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Time To Short Chinese and Hong Kong Developers?

I would stay out of this trade unless you are there on the ground, in either China or Hong Kong, involved in the industry and have a good pulse on timing. There is no doubt that China/HK are in a massive property development, credit and shadow banking bubble that will eventually blow sky high. Yet, to get the timing right is always incredibly hard. Especially, when you have the Chinese government willing to go to an extent that they have done thus far. Too much risk, very limited upside. 

Plus, there are plenty of short opportunities here in the US. As a matter of fact, it’s getting close to short sellers paradise. FB, GOOG, TSLA, TWTR and hundreds of other stocks are selling at incredibly high valuations. Not that dissimilar to 2000 top (Yeah, I know….it’s different this time). When the bear market of 2014-2017 starts, many of the speculative stocks will easily decline 50-80%. Much better than trying to squeeze 30-40% out of highly speculative Chinese developers.

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Time To Short Chinese and Hong Kong Developers?  Google

Short Sellers Target Chinese Developers as Rout Deepens

Stock traders have doubled bearish bets against some of the biggest Chinese developers amid growing concern that a weaker real-estate market will curb property sales just as borrowing costs surge.

Short interest in Evergrande Real Estate Group Ltd. (3333), the nation’s fourth-largest developer by market value, was at 8.4 percent of shares outstanding on March 17, up from 3.2 percent a year ago, according to data compiled by Bloomberg and Markit Group Ltd. It touched a record 8.6 percent on March 4. Wagers against Guangzhou R&F Properties Co. (2777) and Agile Property Holdings Ltd. (3383) have both reached the highest since December 2012.

Investors are bracing for losses as lenders pull back from the industry and local governments take steps to rein in home values in the second-largest economy. Yields on the dollar debt of Evergrande and Agile surged this week as a closely-held developer with 3.5 billion yuan ($566 million) of debt collapsed, while data showed property prices in some of China’s largest cities rose last month at the slowest pace since 2012.

“I see more downside in the share prices,” said Peter Elston, the Singapore-based head of Asia-Pacific strategy at Aberdeen Asset Management Plc, which oversees about $321 billion. “When property companies get into trouble, generally the weak companies start to get into trouble first. If property price weakness starts to become more pronounced, that’s going to impact the broader market.”

Defaults Spread

The Hang Seng China Enterprises Index added 0.2 percent at the close in Hong Kong. Evergrande shares fell 1.8 percent and Agile rose 0.2 percent. The Shanghai Composite Index slipped 0.2 percent. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. rose 1 percent to 98.18 yesterday.

The collapse of Zhejiang Xingrun Real Estate Co. emerged less than two weeks after the first on-shore bond default by a Chinese company. Shanghai Chaori Solar Energy Science & Technology Co.’s missed coupon payment on March 7 may have been China’s “Bear Stearns moment,” prompting investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, according to Bank of America Corp.

Evergrande’s dollar bonds fell yesterday, sending the yield to 10.86 percent, the highest level on record, DBS Bank Ltd. prices show. Short interest in Guangzhou R&F, a developer based in the southern Chinese city, has surged to 7.3 percent from 3.3 percent a year ago. The company’s shares fell to their lowest level since October 2012 on March 17.

Bond Yields

Agile Property’s short interest increased to 2.3 percent from 1.3 percent a year ago. Shares have tumbled 55 percent from a high in January 2013. Yields on its February 2017 notes jumped 20 basis points to 7.46 percent yesterday, the highest since they were sold last month, according to Australia & New Zealand Banking Group Ltd. prices.

“The market is concerned about the financial risks of the property industry,” Chen Li, a China equity strategist at UBS AG who has an underweight rating on the property industry, said in a phone interview yesterday. “Some investors are betting that some developers would have credit defaults and financing difficulty as homes sales are slowing and mortgage rates are rising.”

An Evergrande spokesman said the company can’t comment before earnings. An Agile spokesman declined to comment. Two phone calls to Guangzhou R&F’s investment relations officer Vanessa Wang weren’t answered.

Stock Valuations

Recent declines mean Chinese property stocks are approaching attractive levels, according to Calibre Asset Management Ltd. The Shanghai Property Index fell 10 percent this year through yesterday, sending the gauge’s valuation to 1.1 times net assets, the lowest since Bloomberg began tracking the data in 1998.

“As we rely on fund managers to time the market in the long run, recent conversations indicate they are looking at buying,” Norman Chan, the Hong Kong-based head of investment at Calibre Asset Management, said by phone. “I suspect in a big down day, none of them will want to be a hero, but the current level seems to be the level they will start considering.”

History also shows mistiming bets on Chinese real-estate companies can burn short sellers, said John-Paul Smith, a global emerging-market equities strategist at Deutsche Bank AG.

Short interest in Guangzhou R&F reached a record 19.9 percent on July 30, 2012. Shares surged 48 percent in the next six months. Agile climbed 13 percent four months after bearish wagers rose to a record 9.5 percent on March 13, 2012.

Significant Downside

“If you remember in 2012, a lot of funds shorted those stocks and were very badly burnt,” Smith said by phone. “Fundamentally, I would be fairly negative. I would be very hesitant to recommend people to step in and short them as timing is always very difficult with these things.”

The default of Zhejiang Xingrun may signal difficult times ahead for smaller Chinese developers, which face a “rapidly deteriorating” credit environment, uncertain sales outlook and intensifying competition, Standard & Poor’s Ratings Services said yesterday.

“We think there’s a significant downside in this sector,” said Samuel Le Cornu, who helps oversee $1 billion at Macquarie Investment Management. “We haven’t bought anything for the last five years and I can’t see that changing.”

The Macquarie Asia New Stars Fund had an annualized return of 32.5 percent during the past five years, outperforming 99 percent of peers, according to data compiled by Bloomberg.

Second Homes

At least 10 Chinese cities stepped up measures to cool local property markets at the end of last year, with Shenzhen, Shanghai and Guangzhou raising the minimum down payments for second homes to 70 percent from 60 percent.

China’s households piled into real estate in recent years as they sought returns beyond the regulated caps on savings deposits. With the nation’s stock market failing to keep pace with economic growth, property offered an alternative, along with trusts that channeled credit to borrowers outside the official banking system.

The implications of falling home prices would be “enormous” because Chinese buyers see property as an investment, Aberdeen’s Elston said. “The prospect of them losing money is a pretty serious eventuality.”

 

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Is Putin Right About America?

z21

It’s a sad day for America when I actually agree with what Russian Mafia Cartel Leader Mr. Putin has to say about American Politics. How far down the shit hole have we fallen? 

Russian President Vladimir Putin accused the United States on Monday of being guided in its foreign policy not by international law but by the “rule of the gun.”

“Our Western partners headed by the United States prefer not to be guided by international law in their practical policies, but by the rule of the gun,” he told a joint session of parliament.

“They have come to believe in their exceptionalism and their sense of being the chosen ones. That they can decide the destinies of the world, that it is only them who can be right.”

What do you think guys? Is Putin right on the money. Have we become a nation of trigger happy warmongers who see no fault of our own? 

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Is Putin Right About America?  Google

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Fed Warns: Much Higher Interest Rates In 2016

I will give Janet Yellen one thing. She has been consistent with her haircut. 

As the article below indicates, a lot of people anticipate the FED to start raising interest rates around 2015-2016. Not going to happen. If anything, the FED will be cutting interest rates (if there is anything to cut) and flooding the market with cheap credit….again. Here is why. 

As I have already illustrated, a number of times, the FED is a reactionary force and not a market maker. For instance, Bernanke was worried about the housing acceleration and thought the economy was doing great as late as Q2 of 2008. Mind you, the recession was already in full swing at that juncture. What FEDs analysis of today’s market environment is rather simple. They see the continuation of today’s expansion for the foreseeable future. Even thought most of it has been driven by their own credit and speculation. 

As my mathematical and timing work indicates, we are on a verge of a severe Bear Market that will play out between 2014-2017. During this time the US Economy will slip back into a recession, leaving the FED with no option but to cut interest rates again. If you would like to know exactly when the bear market will start as well as it’s internal composition (all the ups/downs within the bear market) as well as where it’s going to complete….please CLICK HERE. 

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Fed Warns: Much Higher Interest Rates In 2016 Google

The Federal Reserve isn’t going to tell us when it expects to start raising interest rates. It isn’t going to draw a line in the sands of economic data – a minimum unemployment rate, a minimum rate of inflation. It’s done with all of that.

But the Fed is preserving another window on its plans. Since 2012, it has published the expectations of its senior officials about the year of the first Fed funds rate increase. It is scheduled to publish the latest batch of forecasts on Wednesday afternoon.

And those forecasts are likely to carry the same message as the latest round of changes in the Fed’s policy statement: Settle in. This is going to take a little explaining.

This chart from BNP Paribas shows the evolution of the forecasts. (There are 19 seats on the Federal Open Market Committee, but there have been vacancies at some meetings, so the chart gives percentages rather than counting heads.)

A majority of Fed officials has bet on 2015 since September 2012 — the month when the Fed changed its policy statement to read, “Exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”

When the Fed replaced that guidance just a few months later with an economic target – 6.5 percent unemployment – Ben S. Bernanke, who was then the chairman, was at pains to emphasize the timetable had not changed. And the dots did not move.

Lately, however, the number of Fed officials betting on 2016 has been rising, and it seems likely to rise again on Wednesday. Charles Evans, the president of the Federal Reserve Bank of Chicago, walked into the 2016 camp earlier this month.

The BNP chart reflects that move; other analysts say a larger shift is possible.

“We believe that Chair Yellen is probably one of the 2016 dots,” Sven Jari Stehn, a Goldman Sachs economist, wrote in a recent analysis. “If that is true, other participants, especially the governors, might decide to shift in her direction.”

The Fed is dismantling its stimulus campaign – arguably it has been retreating for almost a year now, since Mr. Bernanke roiled financial markets last summer – but the slow drift of the forecast is a reminder that it is moving very slowly.

The Fed may reinforce that message on Wednesday by emphasizing in its statement that even when it does start to raise rates, that too will happen very slowly.

Finally, it’s worth looking at one other part of the forecast. Fed officials are also asked to predict the long-run level of interest rates – basically, to define normal. Before the recession, normal was about 4 percent. But in recent forecasts, a growing number of officials – four in September, six in December – have predicted that interest rates will not return all the way to 4 percent. They’re basically saying this recovery won’t just take a very long time, but that it will remain incomplete.

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What I Would Like To Hear From The FED Chair Yellen

Earlier today Daily Ticker published an article “What markets want to hear from Fed Chair Yellen this week” (see below). Because you know, whatever lies come out of her mouth will determine what the stock market will do and/or what path the economy will take. What a bunch of nonsense. Here is what I would like to hear come out of her mouth.

Dear American People,

Since 1987, myself,  Mr. Greenspan and Mr. Bernanke worked tirelessly to destroy the American economy. Instead of following prudent monetary policy we flooded our markets with massive amounts of cheap credit every chance we got in 1994, 1998, 2001-06, 2008-today. We worked overtime to blow bubble after bubble to give a perception that the US Economy is doing great. We thought that by simply adding more credit into the system we could swipe all of the bad debt and zombie businesses under the carpet in order to continue rapid economic growth. Yet, it didn’t work. Instead of fixing the system, we have distorted to an extent unimaginable just 10 years ago.  

Particularly, our efforts backfired when instead of inflation and dollar devaluation we ended up in a credit default deflationary environment. An environment where we have destroyed the middle class for the benefit of the “Top 1%”. Now, there is no way out. We will have to go through a lot of economic pain to work such imbalances out of our economic system. I am truly sorry about this.  

That’s what I would like to hear. We can all dream….right? 

fed-reserve

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What I Would Like To Hear From The FED Chair Yellen  Google

What markets want to hear from Fed Chair Yellen this week

Federal Reserve watchers are expecting the Federal Open Market Committee to announce an additional taper of $10 billion to its monthly bond-buying program Wednesday. The Fed started to reduce its bond purchases in January as it gauged the economy to be strong enough to withstand the move.

Janet Yellen will also answer reporters’ questions Wednesday in her first press conference as Fed Chair since taking over from Ben Bernanke in February. She does not want to “rock the boat” says BNP economist Julia Coronado, and will likely signal that the Fed has no intention of altering course as it gradually reins in the stimulus program known as “quantitative easing.” The Fed’s balance sheet has ballooned to above $4.1 trillion as a result of its monthly purchases of Treasuries and mortgage-backed securities, up from $869 billion in August 2007.

Like other economists, Coronado says the Fed may also reduce the threshold it has set for beginning to raise short-term interest rates. The Fed has linked that to a jobless rate of 6.5% or so. But the unemployment rate has already fallen to 6.7%, and with the Fed likely to keep rates close to 0 into 2015, an adjustment in the target rate seems necessary.

Related: Jobs better-than-expected but “the labor market is still weak”: NYT’s Greenhouse

“The Fed will abandon those numerical thresholds,” Coronado explains in the video above. “At least half of the decline in the unemployment rate is due to falling labor participation, a sign of weakness.” But the jobs report was not the “decisive factor” in the change, she adds.

“The Fed never reacts to just one data point and it’s willing to look through a lot of the weakness we’ve seen in hiring and other data reflective of the severe winter weather,” Coronado says.

Even as the Fed further reduces its stimulus program, Coronado argues that $55 billion in monthly bond purchases is “still a lot of money” to inject into the economy. That stimulus will keep the markets “resilient” and prolong higher interest rates for a lot longer.

What will Yellen’s first press conference be like? Watch the video to find out!

 

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Inflation….What Inflation?

Core inflation dropped to a 10 Year low of 1.1% Y-O-Y or 0.1% in February. Bad news for Gold Bugs expecting Zimbabwe type of an inflationary environment. I have been a strong proponent, since about 2002, that we are in a deflationary environment as opposed to an inflationary one. Massive bad debt we have in our system must be liquidated, which is deflationary. The reason we see resemblance of inflation is due purely to FED’s efforts.

By pumping a tremendous amount of credit into our financial system the FED was able to create an illusion of inflation. However, most of this inflation went right into the stock market and the real estate market. Creating massive bubbles in both today and in 2007. Today’s low CPI is another confirmation of that. As the FED slows QE even further it won’t be long before net positive CPI number turns into a negative one. 

zimbabwe-money

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Inflation….What Inflation?  Google

The Labor Department has released its latest report on retail inflation via the Consumer Price Index (CPI). Prices in February were up 0.1% on the headline CPI. Core inflation, excluding food and energy, rose by 0.1% as well. Bloomberg had estimates of 0.1% on the headline and 0.1% on the core inflation reading.

The end result is that prices were up only 1.1% from a year ago. What stands out here is that this is the weakest 12-month gain in about six months, but furthermore it remains well under the Federal Reserve’s inflation target of 2% — the same day that an FOMC meeting is starting. The core inflation was up by 1.6% from a year ago.

Food prices were up by 0.4%, but energy prices were down by -0.5%. The gain in food was the most in over two years, which may be partly driven by that West Coast drought. Lower gasoline prices around the country offset higher heating bills in the Midwest and Northeast.

Stock futures surged Tuesday morning on Putin’s comments that he does not want to enter other parts of Ukraine. Tuesday’s CPI report has not taken any noticeable gains away.

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The Real Reason Why Car Dealers Are Terrified Of Tesla

No More Oil Changes. For most car dealers, their servicing centers are their cash cows. And nothing brings cars in like a regular oil change. It’s not a secret that once they are changing your oil they are likely to find 20 other things that “require your immediate attention and repair or your tires will fall off and you will die in a fiery crash”. Now, Tesla is trying to change all of that. With their battery pack technology, your car will not need an oil change or for the most part other servicing. In fact, Tesla offers service download where they would download your car information and let the software fix it. 

Isn’t technology great?

Not according to Coalition of Automotive Retailers which is fighting Tesla and it’s direct sales model in every state that it can.  

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The Real Reason Why Car Dealers Are Terrified Of Tesla  Google

 

Car Dealers Are Terrified of Tesla’s Plan to Eliminate Oil Changes

Car dealers fear Tesla. In states across the country, powerful car dealer associations have lobbied to ensure the electric car maker and its direct-sales model are kept out. This movement claimed another victory this week when New Jersey banned Tesla stores in the state.

On the surface, the fear is hard to fathom. In New Jersey, for instance, sales of Tesla’s $70,000 Model S reportedly number in the hundreds. But if you dig a little deeper, it becomes obvious why dealers are worried. They don’t just fear Tesla’s cars. They fear Tesla’s plan to create a world where you never have to bring your car into the shop again.

The first and most striking way Tesla kills the dealer service department cash cow is downloads. As part of its sales pitch, Tesla says you should think of its Model S sedan as “an app on four wheels.” That may sound like vacuous Silicon Valley marketing copy, but the company isn’t just being metaphorical. Software is at the heart of what keeps Teslas running. These internet-connected cars are designed to self-diagnose their problems. The vehicles can also download software fixes or updates — even new features — much like an iPhone when Apple puts out a new version of iOS. When fixes happen over the air, there’s no need for a shop in the first place.

It’s hard to charge for an oil change when there’s no oil to be changed.

The ability to repair a car via software is especially important when the vehicle itself consists of so much new technology that traditional mechanics don’t know how to fix. The flip side is that without an internal combustion engine, there’s not as much to fix. I’ve written before that a Tesla without its outer shell looks like acell phone on wheels. It’s basically just a big battery. That means no spark plugs, no air filters, no fuel pumps, no timing belts. In short, Teslas don’t have any of the parts that force you to take your car in for “regularly scheduled maintenance” — services that can cost dearly at the dealer. But it’s hard to charge for an oil change when there’s no oil to be changed.

To be fair, Tesla isn’t doing away entirely with bringing your car in. The company recommends an inspection once a year or every 12,500 miles. Its service plans start at $600 per year* or less if you buy multiple years at once. The plans include replacement of standard parts like brake pads and windshield wipers. The company will monitor your car remotely and tell you when there are problems, such as faulty batteries. In theory, there are pitfalls in an arrangement where the company that makes your car is the only one that can fix it. But Tesla would seem to alleviate that concern with its flat-rate plans, rather than fee-for-service gouging for every fix. What’s more, the company says your warranty is still valid regardless of whether you get your car serviced at all.

Yes, these all sound like grand promises. And for all we know, Tesla won’t be able to deliver on them in the end. But Consumer Reports’ decision to name the Model S the country’s best overall car suggests otherwise.

Even the fact that Tesla is making these promises at all must strike horror in the hearts of dealers. Once presented with the possibility that most of the costly headaches of owning a car aren’t necessary, car buyers might start asking dealers why they don’t change, too. The answer, of course, is that all those headaches are exactly what keep us coming back to the shop and putting more money in their pockets.

At Tesla’s most recent annual meeting, one shareholder asked founder and CEO Elon Musk about whether challenges to the company from traditional auto dealers hurt the company’s business outlook. Musk argued that consumer desire for a better way of buying and owning cars would win out. He said the traditional franchise model that dominates auto-selling in the U.S. wouldn’t work for Tesla for several reasons, including its reliance on maintenance to make money. “Our philosophy with respect to service is not to make a profit on service,” Musk said. “I think it’s terrible to make a profit on service.”

The shareholders applauded — the same shareholders that have sent Tesla’s stock price up nearly 650 percent over the past year. Yes, for now, Tesla only makes luxury cars, and its approach to service might seem like a luxury. But if it starts making cars regular people can afford, that applause for car dealers could be the sound of money spiraling down the drain.

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Is China Ready To Start It’s Mass Migration To “Empty Cities”?

China’s communist leadership has long maintained that they are building infrastructure and “empty cities” to allow more than 700 Million Chinese now living in the rural areas to migrate to urban centers. It’s quite an ambitious plan, where close to 100 Million people (equivalent to about 33% of the US population) are expected to make the move by 2020.  

Will it work? 

I believe the plan itself will work as more and more Chinese will chose urban living and higher wages. However, this move will do nothing to bypass China’s economic and credit issues. With massive credit, shadow banking and real estate bubbles, China won’t be able to escape massive defaults and their subsequent impact on the Chinese economy.  Plus, there are numerous questions of exactly how these rural Chinese supposed to afford to live in widely overpriced cities. Either way, it would be interesting to see how this experiment works out. 

mass migration investwithalex

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Is China Ready To Start It’s Mass Migration To “Empty Cities”  Google

China announces plans to expand cities, railways to support economic growth, raise incomes

BEIJING (AP) — China has announced plans to expand its cities and improve public services to support economic growth by allowing millions more rural residents to migrate to urban jobs.

The Cabinet plan issued Sunday calls for raising the share of China’s population of almost 1.4 billion people living in cities to 60 percent from 53.7 percent now, a shift of about 90 million people.

The ruling Communist Party sees allowing people to migrate into cities for higher-paid jobs as a pillar of more sustainable growth based on domestic consumption instead of trade and investment.

China’s evolution from a mostly rural society began with market-oriented economic reform in the 1980s. Cities such as Beijing and Shanghai have grown to become among the world’s largest but migrants are hampered by a household registration system that binds them to their hometowns. That limits access to schools, health care and pensions even for those who live in cities for years.

Sunday’s announcement of the “National New Type Urbanization Plan” for 2014-2020 gave no financial or other details. But plans announced earlier call for improving housing for 100 million people who live in dilapidated shantytowns.

“Domestic demand is the fundamental impetus for China’s development, and the greatest potential for expanding domestic demand lies in urbanization,” the report said, according to the official Xinhua News Agency.

The ruling party has promised in its latest five-year development blueprint to make the economy more productive by giving entrepreneurs and market forces a bigger role and overhauling banking and other industries.

The urbanization plan says railways will reach cities with more than 200,000 residents by 2020 and those with more than 500,000 people will be linked by high-speed rail, according to Xinhua.

It promises to pursue a “human-centered and environmentally friendly path,” according to Xinhua.

“A scientific and reasonable urban development model should be adopted, with green production and consumption becoming the mainstream in urban economic activities,” it said. “China should strive to push for harmonious and pleasant living conditions.”

Longer-term, authorities expect 300 million people from the countryside to become city dwellers by 2030, the equivalent of migration by the entire U.S. population.

The latest plan promises to give permanent urban status to 100 million rural migrants, according to Xinhua.

A study by Tsinghua University in Beijing found only 27.6 percent of China’s people have urban status with full claims to education, health and other public services, while hundreds of millions of city dwellers with rural status have limited benefits.

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Shocking Secret Revealed: Will Zillow.com Accelerate Upcoming Real Estate Collapse?

What was unimaginable just two decades ago is now a reality. The amount of local real estate data one can get with a click of their mouse is mind boggling. While this can be “net positive” when the real estate market is going up, it can quickly turn into a major nightmare when the real estate market is heading down (as we anticipate it to do over the next few years). An incredibly popular real estate website Zillow.com traffic growth rate just went parabolic, now bringing in over 70 Million unique visitors in January of 2014. 

Is that good or bad? 

Well, it’s not dissimilar to speculating in penny stocks and hitting refresh button on your browser every few seconds (back in the day). People are starting to watch their local real estate markets very carefully. This is a speculative mentality. While it does wonders on the way up, a lot of people will rush to sell when they see their comps going negative. I am afraid they will find very few (if any) buyers on the other side. Perhaps collapsing the real estate prices much faster than anyone anticipates. We just have to wait and see. 

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Shocking Secret Revealed: Will Zillow.com Accelerate Upcoming Real Estate Collapse? Google

 

From our friends at Doctorhousingbubble.com 

You can’t stop the internet when it comes to real estate data.  Zillow is a great example of technology revolutionizing the way people view real estate.  Some of you are old enough to remember when the closely guarded MLS was only accessible by your local real estate agent.  Unless you were ready to do some digging, finding out what a home sold for took a bit of time.  It was also hard to view a list of available homes for sale.  That is no longer the case.  When Zillow initially came out the housing bubble was still raging.  My initial thought was that access to information would only serve to create bigger booms and deeper busts.  Keep in mind that the entire housing system is still built upon the appraisal system.  Basically each home is only as good as the last few sales.  When a market is booming and people are now able to see the boom in real time the temptation to buy can ramp up.  When the boom bursts as it did in 2008, you can also see how quickly things will reverse.  Things are already slowing down and sales are dropping dramatically in some areas.  Does access to data liberate us from the old model of buying and selling real estate?

The real estate information revolution

I love digging around in the housing data.  Real estate by far is going to be the biggest purchase most Americans will ever make.  In the past, this big buying decision was usually entrusted to those in the industry.  It made sense if the only folks with access to the MLS were real estate agents.  They held all the cards.  Most people had no idea what homes were for sale until an agent drove them around to view target properties.  Now, open houses are posted online and many people arrive agent free.

People are still irrational and that is why markets boom and bust.  People had access to great information before the tech meltdown in the early 2000s.  Zillow was around in 2006 yet the housing market had its first ever nationwide meltdown starting late in 2007 when data started becoming readily available to all.  The housing market has become a speculative asset class that captures the attention of the masses.  Entire mythologies are built around real estate.  Confirmation bias is extreme in the industry even though we have witnessed 7,000,000 foreclosures since this crisis hit.

The appetite for real estate information is insatiable:

zillow traffic

Zillow put out this chart showing the visitors to their site.  Back in 2009 Zillow was getting about 5 million unique visitors per month.  Today that number is up to 70 million.  This is a massive number of people going to a site dedicated to real estate data.

It is important to understand what is going on behind the numbers.  Appraisals are largely based on a “sales comparison approach” where recent sales are used as a basis for current pricing.  This is great in a market with a high number of transactions and relatively stable price changes but what happens whensales dwindle or inventory flat out disappears?  We are seeing some of this occur where some zip codes are reaching new peaks on low sales volume.

Redfin also provides some good data and we can see that sales are taking a hit in the West Coast:

year over year sales

Year-over-year sales in the West Coast are down 13.4 percent versus 5.9 percent nationwide.  In California sales are leading the way in this year-over-year decline:

california market

Sales in the state are down 13.7 percent year-over-year and the median home price is up 21.3 percent although this trend has stalled out for the last couple of months.  Affordability in California is horrible.  Only one out of three families can actually afford the median priced home.  The last post was interesting and we see many young professional families with six figure incomes struggling to purchase homes in high priced areas.  What is fascinating is that many of these high income households are pausing to buy because they are running the numbers.  Numbers that many times are pulled from these new venues of data.

Why are these seemingly intelligent high earners balking at buying when the trend is obviously showing higher prices?  I believe one of the larger ironies of having access to data is that it makes people more prone to manias and panics.  The late night mantras of “real estate never goes down” or the simple minded retorts of “buying makes sense at any time” are largely lost on a tech savvy audience that can crunch the numbers and understands opportunity costs and can run the numbers on a simple Excel sheet.  The days of fooling a large number of people with hollow mantras is largely gone.  We can see what is going on simply by typing in a few numbers.  However, it is naïve to think that greed, the fuel that sets manias ablaze is also gone.

There is a bigger complexity to the system.  Can the Fed really control interest rates for a very long time?  Do baby boomers have adequate retirement funds to keep them going into deep old age?  With sales slowing down and prices stalling out, will speculators pullback and spook the data hungry mob into changing their tune?  The news cycle feeds off of the quick headline so you have to wonder what will happen when the housing market inevitably slows down as it is.  Going back to the late 1990s, we have yet to see a stable market for more than a few years.  Boom and bust has been the new theme:

case shiller

Boom and bust seems to be a new trait of the housing market.  Access to information only seems to feed the beast or starve the giant.  The fact that so many in their 20s and 30s with healthy incomes that put them in the top 10 percent of households are hesitating to buy tells you something.  These people want a home but are targeting markets flooded by investors, speculators, and people simply willing to mortgage their lives for a poorly built property.  There are 7,000,000 reasons why people should run the numbers carefully and think deeply about making a giant purchase.

It is fascinating to see the number of people being vocal about buying in high priced areas today.  This was similar to the rhetoric we saw in 2006 and 2007.  Some have sound arguments and others are merely using their own confirmation bias as a way to extrapolate their very unique circumstances onto the future.  People seem to crave a social affirmation when buying.  Those that are successful usually feel pressure from family, friends, or even their own internal dialogue that buying is simply the next best thing to do.  Once they buy, the entire narrative usually develops on how marvelous of a decision it was.  Some even mistake luck with market timing acumen.  The rental parity argument makes sense with smaller down payments but when we are talking $100,000, $200,000, or even $300,000 for a down payment, this argument falls flat.  An all-cash investor doesn’t have to worry about rental parity from day one.  Make the down payment large enough and you are likely to arrive at rental parity no matter what.  There are bigger things at play.  How many can actually save this much?  What about the lost opportunity cost in say the stock market?  Can someone actually carry this nut 30 years forward?  It is interesting to note the volume of e-mails I have gotten in the last couple of years of people asking for confirmation about a buying decision.  My response?  Go ahead and buy if you feel you absolutely need to!  I’m not the one that will carry a $4,000, $5,000, or even $6,000 monthly nut deep into the future.

What is also interesting is the big trend in people opting to rent versus buy.  Many have no choice but many that have the ability to buy are opting not to.  Some would rather lease a nicer home versus stretching to buy in an overheated market that is creating a halo effect on neighboring cities.

Access to data is great but I think this coupled with the instant media analysis only accentuates the boom and bust cycle of real estate.  There is a strong possibility that this year, prices will go negative year-over-year in some areas especially if the slowdown in sales continues.  Then the feedback loop will reverse.  We have not had a normal real estate market for more than 20 years so why do some think that after this incredible investor induced boom that somehow, we will calmly reach a new permanently high plateau?  The biggest argument for higher prices is basically the “because the past had lower prices” group and the “real estate always goes up in good areas” group that largely uses anecdotal stories as a method of ignoring the growing strain on local incomes.  I can get behind this rally in home prices if good jobs were plentiful and incomes were moving up in sync with real estate values instead of being driven up byinvestor speculation and Fed market manipulation.  It is good to see that those in their 20s and 30s with solid household incomes are actually crunching the numbers instead of mindlessly waddling into a massive housing purchase by following some old tired mantra.  Remember kids, it used to be true that “real estate never faced a nationwide price decline” until it did only a few years ago.

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The Extent Of China’s Credit Bubble

The chart below speaks for itself and the extent of Chinese Credit Default time bomb. Please note, this chart doesn’t include China’s so called “Shadow Banking” assets which are estimated to be at an additional $6-10 Trillion. In short, China makes US Credit Infusion by the FED look like child’s play. When China finally blows sky high, it’s defaults will be as massive at the credit expansion below. 

China Bank Assets InvestWithAlex

 

The Extent Of China’s Credit Bubble

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Why Putin Doesn’t Care About The Russian Stock Market -or- Russia’s Rich

In another propaganda piece by the Western Media, the WSJ reports (see report below) that Russia’s rich are freaking out. They have already lost billions in the Russia’s stock market collapse and might face margin calls if things continue to deteriorate. Further, if sanctions are implemented, the Oligarchs stand to lose countless billions more. Nice try WSJ, but you don’t get.

Putin, doesn’t give a flying fuck about Russia’s stock market or Russia’s rich at this juncture. He is in full control. I have been saying this since this whole thing started, but no one gets it. Putin is committed to go to war. Against Ukraine, the US or NATO. Whoever decides to intervene into Ukraine will be in a war with Russia. Immediately. There is no way that Putin or Russia will let Ukraine fall into NATO hands. I am not sure why our administration doesn’t understand that.   

western media attack on russia investwithalex

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Why Putin Doesn’t Care About The Russian Stock Market -or- Russia’s Rich  Google

Russian Richest Face Margin Calls With Billions at Stake 

“Russian businessmen are very scared,” the 54-year-old former billionaire, who served in the Soviet embassy in London during the Cold War and owns Russia’s National Reserve Corp., said by phone. “There are risks to the Russian economy. There could be margin calls, reserves might be drawn down, exchange rates may fall and prices will rise. This worries me.”

Billionaires in Russia and Ukraine risk further losses as market volatility and the threat of Iran-style economic sanctions intensify following Russia’s incursion into Crimea. Since Feb. 28, the day unidentified soldiers took control of Simferopol Airport in southern Ukraine, Russia’s 19 richest people have lost $18.3 billion, according to the Bloomberg Billionaires Index, a daily ranking of the world’s 300 richest wealthiest people. 

“The instability caused by the situation in Crimea could be a problem for the oligarchs,” Yulia Bushueva, who helps manage $500 million at Arbat Capital in Moscow, said in a telephone interview. “If a billionaire pledged their stakes in publicly traded companies as collateral for a line of credit, they could face margin calls and have to re-negotiate with banks.”

The U.S. and the European Union are threatening sanctions against Russia if it doesn’t back down from annexing the Black Sea province, which is holding a referendum in two days to join Ukraine’s former Soviet-era master.

‘Negative Consequences’

“All sides now understand each other’s positioning and understand the constraints each other face,” Michael O’Sullivan, chief investment officer of Credit Suisse Private Banking, said in a telephone interview. “It’s now clear as well that an escalation would have negative consequences on pretty much all the players.”

How the Crisis Began, Where It’s Heading

The European Union last week froze the assets of 18 Ukrainians, including “hundreds of millions of euros” in the Netherlands controlled by former President Viktor Yanukovych and his son, Oleksandr, Dutch Finance Minister Jeroen Dijsselbloem said March 6 on the television show Pauw & Witteman.

Dmitry Firtash, a 48-year-old Ukrainian billionaire who made his fortune importing Russian natural gas, was arrested in Vienna Wednesday by an organized-crime unit of the Austrian police on a warrant issued by the U.S. Federal Bureau of Investigation, according to a statement by the country’s Interior Ministry.

Outside Russia

He is alleged to have paid bribes and formed a criminal organization, according to the warrant, issued after an FBI investigation that began in 2006, the ministry said.

One Russian billionaire, who asked not to be identified because of the sensitivity of the situation, said he was concerned about the effect potential sanctions might have on business. He said he’d consider buying assets outside of Russia if sanctions were imposed.

Dmitry Peskov, a Kremlin spokesman, said in a March 11 telephone interview that “there were no consultations” with Russian businessmen and that they “have not expressed any concern” over the situation.

According to a March 13 report in the Wall Street Journal, a spokesman for President Vladimir Putin acknowledged that business leaders in Russia have been in “constant contact,” and that Putin had not met with any of them. The report said a recent meeting between the country’s industrialists and high-ranking government officials turned “tense” when the subject of sanctions came up.

Broken Sanctions

Doing business under sanctions might not be all bad for Russian entrepreneurs, according to South African billionaire Natie Kirsh.

“There are opportunities that come out of sanctions,” the 82-year-old, who started building his $5.9 billion retail and real estate empire during apartheid, said by phone from Johannesburg. “Sanctions can be broken. It always depends on the extent of the sanctions and how they take.”

F.W. de Klerk, South Africa’s last president during the apartheid era, said the country and businessmen were able to work around the sanctions levied by the U.S. beginning in 1986.

“The sanctions delayed change in South Africa because it made us look for ways to evade them,” de Klerk, 77, said in a telephone interview from Cape Town. “We worked with the business community to find ways to keep companies going. In the end, not many factories shut down, they just changed ownership.”

Ukraine’s Richest

Kirsh said the Cold War could reemerge out of Russia’s incursion in Ukraine, and energy suppliers outside of Russia will benefit if sanctions are levied.

“It’s a different story with Putin,” Kirsh said. “South Africa doesn’t supply 30 percent of Europe’soil and gas. There will be some people outside of Russia that will see a huge benefit. Some people who supply oil and gas for Russia will not believe how busy they will be.”

Rinat Akhmetov, Ukraine’s richest person, has lost more than $550 million since Feb. 28. The 47-year-old billionaire, who owns Donetsk, Ukraine-based conglomerate System Capital Management Group, expanded his business with help from Yanukovych. Akhmetov’s DTEK Holdings BV was the only bidder in two of five auctions of state-owned energy assets, which were organized by the former president’s government.

‘Maintain Relations’

The billionaire no longer supports his longtime ally and has committed to rebuilding the government of Ukraine, according to a March 10 report in London’s Telegraph newspaper. Elena Dovzhenko, a spokeswoman for Ahkmetov, said the billionaire wasn’t immediately available to comment.

“He understands that the previous state of things is over,” Ihor Burakovsky, head of the Board of the Institute for Economic Research and Policy Consulting in Kiev, said by phone. “He will try to maintain relations with all the significant players in the country.”

Ahkmetov on March 9 met with Vitali Klitschko, leader of Ukraine’s UDAR party and a potential candidate for Ukraine’s presidency, to discuss the situation, according to a statement from UDAR.

“The use of force and lawless actions from outside are unacceptable,” the billionaire said in a separate statement on March 2. “I state with all due responsibility that SCM Group, which today employs 300,000 people and represents Ukraine from west to east and from north to south, will do everything possible to maintain the integrity of our country.”

State Assets

The 19 Russian billionaires on the Bloomberg ranking have businesses, homes and bank accounts scattered around the globe valued at more than $208 billion. Some of that wealth was accumulated through government ties that enabled them to acquire former state assets during privatization in the 1990s, transactions Putin called “unfair” in 2012. They have since moved control of the assets out of Russia and into the West.

Alisher Usmanov, the country’s richest person, controls his most valuable asset, Metalloinvest Holding Co., Russia’s largest iron ore producer, through three subsidiaries, one of which is located in Cyprus, an EU member nation. The 60-year-old also owns a Victorian mansion in London that he bought in 2008 for $70 million, according to a May 18, 2008, Sunday Times newspaper report.

He’s lost $1.5 billion since the crisis began, according to the Bloomberg ranking.

“We are concerned with the possible sanctions against Russia but don’t see any dramatic repercussions for our business,” Ivan Streshinsky, CEO at USM Advisors LLC, which manages Usmanov’s assets, including stakes in Megafon OAO and Mail.Ru Group Ltd., said in an interview at Bloomberg’s offices in Moscow today.

Greater Compliance

“Mail.Ru and Megafon revenue is coming from Russia and people won’t stop making calls and using the Internet,” he said. “Metalloinvest may face closure in European and American markets, but it can re-direct sales to China and other markets.”

Transferring ownership abroad may prove problematic if sanctions are imposed. The U.S. Securities and Exchange Commission and other regulatory authorities may tell U.S.-based banks to exhibit greater compliance with the existing Foreign Corrupt Practices Act, Standard Bank (STAN) Group Ltd. said in a March 11 report.

The report also said the U.S. might investigate Russia’s compliance with the Financial Actions Task Force on Money Laundering and Terrorism Financing in an effort to push the country onto a black list, a move that would prevent global banks from dealing with Russian lenders.

‘Nuclear Blow’

The third escalation would be actual asset freezes, which perhaps would be “the nuclear blow, as it would risk countermeasures from the Russian authorities,” according to the Standard Bank report.

“Currently, there is no clear link between events taking place in Ukraine and any steps that might be available to freeze assets of wealthy Russian citizens overseas,” Marta Khomyak, a partner of London-based PCB Litigation, said in a telephone interview. “However, given the pace of events and the underlying political tensions, I would not rule out attempts being made to attack various Russian interests overseas.”

Sanctions related to the Crimea crisis so far have been levied on individuals the EU said were responsible for the “misappropriation of state funds” and “human rights violations,” according to the regulation passed by the Council of the European Union on March 5. President Obama echoed the language in a briefing with journalists at the White House the next day.

Lisin’s Steel

“Russians who are making bank transactions and opening new accounts will now be confronted with increased suspicion,” Valery Tutykhin, an attorney with John Tiner & Partners, a Geneva-basedlaw firm that specializes in wealth management, said in an e-mail.

The crisis also threatens to derail the relationship between the West and the Russian businesses the billionaires control. Among the companies potentially affected is OAO Novolipetsk Steel (NLMK), the country’s most-valuable steelmaker, which is controlled by Vladimir Lisin, Russia’s 13th-richest person. The company derived 21 percent of its $12.1 billion in 2012 revenue from Europe, according to data compiled by Bloomberg. Sergey Babichenko, a spokesman for NLMK, declined to comment.

“In the event of a European and U.S. ban on exports of the metal, NLMK’s position would be weakest among Russian steelmakers, because it ships steel slabs to its own mills in Europe,” Kirill Chuyko, head of equity research at BCS Financial Group said. “We see such actions as unlikely for the time being.”

Amicable End

With its stock market falling and interest rates rising, Russia has suffered most of the financial pain the crisis has inflicted.

“To the extent that they can, the businessmen in Moscow will be making their sentiments and voices heard,” said Credit Suisse (CSGN)’s O’Sullivan. “I’m not sure the Kremlin will listen to them.”

Billionaire Naguib Sawiris, Egypt’s second-richest person, who’s done business with North Korea, Russia and Pakistan through his telecommunications companies, said he’s concerned about potential sanctions.

“Putin has proven that toward the end of any crisis, he always goes back to reason and finds compromises,” Sawiris, 59, said in a March 14 e-mail. “Therefore, I bet this crisis will end amicably.”