Many people ask me for investing advice, something that I am quite reticent to give over casual conversation. There is one aspect that I do offer freely though, and that is the push for the return of common sense. When people ask me what sectors to invest in, and whether banks are a potentially good buy or not, I remind them that buying stocks for the longer term is no different than buying a chunk of any business. The question is, "Is this a good business prospect?".
Just imagine if I came up to you and pitched my business for an investment along the lines of the following...
"Listen, Dude! I have this big banking business that does several billion dollar per year. It is very sensitive to the business cycle and as you know, Tim Geithner and Ben Bernanke - two of the smartest and most honest people this universe has ever experienced - says that the worst is behind us and the economy is growing. Hey, even the NAR says that we should buy a house now, and they have those high falutin' fancy economists to crunch numbers for them. So, with that being said, all you have to do is look past the fact that I had to get bailed out by the government several times to the tune of many billions of dollars. My lawyers may also want me to disclose that some smart ass investor/blogger types say that we are coming off a high in the business cycle, but we have Optimism Driven Reduction of Risk Reserve due to our very rosy outlook. Due not be deterred by the fact that the collateral behind our loans has depreciated by as much as 42% and is still on the downfall. I know that blogger/investor guy that is starting to get a few seconds of airplay says we are in a Real Estate Depression That Is About To Get Much Worse, but truth be told, it's really a matter of semantics. A depression is generally a 20% drop in values surround by severely depressed economic activity. We are experiencing 40%+... See! The numbers don't match. It ain't a depression! What that blogger dude fails to realize is that my whole industry is under the protection of the US gubment - that's right, we are directly indemnified by .GOV. In case you didn't get the memo, FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!
We have put out record profits, as the government supports our paying out that vast majority of what should be retained earnings as salary, bonus and other unearned compensation. As a matter of fact, the government has actually funded this exercise with tax payer dollars! I'm telling you man, this is the best gimmick since that PT Barnum guy and his snake oil. There's an ass for every seat." [continue reading up on this topic, for it is highly illuminating. Of course, it doesn’t end there. After all, Buried Deep Within The Files That The Federal Reserve Released On Their MBS Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The Banks]
Does this sound like a sound investment to you?
I made an appearance on CNBC's Fast Money show yesterday. It was a very short clip on real estate, and the fast moving short clips are not conducive to the communication of the thick, fact heavy style of analysis that is common to BoomBustBlog, and yours truly. Nevertheless I am quite thankful for the opportunity to share my contrarian views in the mainstream media.
Now that I have (quite honestly) issued my most sincerest thanks, let's attempt to remedy the shortcoming of the limited amounted of time that I had. You see, after the 3 minute hit ended there was a brief discussion of commercial real estate in which I didn't get to participate, thus I will take the liberty of doing so through this medium.
Yes, commercial real estate has shown some marginal increases in the last quarter, and REITs have been on fire. The issue is, many publicly traded equities have detached from their underlying fundamentals. Let's reference “A Granular Look Into a $6 Billion REIT: Is This the Next GGP?” The following are excerpts from it:
Yesterday I notified, In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse. Today I will show specifically how things will get much worse. The numbers came out for new home sales today, and they were atrocious - and that's after a downward adjustment for the previous month's numbers. Follow the chart with the pretty colors below, keeping in mind that many economists believe that new housing construction is a pre-cursor to economic recovery.
Yes, we are in a balance sheet based, real asset depression. If you take a look at it from an empirical perspective there should be no surprise in this statement, but since most derive their information from the mainstream media media and the sell side of Wall Street (both of whom have a preternatural proclivity for the positive spin) this may come as a bit of a shock to a few. Let's ponder the term "depression" as outlined in Wikipedia with some Reggie edits:
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturnrecession, which is seen by economists as part of the modern business cycle. than a
Well, we have had a severe downturn in real estate in much of the EU, the middle east, the UK, Japan, and definitely the US. See "The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike" for a series of graphs that compare real estate markets in several of these countries.
The Wall Street Journal reports: US housing data may have understated extend of collapse.I can do naught but laugh. Are they serious? Don't they even bother to read BoomBustBlog? The WSJ story goes on to read...
The housing crash may have been more severe than initial estimates have shown.
The National Association of Realtors, which produces a widely watched monthly estimate of sales of previously owned homes, is examining the possibility that it over-counted U.S. home sales dating back as far as 2007.
... The group reported that there were 4.9 million sales of previously owned homes in 2010, down 5.7% from 5.2 million in 2009. But CoreLogic, a real-estate analytics firm based in Santa Ana, Calif., counted just 3.3 million homes sales last year, a drop of 10.8% from 3.7 million in 2009. CoreLogic says NAR could have overstated home sales by as much as 20%.
While revisions wouldn't affect reported home-price numbers, they could show that the housing market faces a bigger overhang in inventory, given the weaker demand.
In December, NAR said that it would take 8.1 months to sell some 3.6 million homes listed for sale at the current pace, but the number of months it would take could be even higher if sales are revised down. Any revisions wouldn't have an impact on homeowners, but it could have consequences for the real-estate industry. Downward revisions would show that "this horrific downturn in the housing market has been even more pronounced than what people thought, and people already thought it was pretty bad," said Thomas Lawler, an independent housing economist.
NAR said the data, which are used by economists, investors and the real-estate industry to gauge the health of the housing market, could be revised downward this summer. Lawrence Yun, chief economist at NAR, wasn't specific about whether and by how much the revisions could reduce reported sales, and he raised the possibility that the CoreLogic estimates have understated the number of home sales. "This is a very important issue, and we are looking at it carefully right now," Mr. Yun said.
Last week I posted a comprehensive piece, The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess. The goal was to outline the literal mess that those who decided to drag us through this “Great Global Macro Experiment”have left us in. Since then, in merely one week's time, we have bore witness to:
- The potentially imminent toppling of another multi-decade, long standing regime, the third in as many months. Gaddafi asserts control amid worldwide dissent - Libyan U.N. mission urges Gaddafi's downfall - Gaddafi son denies civilians bombed - Analysis: Libya could face chaos in post-Gaddafi era. Leading up to the Libyan affair, Tunisia and Egypt fell into the hands of virtually weaponless protesters (at least from a conventional weapons perspective) armed with simply laptops and cellphones (the new age computers and apparently the weapon of choice for those in uprise) to post messages on Twitter and Facebook, amassing solidarity with supporters to converge in certain areas to join the mass protests. Identifying, fearing, and failing to understand the true power of the Internet in toppling a regime, Libya has repeated the faux pas of Egypt in attempting cut the country off from cyberspace - attempting to halt the charge of an African bull elephant with an Acme Walmart (by way of China) fly swatter. It is apparent that Egypt's efforts to isolate its populace from the Internet, although failing to halt the toppling of its regime, did succeed in hiding the futility of such an effort from Quadafi, et. al. This not only forms another basis for contagion, but one that was actually foreseeable nearly a year in advance- see Egypt’s Social Unrest As A Pan-European Economic and Financial Contagion? It Can Happen!!! and First Tunisia, Then Egypt, Now Yemen: Will This Reach The Powder Keg That Is The EU & What Will Happen If It Does? Subscribers should reference Potential Spillover Effects from the Middle East to the EU.
Here is a sequence of events that I warned thoroughly about, and is unfolding like clockwork. Witness the massive destruction of capital, despite the fact that it could have been so easily seen at least a year in advance. Let's walk through just the past couple of months. In January, I posted "The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults". To wit...
About a month ago, I pulled the covers off of the speculation over whether Portugal would default or not. Most of the “experts” declared that a default was not in the cards. I strongly recommended that the so -called “experts” pull out a calculator and run the math. Not only will there be defaults, but the haircuts will look particularly nasty. See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History (December 6th & 7th, 2010).
Today, in the mainstream news we find the ECB Throws Portugal a Temporary Lifeline. From CNBC:
The European Central Bank threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon. A senior euro zone source told Reuters on Sunday that Germany, France and other euro zone countries were pushing Portugal to seek an EU-IMF assistance programme, following Greece and Ireland, in a bid to prevent contagion spreading to much larger Spain, the fourth biggest economy in the euro area.
The interest rate premium on Portuguese sovereign debt fell on Monday after rising sharply late last week as traders said the ECB intervened to buy government bonds on the secondary market. “They’re buying five-years and 10-years in Portugal, whatever people are offering really,” one trader said.
My stance on China's comeuppance for attempting to pack 50 years of growth in to 3 years is still quite unchanged. I am fully aware that many "smart" bankers and analysts have different perspectives, but as I posted a couple of weeks ago, "Currency Crisis! Inflation! Sovereign Defaults! Bahhhh… Who Are ‘Ya Gonna Believe, The Government Or Your Lyin’ Eyes?". From Bloomberg, this morning: U.S. Index Futures Fall After China Raises Banks’ Reserve Ratio
China’s central bank raised reserve requirements for lenders for the second time this year to counter inflation and curb property-price gains.
...Reserve ratios will increase half a percentage point starting Feb. 24, the People’s Bank of China said on its website today in a one-sentence statement. Today’s move came 10 days after China raised interest rates.
And anecdotally on the ground as reported by BoomBustBlogger John:
We import from Asia, V-nam mostly. After Chinese new year factories returned back to:
- 8% devalution in the dong
- New Taxes for using moterbikes and cars
- Interest on loans from 14 to a new 20%
- and more prices controls.
On top of that the real kicker. Business in Vnam had to buy US$ from the black market, the diff was 30% compared to the banks. Business would buy on the black market and get a fake bank reciept at the banks rate and keep the 30% spread & use the fake reciept for accounting, this helped keep their prices down. Now the gov is matching the black, the spread is gone.
We have people on the ground in Vnam. So who is going to pay these new prices that are coming over here right now, higher prices are on their way. Can you say margin compression, possible a big one. Look for shorts in low margin retail, big ticket item retail that are heavy into made in Asia not made in USA.
In reviewing today's headlines, we come across the reliably unreliable Eurozone statistician and forecasting figure failure, again: Euro Zone Economic Growth Below Forecasts:
The euro zone economy grew at the same quarterly rate in the fourth quarter as in the third, data showed on Tuesday, defying expectations of an acceleration.
The European Union's statistics office Eurostat said gross domestic product in the 16 countries using the euro at the time grew 0.3 percent in the October-December period, the same as in the third quarter.
Year-on-year, the expansion was 2.0 percent in the fourth quarter, compared to 1.9 percent in the third quarter.
Economists polled by Reuters had on average expected increases of 0.4 percent quarter-on-quarter and of 2.1 percent year-on-year.
Of course, it is that expected (yet not actually achieved) growth that was supposed to fund the deficits in many of the PIIGS group austerity plans. Export was a major component of this, but if the Eurozone is growing slower than anticipated (big surprise) and the EU members rely primarily on trade with each other, then who will buy all of the stuff to allow these states to pull each other out of the hole. The kicker is that the individual countries' forecasts are considerably more optimistic than the economists' forecasts, which in and of themselves were simply too optimistic. This has been a pattern since the markets collapsed three years ago. Referencing "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!" you can see where this is a pattern in country after indebted country in Europe - both in and out of the Eurozone - Greece, Spain, Italy, Portugal, even the UK. To wit...
The Harlem Community Development Corporation and AAREPNY hosted a breakfast symposium on real estate last Thursday in which I was the keynote speaker. The audience consisted of bankers, developers, investors, lawyers... the usual fare. I fear I may have rained on the optimism parade with my presentation, but I also feel a few salient points were communicated. I have included portions of the presentation here for the blog readers to peruse. One of the main themes of the presentation was that of "lost decades". How likely is it that we can have 20 more years of housing price declines? Note: The "74%" reference below is a typo, the Japanese residential index did not drop that far.
Let's see if any of this sounds familiar, as excerpted from Wikipedia: