Category: Invest with Alex

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Timing The Real Estate Market Crash

So, do you want to know when the real estate market will start heading south, way south? Read on.

Las-vegas-real-estate-investwithalex

As of right now,  the real estate market in the US is anything but clear. Here is just a few articles from today’s paper to prove my point.

 

Confusing at best, isn’t it?

The reason real estate data is all over the place is because the real estate market is undergoing a topping process. As I have mentioned earlier,  that is the way the bear market in anything works. It sucks investors back in before slamming the door and resuming it’s decline. Once again, this stage of the decline should at least 2X the magnitude of the previous one between 2007-2011.

The million dollar question is….when will it happen? Thanks to our friends at Doctor Housing Bubble we might have an answer.

They have correctly identified Las Vegas Real Estate Market as the one to watch for the first signs that the overall (nationwide) real estate market is about to roll over and start it’s decline. Here is why…

las-vegas-housing-market-invest-with-alex

Reason #1: Las Vegas market has seen the fastest real estate appreciation in the nation over the last year. Up 34% in just the last year alone. That is a stunning pace of appreciation.

Reason #2: The majority of buyers in the Las Vegas market are investors/speculators.  The number is estimated to be at 50-70%.   With about 60% of buyers paying in cash.

las-vegas-home-buyers-with-cash-investwithalex

What does it all mean? 

Las Vegas market is experiencing a speculator frenzy with 50-70% in cash buying from investors. There are no fundamental reasons for that to happen in Las Vegas. One can argue that real estate there was especially depressed but I don’t find that argument valid based on the median price and median income at the time of 2010-11 bottom.  Plus, there is no housing shortage.

Either way you slice it,  Las Vegas real estate market is driven by pure speculation and hot money. As such, it could be the first market to cool down and reverse itself  -OR-  it could just blow up.  

Therefore,  if you are interested in timing the real estate market with great precision it might be a good idea to start watching Las Vegas real estate like a hawk.   

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Jim Rogers On Gold

Daily Ticker Writes: Jim Rogers Forecasts a Drop to $900

gold2 investwithalex

Commodities investor Jim Rogers tells The Daily Ticker that gold, having lost its luster as a safe haven, could drop to $900 or $1,000 in the next 1-2 years. Longer term, he has a very different forecast. Gold will soar to “well beyond $1,900 an ounce,” topping its record $1,920 high reached in September 2011, says Rogers, author of Street Smarts: Adventures on the Road and in the Markets. The reason: “massive currency debasement” around the world. “Every major central bank in the world is printing a lot of money plus war, chaos, riots in the street, governments failing,” says Rogers.

Despite that forecast, Rogers warns investments not to consider gold – or any other investment — safe. “I would never use the word ‘safe’ when I’m speaking about investing.”

There are only a few investors that I listen to when they speak. Jim Rogers is one of them. A brilliant and very interesting guy.  So, when he says something you better listen. I highly recommend that you click on the link and listen what he has to say. The video is just 2 minutes long. 

My stock market timing work kind of confirms his thesis on gold. I already talked about gold in one of my previous posts CLICK HERE and the fact that I don’t really understand it or know how to value it properly.

Jim mentions that he anticipates gold to decline further over the next few years to shake out the bulls before resuming its bull market due to currency debasement and inflation. My work confirms this as a highly probably scenario. 

As the markets and the economy decline over the next few years in a deflationary environment, so should the gold.  As we bottom in 2016 and begin the inflation cycle I talked about before, gold should start appreciating. Perhaps significantly. Just my two cents. 

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Buffett Can’t Find Any Stocks

Reuters Writes: Buffett lauds Bernanke but laments lack of investment bargains

buffett investwithalex

(Reuters) – Warren Buffett said on Thursday he would recommend reappointing Ben Bernanke as Federal Reserve chairman, while adding that low interest rates have inflated asset values and complicated his hunt for investments at his company Berkshire Hathaway Inc.

The billionaire investor spoke one day after the central bank surprised investors by postponing its expected wind-down of monetary stimulus, which has in five years more than tripled the Fed’s balance sheet to above $3.6 trillion.

“Since the panic of five years ago, he’s done a terrific job,” Buffett said on CNBC television in a joint interview with Brian Moynihan, chief executive of Bank of America Corp.

Asked if he would reappoint Bernanke when his term expires, Buffett said: “That’s what I would do.”

Nevertheless, at an event later Thursday afternoon at Georgetown University, Buffett said that the Fed’s eventual exit from its monthly bond-buying program will carry unforeseen risks.

“We are in an experiment which hasn’t really been tried before,” he said, adding that “buying securities is usually easier than selling securities.”

Read The Rest Of The Article Here

As the article indicates Mr. Buffett  claims not to be able to find any bargains or value stocks. I second that sentiment.   As of right now I am unable to find any worthwhile value stocks at all. There are some special situations here and there, but overall everything is either fairly priced or overpriced.

That in itself is not necessary a problem.  It is the nature of the stock market to cycle up and down to provide trading opportunities. However, when you combine the current macro economic backdrop with the fact that most stocks are too expensive, the situation is not pretty.

Can they get even more expensive? Of course they can, but as my stock market timing work indicates that shouldn’t last for long. The stock market is in the topping process and when complete we should receive a number of confirmations that the bear market is back. Once again, I don’t believe we have to wait too much longer now.  

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Stock Market Update, Sept 19th, 2013

Sept 19 2013 chart

 

I continue to advice to maintain a long position for the time being, but be ready to switch direction at a moments notice.  

Even though I am “Bear” anticipating the market to decline significantly over the next few years, I do have to admit the chart and other technical indicators look strong here. This is a very interesting time. Will the market go on to set a new high or will it be unable to push much higher from here? Will it pause or reverse here? 

All we can do for now is maintain our long position and wait for a confirmation that the bear market is here. Are we there yet or will March of 2014 (as I have mentioned earlier) be the actual top? The market did open a bunch of gaps at 15,300 that it will have to go down in order to close, but at least for now the short term picture looks fairly good here.  There is no need to fight that. 

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Reality Of Today’s FED Move

Bloomberg Writes: The Fed’s ‘No Taper’ Sparks a Trading Frenzy

 

S&P 500 5-minute

The Federal Reserve surprised nearly everyone today when its Open Market Committee announced at 2 p.m. that it would not taper its $85 billion in monthly bond purchases because it is concerned about weakness in the economy. The announcement led to an across-the-board rally as investors hurried to plow money into stocks and commodities.

The market reaction was instantaneous: According to data off my Bloomberg terminal, between 1:59 p.m. and 2:00 p.m., the Dow Jones Industrial Average jumped 141 points, from 15,485 to 15,626. Over the next two and a half hours, the Dow added another 50 points to close up 147 points on the day.

Read The Rest Of The Article Here 

On a more serious note, while the market and most people celebrate I see it from a different perspective. While most market participants see it as “The Fed will not taper $85 Billion per month stimulus” I see it as “The Fed CANNOT taper $85 Billion per month stimulus”. 

There is a significant difference between these two statements. You see, Ben Bernanke and the Fed understand that if they stop the QE bond purchasing program the following things will happen within a short period of time. 

  • Interest rates will shoot up. 
  • Dollar will strengthen. 
  • Deflation will finally be evident. 
  • Stock market will collapse. 
  • Real estate market and auto sales will collapse. 
  • The US Economy will tank. 

They do not want to allow that to happen for obvious reasons. However, the laws of physics cannot be bypassed. Sooner or later all of the things above will happen irregardless of what the Fed does. 

I do find it troubling that the market only went up 150 points or so. That is a fairly weak performance considering what has happened. In no uncertain terms the FED told everyone that it will keep this credit financed speculation party going for as long as possible. 

The biggest mistake I think everyone is making is the fact that they believe the FED has control of the markets. That is not even close to reality. They do not control anything. Don’t be surprised if the market reverses tomorrow and begins its next let down. 

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How The Stock Market Really Works (PART 1)

3d tunnel - invest with alex

 

People have a lot of misconceptions about how the stock market works. The primary two are…

  1. That the stock market is random and
  2. News, events, policy, governments, etc…. drive the stock market.

After in depth study of the market over the last 15 years, nothing could be further from the truth. The market is NOT random and news/events, etc… have no impact on the overall trajectory of the stock market. As a matter of fact, it is the market that drives events and not the other way around.

So, how does the market work? The stock market is a lot more complicated than most people believe. You see, most people view it as a two dimensional (2-D) representation of time moving up and down over time. It is a very simplistic view to take, but that’s what everyone does.  

However, the market is A LOT more complicated than that. Before I tell you what I mean, allow me to bring your attention to something else for a second. I want you to realize that Mother Nature does not produce 2-D systems. Nothing in nature is 2-D while everything in nature is at least 3 Dimensional (3-D). Look around you. Everything in the physical realm, from planets to atoms exists in 3-D.

What does this have to do with the stock market? Everything.

The stock market is NOT a 2-D environment. It exists in at least a 3 Dimensional environment. It is our human mind that cannot comprehend that and as such forces the stock market chart into the 2-D (Time/Price) chart.

Let me give you an example. Take a look at the 3-D tunnel above. Imagine a snake moving away from you by hugging the walls of the tunnel. Well, that is a 3-D movement. However, if you take this same tunnel and turn it so you face it head on, the ONLY movement you will see is UP and DOWN 2-D movements within the tunnel.

That is exactly what we see on the stock market chart. Yet, the market is a lot more complicated. Not only does it have up and down movements, it moves sideways (in volume) as well.  When one understand that, one can take financial/market analysis to the next level and predict the timing of the stock market moves mathematically with great accuracy.

This concludes Part 1 of How The Stock Market Really Works. 

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Inflation or Deflation. What’s Next For The US?

Bloomberg Writes: Japanese Ask, What’s Wrong With a Little Deflation?

 kondratieff-wave investwithalex

As Haruhiko Kuroda tries to spur Japan (JGDPAGDP)’s inflation rate, he faces a worrying question: What if his Bank of Japan predecessor was right about why he will fail?

In June 2011, then-BOJ Governor Masaaki Shirakawa faced extreme pressure to double the monetary base, a step Kuroda took just days after replacing him in March. When Shirakawa, a University of Chicago-trained economist, was asked why he’d refused to budge, he offered a surprising excuse: Japan’s aging population, whose fixed incomes would be eaten away by rising prices. Politicians thought the rationale was a copout. Shinzo Abe’s first act as prime minister was to dump Shirakawa.

 “The only easy part is starting to print the money because it does not hurt anyone for the first year,” Schulz says. “But after that, when prices start to go up, it really depends on the view at that time: Will people only see the higher costs, or will they see the brighter future that the government is selling with its money? If they don’t, a turn in public opinion will stop the BOJ before expectations have changed enough to get the economy on an inflationary track.” Kuroda could yet prove his predecessor wrong, but he’s going to need help from his prime minister — and soon.

Read The Rest Of The Article Here

A superb article on deflation and I definitely recommend reading it in full.  

I have been a proponent that the US has been in a deflationary environment since at least the early 2000’s. I know there are a lot of people running around screaming inflation, but we must first define what inflation and deflation is. While there are many definitions, mine is …..Inflation is expansion of credit, while deflation is contraction of credit. Simple as that.

The reason most people believe we are experiencing or will experience inflation and/or hyperinflation is because of FED’s massive infusion of credit into the system over the last 10 years. Without it, we would have already seen concrete evidence of deflation all over the place.

Here is the situation. Deflation is destruction of credit and subsequent decline of prices due to defaults, overcapacity and the self feeding trend it generates. We have already started the process of deflation in two very important areas as % of GDP. Financial and real estate sector in both 2000-2003 and 2007-2009.

However, due to the FED’s crazy insistence on inflation they did paper over any sign of deflation by infusing massive amounts of credit and money supply into the US Financial system. What you have to understand is that such a move didn’t fix anything, it only made things worse and the upcoming recession more severe. Now with velocity of bailout money slowing down, more defaults and deflation is unavoidable.

That is where we find ourselves today. So, will the US experience a Japan style deflation? Yes and No. I will talk about it in more detail in my future writings.  

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Why Did Larry Summers Really Back Out From FED Chairman Role

Reuters Writes:  Dollar slips, bonds & shares rally as Summers drops out

BenHelicopter Investwithalex

SYDNEY (Reuters) – The U.S. dollar slid while bonds and shares rallied in Asia on Monday after Lawrence Summers dropped from the race to be head of the U.S. Federal Reserve.

Investors wagered that Fed policy would stay easier for longer under the other main candidate, Janet Yellen.

The surprise news comes just before the central bank meets on Tuesday and Wednesday to decide when and by how much to scale back its monthly asset purchases from the current pace of $85 billion.

Markets had perceived Summers as less wedded to aggressive policies such as quantitative easing and more likely to scale it back quicker than the more dovish Yellen, who is currently second in command at the Fed.

Read The Rest Of The Article Here

Why did Larry Summers really drop out?  Do you think it was because he was afraid of the confirmation fight? Guys  like Summers are rarely impacted or afraid of confirmation committees or pressures associated with holding such an office.

Here is what I believe the real reason is. You see, as opposed to Mr. Bernanke who is an economic theoretician working with hypothetical economic models to drive US Monetary Policy,  Mr. Summers is a market participant closely familiar with how the real world works. I believe Mr. Summers clearly understands where we are in the economic cycle and this credit infused massive financial bubble. He know what is coming over the next few years.  

Simply put, he doesn’t want to be a captain of the Titanic (that is the US Economy) when it sinks and then be blamed for it.  I believe Mr. Summers has enough common sense to understand that the monetary policy US Fed has instituted over the last decade cannot continue for much longer. When it ends (and it will) the markets and the US Economy will suffer though a deep recession or worse on both the main/wall street.  Would you want to be in charge of a sinking ship, no matter how prestigious or powerful the job is?  I know I wouldn’t.

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DOW Jones Reshuffling. Does It Make A Difference?

BusinessWeek Writes: How New Entrants Will Swing the Dow

 wall-street-bull-investwithalex

The venerable Dow Jones Industrial Average just announced its biggest rejiggering in some time: booting components Alcoa (AA), Bank of America (BAC), andHewlett-Packard (HPQ) to induct Goldman Sachs (GS), Visa (V), and Nike (NKE)into its elite group of 30. Prepare yourselves for a very different blue-chip index.

Read The Rest Of The Article Here.

Does this matter? From a trading perspective the answer is most definitely NO. The Dow Jones average will experience no deviation from its original trading pattern due to these changes. It will continue to perform as if there was no change. However, I do want to bring your attention so something interesting.

Please note that we have two huge Finance conglomerates coming into the index (Visa/Goldman Sachs).  What does that mean? It is simply another confirmation that the Financial sector is now the largest sector of the US economy as the % of GDP.

Is that good or bad? Historically speaking that is really bad. If we study history we soon learn that when any given society shifted from production to money shuffling (as the US has done in a big way over the last 2 decades), it always ends badly for the Nation in question. Will this be the case for the US as well? I am afraid so. 

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Why The USA Housing Market Is About To Collapse

(Quick Note:  Dear reader….. I can drop a substantial amount of economic and statistical data on you to support the points below. However, if past is any indicator any such economic data would put most readers to sleep within 10 second.  Plus, a volume of data/analysis can be published in regards to every single point below. As such, I offer only a quick summary and my conclusion for your reference.   Should you require any additional information about the thesis below, please contact me directly. )

housing bubble

 

Yes, I called it perfectly in 2006-2007 and now I am saying that it is not over. 

Before we can understand where we are now and where we are going in the future we must understand where we came from. The Real Estate run up that we have experienced between 1997-2007 has no historical  precedent.  Real estate data going all the way back to 1790 clearly shows that the US housing market basically appreciated at the rate of inflation.  Yes, there were some bubbles and substantial declines, but overall, appreciation at the rate of inflation is an appropriate way to look at the US real estate sector.

real estate 1 investwithalex

 

A QUICK HISTORY LESSON:

All of that changed in 1997 when Bill Clinton signed The Taxpayer Relief Act into law, basically allowing $250,000 in tax free capital gains in real estate.  While real estate was already appreciating at a good clip at that time, that law added fire to the trend. 

Later,  fearing significant economic slowdown in 2002-2003 the Bush administration added a huge amount of jet fuel to the Real Estate Bubble by cutting interest rates and making mortgage finance available to everyone (even to the dead people).  As people used to say, if you can fog a mirror you can get a mortgage. Of course, all of that led to the largest finance bubble in the history of mankind that “kind of” melted down in 2007-2009. I say “kind of” because most of those excesses are still in the financial system and will have to be worked through in the future.  

 

WHERE ARE WE NOW?

Issue #1: US Home Ownership Rate Is Plunging

On historical basis, home ownership rate in the US is in free fall. Take a look at the chart. I think it speaks for itself.  

homeowership-rate-investwithalex 

Issue #2: Real Estate Affordability Is Plunging

Take a look at the chart as it speaks for itself. The affordability index is in free fall as well. Most likely due to higher interest rates and rising prices. 

Housing Affordability Index

 

Issue #3: Interest Rates Are Going Up             

The trend has shifted up and the 10-year rate is up 100% over the last 12 months. I gave detailed interest rate analysis here. Please take a look here.

 

Issue #4: US Economy & The Stock Market Is About To Turn Down (Big Time)

Please read “The Long Awaited US Stock Market Decline Is Likely Here” as to why.

 

Issue #5: Who Is Buying All Of These Properties For Cash Today?

Chinese buyers, hedge funds, banks themselves, investors, speculators, etc…..  Who cares!!! Remember all those Japanese investors buying everything they could in California and Hawaii in the late 1980’s. I wonder how that turned out for them.

On a more serious note, notice that I didn’t say Average American Family. That is the only category that we should track if we want to accurately predict the future trend in the US Real Estate market. Every other category is irrelevant over the long run.  And guess what? They are not buying.  See the charts above. 

 

Issue #6: Bear Market In Real Estate (sucks people back in)

As I have said here before (US Real Estate At A Turning Point), this is how the bear market works. This is the stage #2 bounce, before the big decline (stage #3).  The bear market tends to suck people back in, offer them perceived safety and a high return before slamming the door, ripping their head off, drinking their blood and taking all of their money.  The US Real Estate market is topping in Stage #2 run up here. That is why you are seeing so many divergences. The market should turn down soon. Beware.  

 

FUTURE OF REAL ESTATE:

Real estate is not made of Gold.  There is a tremendous amount of land available in California, Florida and all over the US.  There is no housing shortage. As such, expect real estate to decline significantly in order to revert back to its natural inflation adjusted mean. It might take a few years, it might be different for various cities, but one way or another the market will get there.

BubbleBurst investwithalex

 

HOW FAR DOWN?

Let’s do very simple math for the San Diego market.  It doesn’t have to be exact for our purposes.

Setup:

  • San Diego Median Family Income: $61,500
  • As Per Various Financial Guidelines Families Shouldn’t Spend More Than 30% Of Their Income On Housing.  That means a $1,500/monthly payment.
  • Median Home Price in San Diego: $500,000 (pushing that level again as per Trulia.com)
  • Interest Rates: 30 Year Mortgage 4.72% (Rates as of 9/4/2013) 

With such fundamental input variables median house value should be $290,000 -OR – A 42% DECLINE     ($1,500x360month@4.72%)

What if interest rates go to 7% over the next 5 years, which can easily happen? 

The fundamental value of the median house drops further to $225,000 -OR- A 55% DECLINE

Also, don’t forget that markets oftentimes overshoot to the bottom, just as they set blow off tops. In such a case I wouldn’t be surprised to see a median price of $150,000- 200K -OR- A 70%-60% DECLINE

You say impossible….. I say study financial markets. Nothing is impossible. 

Now, I understand and agree that there are various market forces at play that make the picture a lot more complicated. Interest rates, timing, mortgage finance, cash buyers, the FED, foreign buyers, speculation, location, supply/demand, etc….    However, fundamentals will always prevail over time. Everything else is just temporary bullshit.

 

ADVICE: 

Your house is not an investment. Don’t be confused. It is the place you live and raise your family. If you are happy with your house, have a fixed interest rate, can afford your monthly payments and don’t care if your house depreciates in value, I would stay put.

If you find yourself in a contrary situation……..I would consider various options. 

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