Saturday, September 18, 2010

When Should I Buy?

Back in April during the week of the stock market highs, I wrote an article titled America Is Back: The Stock Market.  In the article I discussed the importance of tracking investor psychology and sentiment as an investing tool.

I want to discuss that topic again this weekend because I feel we are already at or closing in on another important moment of extreme sentiment.

The fundamentals for stocks, which I discuss on a daily basis, are horrible.  We received data this week showing the 19th consecutive week of investors removing capital from stock market focused mutual funds.  In addition, the month of August showed investors removing money from stock market focused ETF's.

The money is being re-allocated to bond funds.  This is viewed by some market observers as a good thing because it means there is more "cash" on the sidelines ready to invest.  The problem is that investing in bonds is not investing in cash.  Most investors are moving into funds that have an attractive yield (interest rate) which are very risky.

An example from a Bloomberg article this week:

Issuers have sold $4.4 billion of bonds tied to subprime auto loans this year, more than double the amount arranged in 2009. While sales plunged during the housing crisis of 2007 and froze after Lehman suffered the biggest bankruptcy in history, investors are now snapping up similar securities attracted by their yield.

The actual "cash" on the sidelines for mutual fund holdings today is at 3.4%This is the lowest percentage in the 60 years it has been tracked This means funds are 96.6% invested in the market. 

The American Association of Individual Investors (AAII) poll shows that 50.9% of investors are currently bullish on the stock market.  This is above the April high of 48.5% bullish.  The percentage of bears is currently at 24.3%, lower than during October 2007 (the month the market was at the all time record high) when the percentage of bears was at 25.3%.

The daily sentiment index read 83% bullish this week.  This means only 17% of investors polled felt the stock market was going lower.

What justifies this bullish outlook?  One of them is an investing tool called a P/E ratio.  This is the price of a stock divided by the future earnings.  The key word is future because analysts use earnings estimates looking 12 months in advance and their estimates show a full recovery in the economy. 

Look at some other extreme daily sentiment readings for assets this week:

Sugar: 98% bullish
Corn: 96% bullish
Oats: 96% bullish
Yen: 92% bullish
Swiss Franc : 95% bullish
Euro: 85% bullish
Silver: 93% bullish

Some assets on this list I love (silver, agriculture, Swiss franc) and others I do not.  Tracking the sentiment helps me understand when to utilize cash to add to my investment positions.

It is no secret that I love silver, but I do not like to buy it when other investors love it.  The same goes for other investments I love (gold, energy, Aussie dollar, Canadian dollar).  Of those four, energy today is the least favored in the marketplace, and therefore would be the most attractive addition to my portfolio.

As an investor I would recommended learning and studying to build your own conclusion on what the long term outlook for certain asset classes will be based on fundamentals.  THEN you can utilize both technical analysis (stock charts) and sentiment readings to determine when to add to your long term positions.

Friday, September 17, 2010

New Inventory Coming Soon

As the housing market moves into the second phase of its collapse, we received word today from the Wall Street Journal today that there is a new seller in town to add to the skyrocketing home inventory supply:

Fannie Mae and Freddie Mac

The two mortgage giants have taken back 191,000 homes through the first half of this year, double the total for all of 2009. 

They are also putting pressure on mortgage services to get the homes into foreclosure at a faster pace.  Why?  Because they understand that homes sold today will be worth far more than homes sold next year.

They are in a far different situation than the banks because they can take unlimited losses paid for by the tax payer.  In addition, the Wall Street Journal reports that, "when they take the homes back Fannie and Freddie must not only cover the utility bills and property taxes, but they are also relying on thousands of real-estate agents and contractors to rehabilitate homes, mow lawns and clean pools. Fannie took a $13 billion charge during the second quarter just on carrying costs for its properties."

Instead of allowing home prices to fall to market clearing prices, every tax payer in America must pay for the Fannie and Freddie losses every month in the attempt to keep home prices artificially high.

By paying these additional subsidy taxes it then allows American home owners to pay higher mortgages, property taxes, and insurance payments every month.

God Bless America.

Wednesday, September 15, 2010

Rethinking Home Ownership

Corelogic reported their most recent home price data this morning for the month of July.

Home prices fell in 36 states, which was twice as many states experiencing declines from the month of May.

The most recent data shows 4 million homes listed for sale on the MLS nationally.  Based on current monthly sales this is 12.5 months of inventory.

Morgan Stanley now estimates the number of bank owned/foreclosed bound homes that have yet to hit the market at 8 million.

That is an additional 8 million homes on top of the current 4 million that will be sold at distressed bank owned prices. 

This does not include the homes currently being held off the market by sellers who are currently praying for the market to recover.

CNBC reports this morning: "Home Price Double Dip Begins"

This is the most positive media network in the universe.

The following is this week's cover of TIME magazine:

This cover is far different that the once seen back in June 2005:

The public is now starting to understand that home prices are once again rolling over.

This will make it far easier for them to stop paying their mortgage and send their keys back to the bank.  They can then rent the nicer home across the street for half of what they are now paying on their current mortgage.

Soon the "stigma" that is renting will be gone.  Home buying will be for crazy people.  Then it will be time to buy.

Chart Of The Day

Good visual to show the ten year investment returns for all asset classes:

Bonds (T Bills, Long Term, Coporate)
Real Estate

Click on chart to enlarge:

Coming Retail Opportunity

The conference I attended this week was a very eye opening experience on the state of the retail sector of commercial real estate.

At the moment both banks and investors are running away from retail buildings across the board.  The is due to a number of fairly obvious reasons:

- The American consumer is retrenching due to economic pain
- Americans are borrowing less to fund their spending
- Lack of credit/financing available to purchase/refinance buildings
- As leases come due rents are being adjusted downward in price

This is a trend that is not short term and will most likely continue to accelerate over the next 2 to 3 years.

In general, banks will not lend on any building that is not stabilized.  This means a building has a certain percentage of its square feet leased with quality long term leases. (5 years or above)

For example, a retail strip with 5 stores (of equal size) has 4 of those 5 stores leased with a quality business.  If one of those stores were to leave or go out of business, the strip would now only have 3 of the 5 stores occupied.

This brings it's occupancy from 80% to 60%.  The building is now no longer stabilized, meaning no bank will lend it money to refinance AND no bank will lend a new investor funds to purchase the site.

An investor can secure this troubled asset through what is called a lease option in real estate terminology.  If they can bring in a strong tenant during the lease period, they can then secure real financing or sell the asset back into the marketplace to a much larger buyer pool.

This phenomenon, which will continue as retail deteriorates, will present tremendous opportunities for investors in the future.  The key is to understand what type of business will thrive based on the surrounding demographics, income level, etc. 

In addition, an investor must understand that we are in the early stages of a depression, and the real economic pain is ahead of us, not behind us.  Real estate owners must focus on businesses that will perform under this environment.

I will continue discussing the coming commercial real estate opportunities in great detail as we move forward.  Until then, continue to accumulate precious metals and enjoy the early stages of what may become the greatest bull market in history.

Tuesday, September 14, 2010

New Record High For Gold

Gold has smashed through to all time record highs this morning. Congratulations to those that have held on during these turbulent times. Continue to keep cash available for the pull backs that will come along the way.

Mining stocks are also exploding upward today. You haven't seen anything yet.

Monday, September 13, 2010

Retail Real Estate

I came down to Orlando on Friday for a commercial real estate conference.  I'll be down here through Wednesday so I'll do my best to update with my thoughts on the markets while I'm here.

The conference is focused on the retail sector of commercial real estate.  This may seem like the last possible event I would partake in based on my outlook on both real estate and retail.

I am probably more bearish on retail over the short term (1-2) years than just about any other investment in the world.  This is the reason I am down here studying it, because I believe prices are about to get slaughtered and this will bring investment opportunity.

All assets move through cycles, and I hope to be prepared to buy into this one as pessimism reaches it's peak.  I will discuss the highlights of the weekend and my thoughts on the retail sector moving forward when I get back home later this week.

In the meantime the markets continued to move higher today and the euphoria is beginning to creep back into the media.

During this run up over the past week corporate insiders (the people running the companies whose stocks are on the exchange) were sellers of stocks compared to buyers with a ratio of 651 to 1.

They purchased $500,000 in shares and sold $332,000,000.  Their vote of confidence in the stock market recovery should be another good sign for those still holding onto their shares.