Friday, September 3, 2010

September Jobs Report

This morning we received the jobs data for the month of August.  We lost 54,000 jobs in total, but the private sector added 67,000, which was very good news.

My only concern was where those private sector jobs came from......

The government added 115,000 jobs to the payroll using the birth/death model.  This is a number the government makes up, based on the projected number of employees hired by small businesses.

The notion of small business adding 115,000 jobs at this point in our economic depression is the equivalent of reading a nice story about unicorns and leprachauns.

The government's U6 unemployment rate, which includes those unemployed for so long that they have given up looking for work, moved up to 16.7%, which is on it's way to the 25% peak seen during our last Great Depression.

The following graph shows where our current employment recovery stands compared to previous recessions: (We are red line)

The stock market is rocketing higher on the news.

Thursday, September 2, 2010

New Stimulus Package Emerges

This evening the Washington Post has leaked news that the Obama economic team is working on a new stimulus package priced in the hundreds of billions.

With the artificial stimulus now wearing off (other than the massive debt we are left to pay) the economic team of mass destruction appears to be back at work after a long summer break.

The country does not need to be "stimulated" with the government's debt poison, it needs to be restructured. 

This of course is the last option for the administration. Restructuring will only come in the form of complete collapse. 

This stimulus will most likely coincide with Bernanke's much anticipated Quantitative Easing Part II, the new trillion plus dollar printing party directed at keeping assets such as stocks and real estate at artificially high bubble levels.

The country does not need the Fed's printing poison, it needs to allow the debt to restructure and prices to fall.

When our leaders finish destroying the country and money begins to move swiftly out of the government bond bubble, keep your eye on gold and silver as a home for that capital.

Commercial Real Estate Value Today

A Bloomberg article yesterday discussed the relative value of commercial real estate today based on the rates for a 10 year government bond.

Their analysis concluded that because the spread between the two was at its highest level in two years that it implied a buying opportunity for commercial real estate.

That is a confusing overview of the article.  Let's discuss what that means in simple terms:

Let's say that as an investor you have $1 million to invest.  You wake up, have a cup of coffee, and try to decide where you're going to invest your capital.

A 10 year government bond today yields 2.6%.  This is considered a risk free investment because it is assumed the government will always be able to pay you back.

However, you may decide that 2.6% is too low of a return in order to achieve your investment goals.  So you look for investments that have a higher return (interest rate), however, these investments are also more risky. (You may not get your money back if there is a default)

This process is called moving out on the risk curve, or yield curve.

For example, stocks (usually) have a higher dividend (interest) payment than bonds.  This is because a company can go bankrupt.  Same goes for corporate bonds.  Higher payments, higher risk.

Now let's look at real estate.  The return you receive for commercial real estate is called a cap rate.  This is the rate that determines how much (price) you are willing to pay for a building's income.

Right now the average cap rate for a commercial building is 7.2%.  Bloomberg now compares that return against the risk free 10 year treasury at 2.6%.  As an investor you will get 4.6% more every year by investing in a commercial real estate building.  That 4.6% is called the "spread."

On the surface their argument seems valid.  However, what if the 10 year treasury yield at 2.6% was overvalued. (I make an attempt on this site every week to explain why it is extremely overvalued) 

What if 10 year treasury rates went to 5%?  Or 6%? Or 7%?

If you could receive a risk free payment from the government at 7%, what do you think investors would pay for a return on a much higher risk commercial real estate building?  Do you think it would be above 7.2%?  Of course it would.  It would most likely be 10-12%, or much higher.

It is beyond the scope of this article to explain how rates move price, but if interest rates/cap rates rise for bonds or real estate the price of the asset moves down.  Think of it like a see saw.  Rates up, Price Down.

This is the outcome I expect over the next few years, and it is why I feel that commercial real estate (and the 10 year treasury bond) are still overpriced.

Tuesday, August 31, 2010

Home Prices For June

The Case Shiller home price index was released this morning showing a positive print month over month.  The index works on a 3 month lag and is an average of home prices in April, May, and June.  This average provides the June price number.

As I mentioned last week when the July existing home sales and new home sales data were released, we probably will not see the lagging indicator show a price decline until September or October when the July prices are included.

The following is a great graph showing the stages of a market cycle and shows where we currently are in the real estate bubble:

Monday, August 30, 2010

Beach Water Calm, Stock Market Quiet

Still on the beach today, but I came in to check on the market action which appears to be calm.  The main market moves are due to the Japanese currency movement overnight.  (It is amazing how at this moment all market direction is based on currency movement overseas with all retail investors out of the market and computers running the show)

As for the economic data this morning: July personal income rose .2% and consumer spending rose .4%.  The savings rate fell to 5.9%.  This all means that consumers last month were spending more and saving less.  They are still confused on whether we are entering a "double dip" recession or we are in the early stages of recovery.

Unfortunately, it is neither.  We entered a depression in December 2007 and have not left.  The stock market rebound and economic euphoria are identical to what we saw in the dead cat bounce in 1932. 

Lost on the media's radar is also the fact that consumers are spending more because they are no longer paying their mortgages.  Fortunately, with all Too Big Too Fail banks and Fannie/Freddie nationalized this is no longer a concern.

Until is reflected in the dollar's value.  That will continue to be measured daily by gold and silver.

Sunday, August 29, 2010

Drawing The Line

(Don't worry, don't worry, the state governments have already received just under $200 billion in bail out money since Obama took office.  They will need far more just to make payroll over the next few years, and they will get it, in addition to the money needed to cover the estimated $1-$3 trillion state government pension fund short fall)

The first actual failure will be the US Federal government when the day finally arrives when no one shows up at our debt auctions to put money into the beggar's plate.