Friday, April 8, 2011

$40 Silver

$40 silver was breached in the early trading hours this morning.  Next stop is the all time record high of $50 set back in 1980 when the Hunt Brothers cornered the silver market.

$50 will mark the point of phase 2 for the silver market, the optimism phase, when the first of the public will begin to enter.  Phase 3 will be the mania phase when the US is closer to a complete run in the market on our government debt, (just like Greece, Ireland, and now Portugal) with only the Federal Reserve remaining as a buyer.

Where will the final dollar value of silver top out?  It is impossible to say, with only a few hundred million ounces on the market available to purchase, and trillions of paper currency being printed around the world every year, the game of musical chairs will be very interesting.  As always, prepare for massive pull backs along the way.

Wednesday, April 6, 2011

United States Of Greece?

Helpful graph below to show how the bankrupt U.S. stands next to the bankrupt Greece.  (Hint: The U.S. is in far worse shape)


Oh, I forgot to mention, the bar for Greece above includes all of their local and municipal budgets, where the U.S. figure does not. (Meaning it would be even more ugly for the U.S. if that debt was included)

Why have you not heard about the U.S. fiscal crisis the way you have heard about Greece?  We have a magic tool called a printing press to purchase our debt, and they do not.

In other news, gold exploded up to an all time record high this afternoon while silver is closing in on $40.

Portugal Death Watch Is Over

Because the funeral has begun.

We've been running the Greece/Ireland and now Portugal death watch since the European crisis began 1 year ago.

With Greece and Ireland accepting their bail outs during 2010, the death watch and spotlight has been on Portugal through all of 2011. 

Week after week we heard riveting speeches by Portugese leaders across the board who told the world that their balance sheet was sound, and they would not need help from the EU and IMF.

The bond market, of course, paid no attention to the non-sense as it heard the same exact rhetoric from Greece and Ireland last year.

Things changed only hours ago when the Portugese Finance Minister said

"It is necessary to refer to available funding mechanisms in the European framework".

They have taken out the white flag.  The Portugese bail out has officially begun.

Next up will be Spain, which is twice as large as Greece, Ireland, and Portugal combined.  If the first three bail outs can be compared to Bear Stears, Countrywide, and Indymac during the US financial crisis, Spain is the equivalent of Lehman Brothers.  It will be the first true test for the market and will most likely arrive before year end.

Buckle up, because after Spain falls the bond market will begin to eat away at Japan, the UK, and finally the U.S. of A.  All losses will be papered over with a printing press, and the final price for gold and silver at the peak of the mania years from now will be truly staggering.

Tuesday, April 5, 2011

The Future Documentary

Erskin Bowles, member of the Senate Budget Committee, sums up what everyone already knows: The next major financial crisis is coming and we know exactly how and why it will arrive.

While nothing will ever change until we reach the point of crisis, the following clip will be an excellent addition to the American economy collapse documentary that will be created a few years from now:

Monday, April 4, 2011

60 Minutes: Fraudclosure

Last night on 60 minutes America met the Fraudclosure crisis.  I began talking about this topic last summer when news broke that banks were foreclosing on homes when they did not have title to the properties.

Out of the 48 million mortgage holders in our country, 11 million are currently underwater, meaning they owe more than the home is worth.

After watching this clip last night, many of those millions will second guess whether they should send their next mortgage payment in the mail (thus throwing money away).  Some may decide it would be easier to live for free for what is now an average of 537 days before homes are foreclosed on.

What this means for home prices?  I'll leave that up to your imagination.

Sunday, April 3, 2011

Commercial Real Estate 2011 And Beyond

I track every major commercial real estate publication in the country, and the psychology within the marketplace is truly fascinating.  While I love reading book after book on market history that discuss case studies of the madness of crowds, there is nothing better than to witness it firsthand and wonder how historians will document our current time in relation to the tulip bulb, south sea, dot.com, and real estate manias of the past.

If you were to pick up and read all of this months commercial real estate publications,  you would believe we are currently in the greatest real estate buying opportunity in history.

I am here as part of the small minority to discuss why it is not. (yet)

In 2009 we could look ahead and see $1.2 trillion in commercial real estate loans maturing (needing to be refinanced) between 2010 and 2013.  The coming collapse was crystal clear after people witnessed the residential market's attempt to refinance short term teaser loans that were underwater.  The graph below shows the loan maturity schedule during the deadly 2010 to 2013 period.



However, that great collapse and bargain buying opportunity has not materialized. (yet)  Why not?

3 words: Extend, Pretend, and Pray

The banking system understood that they could not withstand this tsunami smashing on their shores based on how they were capitalized.  The vast majority of commercial loans, as seen by the green in the bar graph above, are held by smaller banks.

The banks have developed all sorts of tools in order to try and diminish the losses on their balance sheet and minimize the write downs.  If a bank has to write down more in losses than the reserves they hold, the FDIC arrives on a Friday and closes their doors.

One tool they have used to reduce their reserves needed is to divide the loans into performing and non-performing loans.  For example, if an office is 30% vacant and 70% occupied, with sleight of hand, they divide this into two loans on their balance sheet.  One is 70% with monthly cash flows covering the debt service.  The other is now a new 30% loan that is "non performing" allowing them to only need reserves to cover the 30% loan.

They are extending loan terms to borrowers, reducing interest rates, and coming up with any creative way possible to keep the loans performing.

As an investor you must see through this smoky haze and look at the fundamental value of properties.  Prices based on the current cash flow and operating income of these buildings have fallen by 43% from the peak.

However, these properties are not yet hitting the market and selling at these values.  Investors today are overpaying because they cannot see the hidden shadow inventory waiting on the zombie bank books.

The tsunami is hitting as we speak.  There has just been a temporary wall put in place to hold back the water.  As you can see above we have 3 more years of massive loan resets ahead of us.  The pressure will continue to build and build behind this wall as we move forward.

As banks pray that property prices will rise again to bail them out, the opposite is happening even with the misplaced euphoria in the market.



Commercial real estate prices are down 4.3% from a year ago, and 43% from the peak.

The vacancy rate in the US for
           office space is 16.5%.
           industrial space is 14.2%.
           retail space is 13%.

The delinquency rate for CDO's (packaged loans) rose to 14.6% in February.

The banks are zombies.  They operate with loans on their portfolio that are worth less than the capital they have on hand.  They are on life support.

Intelligent investors today are waiting in the shadows for the real deals to hit the market.  At some point between now and 2014 these properties will enter the market.  I cannot tell you when they will arrive and as an investor all you can do is get yourself as prepared as possible for the buying opportunity.  The patient lion who waits in the brush today will soon have the chance to eat its prey at its most vulnerable point.



h/t James Quinn

Are Stocks Cheap Today?

The chart below shows the Q ratio, which is another tool to measure the price of stocks in regards to being overvalued or undervalued.  The chart shows points of extreme undervaluation (1948, 1982), which coincided with the beginning of the next major bull market in stocks.  These points are usually when investors also have the most bearish sentiment.



As you can see by the chart above, the only time stocks were more expensive in history was during the few years of the dot com mania.

Stocks are currently more expensive than the peak of the stock market bubble in 1929, just prior to the great crash and great depression.

Can stocks go higher from here?

Absolutely they can.

Do I want any part of the market?

No thank you. I would rather sit on the side lines, watch the mania unfold and wait for stocks to become inexpensive, which they will again, just as sure as the ocean will go back out to sea.