still be on the hook if there's a difference between what they owed on their mortgage and what the bank could sell it for at auction. And these "deficiency judgments" are ticking time bombs that can explode years after borrowers lose their homes.

It can even happen to people who got their bank to approve them selling their home for less than it is worth.

I read today, I believe in the Daily Reckoning, that two-thirds of homes in Nevada are underwater. Two-thirds!

This is not going to end well. Get yourself some gold, sheep, guns - and of course US dollars - and get ready for the next shoe to drop.

Ed. Note: Why US dollars? Because the dollar's fate is driven by global liquidity flows, which are starting to dry up once again.

A Random Walk Down - China's Bubble? Oh Burton!

Burton Malkiel, author of A Random Walk Down Wall Street - because of course we all know that stock prices are subject to completely random movements - is starting a hedge fund to "go long China."

This story really is too good to be true. Chinese stocks quietly topped last August.

Burton is timing the random walk into a downtrend perfectly.

Usually we see ultimate contrarian indicators like this near a top, but mostly still on the way up - this is a special treat to get one while we're on the way down. Especially as the Shanghai Composite moves below it's 200-day moving average.


Hat tip to Porter Stansberry for writing about this in the S&A Digest

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