Saturday, May 10, 2014

U.S. Residential Real Estate Now Tracking The Historical Commercial Cycle

In the discussion below I use the term "foreign markets" as those outside the United States. I know that most of the readers here live outside the United States, but it is just easier to describe it that way.

Let's discuss how a normal real estate cycle flows, because I am seeing some interesting comparisons today between the current U.S. residential real estate market and a typical commercial real estate market. 

In a normal commercial real estate market cycle you have a downturn where everyone that did not get out in time is hurt. This occurred in the United States in 1990 and 2007. Following the downturn those that exited in time have cash available and begin making purchases. Some call this the smart money.

Once momentum begins to build in the market, institutional investors (pension funds, insurance funds, large banks, hedge funds) enter and put money to work in the sector . This is usually followed by a few mom and pop entrants, and it concludes with foreign money providing the icing on the cake. 

Foreign money enters last because there is a time lag from the Federal Reserve's easy money policy reflating assets in the United States, then having hot money reflate foreign assets, then foreign asset holders looking for a place to park their "excess cash," which is then recycled back into United States real estate. 

At the end of a commercial real estate cycle the market looks like a perfect machine. Foreign buyers usually make their purchases all cash so there appears to be limited fall-out that will occur due to interest rates rising or property price declines.

As I mentioned above, this is the normal real estate cycle for commercial real estate. What is fascinating is that since early 2012, this process has occurred in the residential real estate sector for the first time. In previous cycles, institutional money did not participate in the residential sector due to the difficulty involved in managing single family homes. 

In early 2012 institutional money entered the single family sector with force. The market found a bottom and began to gain momentum. This led to the mom and pops entering with confidence, knowing they had the green light to begin flipping properties again. More recently we have seen foreign money flood into the United States trying to diversify into an asset class that is working. 

Think about it; if you were an ultra wealthy citizen living in China and you already own 4 or 5 homes (many do), wouldn't it make since to buy number 6 in the United States to diversify? The residents in China are terrified of their domestic stock market and need another asset source to park the depreciating cash (inflation is running hot in China as the Fed exports inflation onto their shores). 

The chart below shows the quarter by quarter rise of institutional demand in the single family market (green bars), until the first quarter of this year when it fell dramatically (see Institutional Investors Pull Out Of Real Estate Market As Boomers Look To Sell). The blue line represents cash buyers, which have moved up to 42.7% of the market. The attractive markets for foreign money are experiencing the largest percentage of purchases in cash; Miami (67.1%), New York (57%), Las Vegas (52.2%), Atlanta (53.2%). 

The institutional buyers are slowing purchases while the smart money is already selling. There is no hand off during this cycle from the investment group to regular home owners because at these prices and interest rate levels home are already unaffordable (see Diana Olick Explains Housing Unaffordability).

If residential real estate follows the same historical pattern we have seen on the commercial side (which it has so far), the flippers and foreign buyers will be left holding the bag and taking the bulk of the losses. This could occur due to interest rates rising, the global economy slowing down, or asset bubbles deflating in foreign markets (real estate bubbles in Canada, Australia and China for example). The scary part is that all three of those could be in the early stages of occurring simultaneously right now. 

There are many factors that go into making a home buying decision (potential price appreciation being just one of them), but if you are thinking about getting started with a home flipping company you are probably late to the party. 

Friday, May 9, 2014

Watch What They Do - Not What They Say

Great chart this morning from Zero Hedge visually displaying how the big four central banks (Federal Reserve, European Central Bank, Bank of England and Bank of Japan) have pushed all in. The green line shows that the amount currency printed has now crossed $10 trillion. The currency they print is then used to purchase "assets" such as bonds.

The average central bank interest rate sits at 0.75%. Central banks say that the economy is recovering strongly and they are confident about both employment and economic growth. Yet the actions shown below look like we are stuck in the middle of a global depression (hint: we are).

We have also been told the unwind of these programs, which would be selling the trillions of assets back into the market to mop up the liquidity and raising interest rates back to normal levels, will cause no major economic disturbances.

My view is that the policies above are the equivalent of squeezing toothpaste from a tube. It is far more difficult to get the paste back in.

Thursday, May 8, 2014

Marc Faber: Worried About A Crisis Bigger Than 2008

Faber reviews that:

- The real economy is not recovering
- Emerging market export growth non-existent
- There are geopolitical problems
- Total debt (corporate, government, consumer) is now 30% higher than 2008 crisis
- He believes the next move for U.S. stocks and bonds is a simultaneous decline

Faber notes that no one likes cash, and it could be the most effective asset for the next six months. The CNBC host quickly dismisses this "insane" comment by saying, "I don't want to be in cash."

Jim Rickards - The Fed Has Tapered Into Weakness

Tuesday, May 6, 2014

David Tepper Makes A Typical CEO's Salary Every Few Days

The annual hedge fund income list was released this week and once again it will take your breath away. There were four hedge fund managers that made over $2 billion in income last year (that's billion with a B), and David Tepper topped the planet at $3.5 billion.

It is fascinating to me that we live in a world where someone who pushes a few key strokes on a computer throughout the year can takes home 3.5 billion dollars. Appaloosa management, Tepper's hedge fund, adds almost no value to society as a whole. He employs a measly 32 employees.

A few weeks ago there was outrage that Google's executive chairman, Eric Schmidt, took home over $100 million in annual pay last year. Google employs over 46,000 people and creates products that arguably benefit the lives of almost everyone on the planet (I feel like I use Google for just about every aspect of my life that involves technology).

I am not trying to say that David Tepper is a bad person. He is extremely charitable, and I enjoy listening to his thoughts on the financial markets when he visits CNBC. Perhaps the $3.5 billion is just a snap shot in time of how ridiculous the world has become, and I commend David Tepper for taking advantage of it.

David Einhorn Speaks With Bloomberg As Technology Stocks Burn

Excellent interview below with David Einhorn of Greenlight Capital. He reviews the discussion in the financial world around his most recent letter which I posted last week in David Einhorn On The Next Tech Bubble.

It has been a good few months for shorts as the most frothy tech stocks (Twitter, Netflix, Yelp, etc) are in complete free fall (he mentions he put his shorts on earlier this year at the top).

The second half of the interview gets real interesting when Einhorn talks about a recent dinner he had with Ben Bernanke where he was able to ask questions about Fed policy to the former chairman.

I won't spoil the entire conversation but David mentions; "it was sort of frightening because the answers weren't any better than I thought they might be."


Kyle Bass Presentation On The Global Financial Markets

Earlier this year, Kyle Bass gave investors at Hayman Capital Management an overview of what is taking place around the world and what to expect next. He reviewed:

- Tapering In The United States
- An Update On The Coming Japanese Collapse
- Chinese Debt Crisis
- Emerging Market Bonds (specifically where he is bullish)
- Canada Home Prices

I would highly recommend taking the time to watch the presentation which you can view here.

The slides and notes are below:

Monday, May 5, 2014

How The Free Market Will Soon Destroy The College Bubble

We are in the very early stages of the college education bubble popping, and the snowflake that ultimately causes the avalanche will likely be the free market doing its job. From Bloomberg this afternoon: "The $10,000 Bachelor's Degree Arrives"

Today in Washington, the disruption of higher ed will take another step with the announcement of the first nationally available $10,000 bachelor’s degree. That’s $10,000 for the whole degree, not per year. It will be offered by College for America, an online operation of Southern New Hampshire University. The college keeps its costs down by offering classes online.

College for America doesn’t teach courses with credit hours. It teaches competencies, and it tests them using projects that resemble work that employees would be called on to do in their real lives. The first bachelor’s degrees to be offered are in health-care management and communications.

The school’s online degree won’t solve the problem of college costs for everyone, but the trend toward teaching practical skills may well trickle up. Says LeBlanc: “There are a lot of these programs coming. There are already a fair number of competency-based programs in existence, thirtyish. There are 130 in development and hundreds being discussed. This is a wave. This is coming.”

This will start as a trickle and turn into a tsunami. There will be big money made shorting anything and everything involved with the current higher education structure. That includes student housing, student loans or the salary of your local college professor. It's going to be a massacre.

If you have a child about to enter college I would think long and hard about writing that $100,000 check. You may get a 70% off discount by waiting just a few years.

Sunday, May 4, 2014

Opportunity In The Uranium Sector

We just recently passed the three year anniversary for the terrible Fukushima nuclear disaster that occurred in Japan on March 11, 2011.

Following that disaster, Japan took their entire nuclear power fleet offline (similar shut downs occurred in other plants around the world) and crushed the global demand for uranium; the key resource used in nuclear power.

It has been a steady three year decline in the price of uranium with the price falling to slightly above $30 per pound as we ended the week.

Uranium mining stocks have shared the pain of the price decline. The largest ETF tracking the sector (URA) has fallen from 65 in February 2011 to 15 this past Friday.

Cameco, one of the largest publicly traded uranium mining companies in the world, recently stated that it takes the average producer in the industry a uranium price of $70 per pound to cover the cost of capital and operating costs. Many of the marginal mines have closed since Fukushima hit, with four major mines shutting down in just the last few months.

So what could possibly be attractive about this sector? We may be at or very near the point of maximum pain and suffering, which historically marks the most favorable entry point for investors.

The world currently burns 175 million pounds of uranium through the 435 nuclear power plants operating globally. There are only 150 million pounds of uranium added annually through current mine production. That leaves a short fall of 25 million pounds based on the current demand.

Japan is currently in discussions regarding solutions to their energy needs, which many believe will involve turning on some of the dormant nuclear facilities. They have been forced to import a large part of their domestic energy needs since 2011, which has caused their trade deficit to move massively into the red. This has been an enormous burden heaped onto an already fragile economy (something we have reviewed in the past in relation to their currency and bond markets).

Europe is currently watching in terror as Russia is threatening to cut off a large portion of their energy needs. Adding additional nuclear power in Europe would be a huge step toward removing Russian dependence.

China, India, Korea and Russia currently have 70 new reactors under construction. The United States has 3 under construction with 9 more in the planning stage.

All these facilities will need to be fed tens of millions of pounds of uranium to operate at a time when the world is already producing 25 million pounds less than annual demand.

Due to natural supply and demand laws the cost of uranium must rise to a level necessary for new mines to open and provide this additional production (no mine will begin construction with the guarantee in place they will lose money). This sets up an extremely favorable environment for the price of uranium and the producers already in place to capture the upward price movement in the years ahead. 

The question, as always, will be when this actually occurs. Can the prices remain depressed for another 12 months? Of course. Prices only move when the market locates the imbalance and acts on it. However, if you are an investor that enjoys entering markets before the crowd arrives, the uranium sector provides an incredibly attractive entry point today.

h/t King World News, The Energy Report