Friday, November 8, 2013

#Tulip Bulbs & The ECB Cuts Rates

After discussing the excitement around the Twitter IPO pricing yesterday morning, the market then brought back memories of the tulip bulb mania and opened the stock at $45. It is staggering to think that we can be living through this again after what occurred in 2000 and 2008 but here we are.

In more important news for the global economy, the European Central Bank unexpectedly cut interest rates yesterday from 0.5% to 0.25%. While the ECB has trailed the Fed, Bank of Japan and Bank of England in terms of being the most insane, it appears they are ready to try and catch up. From the ECB:

"We are ready to consider all available instruments, and, in this context, we decided today to continue conducting the main refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the 6th maintenance period of 2015, more precisely on July 7, 2015."

While central banks all prepare to try and debase their currency against each, precious metals have been beaten down in price, hated and now completely forgotten. It is the dream scenario for a long term investor.

David Stockman, former US budget official and author of The Great Deformation, discusses the madness of the world we live in today:



Thursday, November 7, 2013

Welcome Back To 2000: Twitter Valuation Explodes Based On Hot Air Mania

This week the media has concentrated on the new darling Twitter Internet IPO. Twitter began the week with an IPO target price of $17 to $20. It then raised that estimate to $23 to $25 before raising it again to $26 where it will launch this morning.

Did the company see a massive growth in profits over the last 72 hours to justify the price surge? No, the CEO this morning said it was due to the number of people that recognized the Twitter brand during his road show this week. I am not making this up. It was raised solely due to hype, mania and madness.

What kind of profits can the swarms of investors that pour into the market today to buy the stock expect? None. It has no profits. This has been the new trend of IPOs this year, with 61% of companies coming to the market that have lost money in the preceding 12 months. That is the highest rate since the peak of the last tech mania in 2000.

The graphic below shows a Twitter valuation of $11 billion with no profit. That was so last week. It has now crossed $18 billion. What a show.


What are the companies doing with the money provided during the IPO? Most respond that they are paying back private equity investors that bought in early rather than invest in the expansion of operations. Information like that gets glossed over during a mania, however, as the smart money that bought in early cashes out and the masses are led to the trough for what is left.

The market excitement has moved beyond Twitter and the technology sector to sweep the entire U.S. stock market which crossed new all time record highs during yesterday's session. The Investor Intelligence bull to bear ratio is at the second highest point since the cyclical bear market rally began in March of 2009. The only higher reading occurred in April of 2011 when the market fell 22% just a few weeks later. To find a higher reading before that moment you would need to go back to October 2007 just a few weeks before the market peaked and fell over 50%.

Shiller's CAPE P/E ratio has crossed over 24 and is rapidly closing in on the 25 mark.


Hitting the 25 point is interesting because as the chart from Bespoke below shows, we can look at how money has performed over history when investing at a P/E ratio of 25 or above. While you may be lucky and catch the continued momentum in year one, a longer term investor has been slaughtered when investing at these valuation levels over a 3, 5 and 10 year period (dark blue bar below). The time to invest is when stocks are the most hated, when P/E ratios are under 10 (green bar below), which occurs at the beginning of secular bull markets (see graph again above).


The madness gets even crazier delving further into specific indexes. The top 50 companies in the Russell 2000 now have a P/E ratio over 45. This means it will take an investor 45 years to earn back the money they have invested today. That is of course unless the P/E ratio doubles again and they can sell to a greater fool tomorrow, which is what everyone is counting on.

I think the following perfectly sums up the rationality toward buying and selling the market today. We can only hope that the same fundamental reasoning used for buying today is not used on the sell side tomorrow.


h/t Bespoke, Wall Street Journal

Sternlicht On The Heroin Addiction That QE Has Become

Wednesday, November 6, 2013

U.S. Housing Affordability Falls As The Youth Remain In Their Parent's Basement

A topic reviewed often here is the negative impact on housing affordability due to rising prices combined with rising interest rates. After years of improving affordability beginning in 2008 (due to falling prices and falling interest rates), the affordability index has experienced the largest year over year decline in 25 years.


Trulia reported this week that there has been no increase in young adults moving out of their parents homes or getting jobs over the past year. The percentage of millennials living with their parents actually rose to a staggering 31.6%. The rising cost of home ownership and the inability for the youth to gain any employment traction is causing a lower level of new household formation.



Trulia also reported this week that 10.2% of all housing units are currently vacant and 53% of those vacant units are currently being held of the market as shadow inventory.

For more on the U.S. housing market see:

U.S. Housing Update: Rates Rise, Prices Fall, Pending Homes Sales Plunge

h/t Sober Look, Zero Hedge

ECRI's Achuthan Discusses The U.S. Recession

Achuthan provides excellent information on the disconnect between manufacturing surveys and actual output, plus he reviews the important change in growth/contraction cycles that began after 2008.


Sunday, November 3, 2013

U.S. Housing Update: Rates Rise, Prices Fall, Pending Home Sales Plunge

After launching higher in spectacular fashion over the past 18 months, the median sales price of an existing home in the United States hit a ceiling over the summer and has descended rapidly.


Existing home sales have hit a similar ceiling:


While new homes sales, after reaching previous depression level troughs at their most recent peak in sales, have also turned down sharply.


This slow down was due in large part to the surge in the 30 year mortgage rate seen below after the Fed whispered the possibility of tapering their QE program in May. After falling steadily for 5 straight years (which everyone assumed would continue forever), rates bottomed in May and rocket launched higher. Higher rates combined with the surge in home prices from early 2012 to mid 2013 seen above, greatly reduced the affordability for the average American (higher prices + higher mortgage rates = higher monthly payments).


With such a strong "recovery" in place in the economy you would think that rising incomes would offset rising mortgage cost taking away any affordability issues. Those that have been paying attention know that wages for the 99% have been stagnate for decades. This trend shows no signs of changing. It is the 1% that have received the wage growth and unfortunately there is only a certain number of homes one wealthy family needs or wants to purchase.


The chart above helps explain why flipping has begun to diminish at a slower rate for the super high end (red line below). With the stock market surging, the wealthy feel wealthier and they are once again ready to participate in bidding wars for the largest mansion (temporary) stock bubble equity can buy.


Do we have a gauge on what rising mortgage rates could mean on existing home sales moving forward? Yes, pending home sales have fallen 21% month over month, the largest drop since September 2001 when home owners were nervous about making a large investment for obvious reasons.

With the real homes buyers moving back to the sideline it only leaves the large investment groups to pick up the slack, and they are already purchasing 33% of all homes sold. These groups are showing signs of fatigue as their portfolios swell in size. They are beginning to compete with other investment groups, new apartment supply and their own supply for rent prices in the market. In major investor focused markets rent growth has shown signs of slowing. As they plug these new growth rates into their excel spreadsheets, they will begin to tap on the breaks for new purchases.

The built up momentum and euphoria in the market can probably propel it higher in the short term, but without a major surge in employment and wages combined with another large drop in interest rates the underlying fundamentals for the housing market remain very concerning.

The QE Conundrum Summed Up In One Minute

Peter Schiff takes one minute to provide a very quick and simple splash of reality to the CNBC studio. He briefly sums up the artificial QE world we live in today.