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No Stock Market Bubble, All Bears Are Idiots

Well, at least according to the WSJ and Steven Russolillo. What is his evidence? The P/E ratio of course. 

“Nine of the 10 biggest S&P 500 companies currently trade at price-to-earnings ratios of less than 20, according to Bespoke Investment Group. At the peak of the tech bubble in March 2000, none of the 10 largest companies were that cheap, suggesting the irrational exuberance that infiltrated the market back then hasn’t come close to making a comeback now.”

I am not sure how many times I have to explain this stupidity away, but let me give it another try. Take a look at the P/E chart below. The P/E ratio is no longer relevant in today’s macroeconomic environment where the FED floods the market with cheap credit. You see, most of the corporate earnings (the E in P/E) have been driven by this same credit. If you take away the low interest rates and over $1 Trillion of stimulus that was pumped into our economy over the last 3 years, you will see this E collapse. Making today’s P/E ratio not only expensive, but “are you fu&#ing kidding me expensive”.

That is exactly what happened at the market top in 2007 when the S&P P/E ratio went from about 18 at the top in 2007 to 128 in 2008. How is that possible? Well, the earnings that were driven by credit and speculation at 2007 top simply vanished. Today we face an identical situation. The bottom line is this. Anyone who relies on the P/E ratio to “value the markets” in today’s environment will lose a lot of money.

s&p ratio

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No Stock Market Bubble, All Bears Are Idiots  Google

Morning MoneyBeat: No Bubble Here

Warnings of an impending stock-market bubble are everywhere. But one important, and perhaps underrated, indicator says investors shouldn’t worry so much.

Nine of the 10 biggest S&P 500 companies currently trade at price-to-earnings ratios of less than 20, according to Bespoke Investment Group. At the peak of the tech bubble in March 2000, none of the 10 largest companies were that cheap, suggesting the irrational exuberance that infiltrated the market back then hasn’t come close to making a comeback now.

In 1999 and 2000 when the market zoomed to uncharted territory, the bubble started in tech stocks and then spread through the rest of the market. It lifted tech companies to exorbitant valuations and pushed the overall market to historically expensive levels. But now, the fact that valuations among the biggest companies remain in-line or even below historic averages highlights how pockets of frothiness haven’t had the same impact on the broad market.

The top 10 companies, on average, currently trade at 16.1 times trailing earnings, Bespoke’s data show. In March 2000 the 10 biggest firms had an average P/E multiple of 62.6, almost four times the current amount.

Apple Inc., Exxon Mobil Corp. and Microsoft Corp.—three of the S&P 500’s four biggest companies right now—all sport P/E ratios around 13, well below the S&P 500’s trailing P/E ratio of 18.09. Wells Fargo, Wal-Mart andJ.P. Morgan also have cheaper multiples than the broader market. The priciest stock in the top 10 is Google Inc., which trades at 33 times earnings.

To put those numbers in perspective, Google’s current valuation would’ve ranked as the third cheapest among the S&P 500’s top 10 biggest companies in March 2000.

The go-go days of the dot-com boom were much different than today. Consider some of the valuation metrics: Microsoft, then the biggest company, traded at 56.8 time trailing earnings. Cisco Systems had a P/E ratio of 196.2 and Oracle traded at 148.4 times trailing earnings. The cheapest of the top 10 was Exxon Mobil, which had a P/E ratio of 24.6. That would rank as the second priciest among today’s top 10.

“Back in 2000, many of the technology stocks that were part of the bubble were also among the largest companies in the U.S. in terms of market cap,” Paul Hickey, cofounder at Bespoke Investment Group, wrote to clients. “When the bubble stocks popped, they dragged down the entire index along with them.”

In 2014 some pockets of the market, such as biotech and social media, look particularly frothy. But even if those groups fall substantially, they aren’t big enough to bring the rest of the market lower. “A large decline in fuel-cell, marijuana, or even social-media stocks is unlikely to be a major market moving event,” Mr. Hickey says.

To be sure, the bubble warnings flying around Wall Street shouldn’t be ignored. We’ve cited several of them recently, including pricey stock valuations and record high margin-debt levels. Investors have also been pushing stocks of newly public companies higher even as a growing number of them aren’t profitable.

But the message from America’s biggest companies isn’t flashing concern just yet. That’s far different from what transpired 14 years ago.

Morning MoneyBeat Daily Factoid: On this day six years ago, gold prices on the New York Mercantile Exchange hit $1,000 an ounce for the first time ever.

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Did Aliens Hijack Malaysia Airlines Flight 370?

As ridiculous as this sounds, this might as well be the case. A fascinating and unprecedented case worth following. How can a plane vanish into thin air and without a trace? With over 80 planes and ships searching the area and with most of the developed nations searching with satellites, not a single piece of evidence have been found. Let’s look at some of the theories out there. 

  • The Plane Turned Around, Turned Off It’s Transponder and flew towards the Indian Ocean – this doesn’t make any sense. Plus, China Mobile is saying that some of the cell phones on board still ring, no one answers and they can’t trace them. I am not sure how that’s possible. 
  • Catastrophic Mechanical Failure and Midair Disintegration…..OK, but where is the debris?   
  • Terrorism: Did the two individuals traveling with counterfeit passports blow up the plane?  With mysterious Mr. Ali buying both plane tickets with cash in Thailand, there are more questions than answers. Than again, where is the debris?  
  • Hijacking: In the day and age where NSA tracks every click you make, how is it possible to steal or hijack a Boeing 777 without a trace? Did Kim Jong Un need a private plane? 
  • Aliens: Might as well be at this point in time.  It won’t be long before these theories show up. 

Too many questions and not enough answers. No one knows. The plane simply vanished. While a fascinating case, our prayers go out to the families and to the loved ones of the people on board. 

malaysia airlines flight 370

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Did Aliens Hijack Malaysia Airlines Flight 370? Google

(CNN) — With lead after lead failing to pan out, search and rescue officials said Monday they will expand the search area for the Malaysia Airlines aircraft that vanished three days ago.

The newly expanded search area encompasses a larger portion of the Gulf of Thailand between Malaysia and Vietnam, said Azharuddin Abdul Rahman, director general of the Malaysian Civil Aviation Department.

Nearly three dozen aircraft and 40 ships from 10 countries have so far failed to find any sign of the aircraft.

Other leads — reports that a plane door and its tail had been spotted — turned out to be untrue, he said at an earlier briefing.

“Unfortunately, ladies and gentlemen, we have not found anything that appear to be objects from the aircraft, let alone the aircraft,” Rahman said at the earlier briefing.

Authorities are sending ships to investigate a report of debris found south of Hong Kong, but it will likely be Tuesday before authorities know if there is anything to those reports, Rahman said.

No emergency signal has been detected by any search vessel or aircraft. And family members of passengers are being told to prepare for the worst.

So the mysteries surrounding Malaysia Airlines Flight 370 — and the true identities of some of its passengers — remain unsolved.

“For the aircraft to go missing just like that … as far as we are concerned, we are equally puzzled as well,” Rahman said.

“We have to find the aircraft.”

So far, nothing

Malaysia Airlines Flight 370 took off from Kuala Lumpur shortly before 1 a.m. Saturday (1 p.m. Friday ET). The Boeing 777-200ER, carrying 227 passengers and 12 crew members, went missing while flying to Beijing.

Since then, teams of searchers from Vietnam, China, Singapore, Indonesia, the United States, Thailand, Australia, the Philippines and New Zealand have been working alongside Malaysians to scour the Gulf of Thailand, part of the South China Sea that lies between several Southeast Asian countries.

The focus has now shifted to the Andaman Sea, near Thailand’s border, after radar data indicated the plane may have turned around to head back to Kuala Lumpur.

But the pilot apparently gave no signal to authorities that he was turning around.

From 7 a.m. to 7 p.m., planes flew over the vast waters. Ships searched through the night

It is perplexing enough that a jetliner seemed to have vanished without a trace. Adding to the mystery is the news that at least two people on board were traveling on passports stolen from an Austrian and an Italian.

Malaysian officials have shared with the U.S. government the images and biometrics of the men believed to have used stolen passports to board the flight, a U.S. intelligence official told CNN’s Jim Sciutto. The official didn’t specify what data were shared. Biometrics can include things like fingerprints.

“They will compare that to what we have in our terrorist databases. These are lists of people on no-fly lists, people with possible terrorist connections, people we have reasons to be suspicious of,” U.S. Rep. Peter King told CNN’s “The Lead.” “We have these listings, and those names and those biometrics will be compared to those.”

According to Thai police officials, an Iranian man by the name of Kazem Ali purchased the tickets for two friends who he said wanted to return home to Europe. While Ali made the initial booking by telephone, either Ali or someone acting on his behalf paid for the tickets in cash, according to police.

Rahman said Monday that authorities have reviewed security footage from the airport and said the men who traveled on the stolen passports “are not Asian-looking men.”

Interpol tweeted Sunday it was examining additional “suspect #passports.”

“Whilst it is too soon to speculate about any connection between these stolen passports and the missing plane, it is clearly of great concern that any passenger was able to board an international flight using a stolen passport listed in INTERPOL’s databases,” said Interpol Secretary General Ronald K. Noble in a statement.

The passports were reportedly stolen in Thailand, and Thai Prime Minister Yingluck Shinawatra told CNN’s “Amanpour” on Monday that police are investigating.

“Initially we don’t know about their nationality yet,” she said. “But we gave orders for the police to investigate the passport users. Because this is very important to Thailand, to give full cooperation to Interpol in the investigation about the passport users. We are now following this.”

Terrorism concern

The passport mystery raised concerns about the possibility of terrorism, but officials cautioned that it was still too early to arrive at any conclusions.

One possible explanation for the use of the stolen passports is illegal immigration.

There are previous cases of illegal immigrants using fake passports to try to enter Western countries. And Southeast Asia is known to be a booming market for stolen passports.

Five passengers ended up not boarding the aircraft. Their bags were removed and were not on board the jet when it disappeared, Rahman said at Monday’s briefing.

Could the plane have been hijacked? “We are looking at every angle, every aspect,” Rahman said.

“We are looking at every inch of the sea.”

There has been some speculation that the flight might have been a test run for a terrorist organization planning a later attack.

The incident has some similarities to such incidents in the past, such as the 1994 bombing of a Philippine jetliner that investigators later learned was a test run for a wider plot to bomb numerous airliners, former U.S. Department of transportation Inspector General Mary Schiavo told CNN on Monday.

But John Magaw, a former Transportation Security Administration official and U.S. Secret Service director, said his best guess is the Malaysia Alrlines flight was not a test.

“They’ve already done the dry run,” he said. “This was the actual flight.”

Agonizing wait

For the relatives of the 227 passengers and 12 crew members, the wait has been agonizing.

Among the passengers, 154 people were from China or Taiwan. The plane was also carrying 38 Malaysians, five Indians and three Americans citizens. Five of the passengers were younger than 5 years old.

In Beijing, family members gathered in a conference room at a hotel complex.

More than 100 people signed a hand-written petition that demanded “truth” from the airline. They also urged the Chinese government to help them deal with Malaysian authorities.

Malaysia Airlines, which was helping family members apply for expedited passports, said it will fly out five relatives of each passenger to Kuala Lumpur.

A fuller picture of what happened may not become available until searchers find the plane and its flight data recorder.

And so far, that hasn’t happened.

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George Soros: Germany Is Stupid For Staying In The EU and Euro

It’s nice to find George Soros and myself on the same page….again. The EU is a basket case and a bad idea. I have been a proponent, for quite a while, that Germany should have said Auf Wiedersehen to the EU and Euro a long time ago. They could have gone back to the Deutsche Mark and watch their economy skyrocket. Instead, they are supporting socialist French, flamboyant Italians,  forever fiesta Spaniards and we are never going to pay you back Greeks. With cultural differences going back thousands of years, I very much doubt that the EU will be able to survive over the next 20 years. If German people wise up, they will be the first out of the door.  

george-soros-investwithalex

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George Soros: Germany Is Stupid For Staying In The EU and Euro Google

 

Soros: ‘EU fulfilling my worst expectations’

Germany should have quit the euro zone to help boost its indebted counterparts in the currency union, according to billionaire investor George Soros, who discussed the future of Europe at an event in London on Wednesday. The exit of Europe’s largest economy from the 18-country currency bloc would likely have weakened the euro (Exchange:EUR=), potentially helping the region’s struggling economies to recover from the recent sovereign debt crisis. (Read more:Russia’s Putin acting out of weakness: Soros )

With regards to Germany’s decision to remain in the zone, Soros said: “This has fulfilled my worst expectations.” Before German elections last year, Soros said he was an advocate of the country leaving the single currency. This, he said, would have created a difficult but “quick fix” that would have allowed the region to rebalance. Now the chances of this happening are almost none, he added, saying Europe will likely face a prolonged period of painful readjustment and stagnation.

“(This is) endangering the European Union from what it is meant to be, namely a voluntary association,” he said. “(It’s changed into) something that is radically different, into a creditor debtor relationship.” He added that as a result the European Union (EU) now has two-tiers – or two classes – of members. “Currently the power is in the hands of the creditors,” he said with Germany’s government holding most of that power.

A crisis of ignorance Soros viewed the euro zone crisis as “a crisis of ignorance” – a very complicated situation which neither markets nor government authorities had fully understood. There was some optimism on the Union though.

Soros said a new public debate was now beginning. “The understanding of the issues is now catching up with reality…it gives me hope,” he said. Following the global financial crash of 2008, a sovereign debt crisis raged across the continent in 2011 with bailouts needed for several euro zone nations. Austerity followed with tough fiscal tightening required of some of the more indebted countries.

Despite opposition and a rise in fringe politics, the underlying fundamental data in many euro zone countries have improved. These flickering signs of growth have helped the bloc manage to exit a prolonged recession. Meanwhile, the euro has strengthened significantly – since the middle of 2012, it has risen around 13 percent against the dollar.

Soros also criticized Germany’s leadership, saying that it should never insist on austerity policies in a deflationary environment. ‘QE saved the world’ His comments follow the launch of his book “The Tragedy of the European Union,” in which Soros questions whether it is too late to preserve the EU. If the 28-country economic and political union collapsed, the effects would be felt way beyond Europe, according to a press release on Thursday, with “serious economic and political consequences” for both the U.S. and the rest of the world. (Read more: Why Soros and Paulson’s bet on Spain could pay off )

The founder of Soros Fund Management called on European politicians to react to these “unusual circumstances” quickly – and not to cling to old rules for the union that have proved inadequate. He heaped praise on the U.S. Federal’s Reserve’s quantitative easing program (QE), which saw it buy up bonds to lower interest rates and boost money supply.

“Quantitative easing has saved the world from a repeat of The Great Depression,” he added. With regards to the ongoing trouble in Ukraine, Soros stressed that it should be a “wake-up call” to the EU that “people are willing to sacrifice their lives to move closer to Europe.” Gun battles between police and protesters last month resulted in the ousting of former president Viktor Yanukovich but also claimed many lives. -By CNBC.com’s

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The Secret To Chinese Real Estate

Chinese Real Estate is in a league of its own. Unlike the US/Canada/UK/Australia where real estate is a function of simple overvaluation and speculation, China took real estate to a whole new level of ridiculousness. Massive developments, empty cities and massive empty shopping malls.  In fact, real estate speculation has became a nationwide pass time. Last time I was there I heard the same thing from many very well to do and very smart Chinese “Our government will not let real estate collapse or even decline and because of that our real estate market will continue it’s climb….forever.”  You can read my previous post here. 

Sure, whatever makes you sleep better at night. 

Now, the Chinese Communist party is delusional enough to believe they can control the real estate market (or any market) and let it slow down “Softly, Softly”. With the Chinese economy finally showing major cracks and with the US bear market just around the corner, I highly doubt that Chinese real estate sector can escape carnage. Oh, and don’t forget the following numbers for China

  • $21 Trillion Debt Mountain. Roughly the same size as the entire US Banking Sector. It took the US 220 years to get to that number, it took China just 5 years of explosive credit growth. 
  • $6 Trillion In Shadow Banking. Actually, no one knows how large this number is. I have read good data/reports putting this number at $10-15 Trillion range.  

 

china empty cities

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The Secret To Chinese Real Estate Google

China Premier Li Chooses ‘Softly, Softly’ Approach to Property Market

China’s property moguls probably sighed in collective relief when the curtain came down on the annual session of parliament Thursday and there was no announcement of any new measures to keep real-estate prices from spiraling higher.

While the annual event is known more for ceremony than substance, it does give the senior Communist Party officials—the ones who really run the show—a chance to make important pronouncements on policy matters.

The parliament session opened with much fanfare but it paid only minimal attention to the housing market, where prices have continued to march higher despite more than four years of government-control measures.

The last chance for an unpleasant market surprise was the premier’s news conference Thursday morning, which traditionally is the final event on the parliamentary program. Premier Li Keqiang was asked directly whether there were any new policy measures planned that might affect the property market. He trotted out a time-worn line about ending speculation and building more affordable homes.

He could have said a tax on property values – now being used on a trial basis in Shanghai and Chongqing – would one day be rolled out more widely. But he didn’t.

He could have threatened a host of other tightening measures if there are more price advances like the nearly 11% year-on-year gain in February, according to a major private-sector survey. But he didn’t. And he could have vowed to get tough with speculators who ignore government efforts to curb price rises. But he didn’t.

The premier’s quiet approach followed the remarks of Finance Minister Lou Jiwei, who told reporters during the parliament session that a hefty tax on profits from home sales—one that has encouraged some people to divorce just to avoid paying it—was “defective.”

The policy shyness probably reflects the fact that the property sector is a key source of economic growth, which is now showing signs of flagging. Beijing has set a target of about 7.5% growth this year, and Premier Li said Thursday he is confident growth will be in a “reasonable range.”

But a raft of economic data released Thursday suggests that growth at the start of the year was fairly lackluster. Industrial production, retail sales, fixed-asset investment data and even property construction figures were released later in the day, and all looked disappointing. New construction starts—measured in terms of area—were down 27% from a year ago.

“[Decision makers] recognize a key role investment plays in boosting growth,” said ANZ economist Liu Li-gang, noting the softer tones of the premier’s remarks.

Others agreed.

“The officials are signaling that they do not want to intervene in the property market, but this doesn’t come as a surprise. They have been doing that quietly for the past year,” said Rosealea Yao, an analyst at GaveKal Dragonomics.

While the premier’s rhetoric was “softly, softly,” it was loud enough to be heard on the stock market. Property stocks eked out a 0.6% gain Thursday on the Shanghai bourse and they were up 1.5% from March 5, when the parliament session began. Analysts said that reflected relief that no new property measures were in sight. The Shanghai bourse as a whole, by contrast, fell 2.5% over the parliament session.

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Global Slowdown….Just Starting Or Nearly Over?

china ore investwithalex

The chart above should clear things up fairly fast. As you can see the Chinese stock pile of Iron Ore has gone parabolic. Indicating an unanticipated slowdown in Chinese economy. In addition, Baltic Dry Index has collapsed to the tune of 40% since the beginning of the year. Put them together and you have your answer. The global economy is on a verge of a massive slowdown. Our timing and mathematical work confirm the same.   

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Global Slowdown….Just Starting Or Nearly Over? Google

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InvestWithAlex Joke Of The Day

Goldman Sachs issues a Strong BUY recommendation on what is forecasted to be the hottest selling toy of 2014 holiday season. God Almighty, Inc (GOD), now with AK-47. 

z16

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Stock Market Update. March 12th, 2014. InvestWithAlex.com

Daily Chart March 12, 2014 investwithalex

A relatively flat day….the Dow Jones lost -11 points (-0.07%) while the Nasdaq gained +16 points (+0.37%)

After a massive sell off in Asia overnight, most bears proclaimed that the US market will take a hit as well. The markets did open up with a large gap down, but were able to recover most of their losses to end the day either up or flat. Even thought negative fundamental data, overvaluation data and speculative bubble metrics continue to pile up, the bears cannot catch a break. 

WHAT GIVES? 

Well, it’s rather simple. Based on our mathematical and timing work, the stock market has an internal mathematical structure. It must hit its points of force before any bear market or a reversal can take place. Believe me, the fundamental bearish data above will come in to play, soon enough, but for the time being the market doesn’t care. If you would be interested in learning exactly when the bear market of 2014-2017 will start as well as it’s exact internal composition, please Click Here.  

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Stock Market Update. March 12th, 2014. InvestWithAlex.comGoogle

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How To Avoid Paying Taxes….Through A Legal Loophole…. Of Course

In another perfect illustration of Federal Tax incompetence, multinationals have accumulated close to $2 Trillion in tax free earnings overseas. Only a corrupt government with a messed up tax code can tax your Social Security or Welfare income while allowing Apple, Google and IBM to accumulate hundreds of billions of dollars in tax free profit overseas. In fact, when I have lived and worked overseas I had to declare my foreign income and pay taxes on it here in the US. That is on top of taxes I have already paid to the foreign government.  But not multinationals.

Does anyone know how I can get one of these loopholes for myself? 

Short of renouncing your American Citizenship you are shit out of luck. But here is how you can achieve the same status as multinationals. .

  • Step #1: Fly to British Virgin Islands and Incorporate a company.
  • Step #2: Fly to Hong Kong and open a business for your company in step #1.
  • Step #3: Fly back to the US and incorporate your HK company in Delaware.
  • Step #4: Properly structure your income generation and bank accounts.  

Congratulations!!!. You are now untraceable and can achieve the same status as multinationals. Outside of income generated within the US, all of your other earnings/income should be considered “deferred” forever under today’s IRS laws. Fair and square. Plus, you get to visit BVI and HK. Everyone wins.

Loopholes investwithalex

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Google

The largest U.S.-based companiesadded $206 billion to their stockpiles of offshore profits last year, parking earnings in low-tax countries until Congress gives them a reason not to.

The multinational companies have accumulated $1.95 trillion outside the U.S., up 11.8 percent from a year earlier, according to securities filings from 307 corporations reviewed by Bloomberg News. Three U.S.-based companies —Microsoft Corp., Apple Inc. and International Business Machines Corp. — added $37.5 billion, or 18.2 percent of the total increase.

“The loopholes in our tax code right now give such a big reward to companies that use gimmicks to make it look like they earn their profits offshore,” said Dan Smith, a tax and budget advocate at the U.S. Public Interest Research Group, which seeks to counteract corporate influence.

Even as governments around the world cut tax rates and try to keep corporations from shifting profits to tax havens, the U.S. Congress remains paralyzed in its efforts. The response of U.S.-based companies over the past few years has been consistent: book profits offshore and leave them there.

Congress hasn’t acted because of disagreements over whether to be tougher on U.S. companies operating abroad amid broader disputes over government spending and taxation. The stalemate has prevented the U.S. from tapping a pot of money that President Barack Obama and the top Republican tax writer in Congress have eyed for such projects as rebuilding highways.

Deferring Taxes

Meanwhile, the companies are deferring hundreds of billions of dollars in U.S. taxes as they lobby to end a system they describe as a competitive disadvantage in world markets. The top 15 companies now hold $795.2 billion outside the U.S., up 10.6 percent.

That increase was slower than the 15.9 percent rise in stockpiled profits those same companies had the previous year. Pfizer Inc. reported a decrease in offshore profits this year, and General Electric Co. and Citigroup Inc. each reported growth of less than 3 percent.

The Bloomberg analysis covers the two most recent annual filings from 307 companies in theStandard & Poor’s 500 Index. It excludes purely domestic corporations, those that don’t disclose offshore holdings, companies with headquarters outside the U.S. and real estate investment trusts that aren’t subject to corporate taxes.

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Yo Canada, Your Real Estate Is Way Overpriced. Crash Coming?

If you thought California real estate was expensive, take a look north of the border. The situation in Canada is equivalent to the hottest markets in the US, with one primary difference. Canadian real estate was a late bloomer and their speculative cycle didn’t really get going until after 2002. Since their real estate cycle was about 8 years behind, they were not impacted by the real estate collapse in the US. Further, when the next round of financing (by the FED) showed up in 2008, Canadian Real Estate simply continued to accelerate as if nothing had happened. 

Basically, Canadian real estate is where the US real estate was 8 years ago. The cycles confirm that as well. When this particular liquidity party ends (happening now) and the stock market shifts into the bear market of 2014-2017, I would fully expect Canadian real estate to collapse. It is never different. 

Garth Turner’s Blog “Greater Fool” is a great place to follow Canadian Real Estate if you wish. Click Here. 

Please see the full report below.  

crazy canadians investwithalex

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Yo Canada, Your Real Estate Is Way Overpriced. Crash Coming?  Google

From Our Friends At Doctorhousingbubble.com

I really enjoy Canada.  A beautiful country with great cities and fantastic food.  Leave it to our neighbors to the north to show us how it is done for a real housing mania.  For the first time in history we have experienced coordinated global housing bubbles courtesy of central banks following very similar policies.  The addiction to debt isn’t only a U.S. born condition.  While the recent U.S. market is dominated by low supply and massive investor buying, Canada continues to see rising home prices even right through the global Great Recession.  The Canadians interestingly enough also face similar dilemmas between older and younger generations.  Many young professionals are fully priced out of the real estate market even when they are working at relatively good careers.  Many battle it out in the condo markets were even in this market prices are inflated.  Canada has an incredibly heavy reliance on real estate, more so than the United States and their household debt ratios make the U.S. look like a frugal uncle.  One fascinating story highlights a similar story to what many baby boomers here in the U.S. are facing with their offspring.  They face the reality that they are house rich but cash poor.

Canada’s inflated real estate market

Home prices in Canada are inflated.  Global cities like Vancouver and Toronto face massive investor buying that largely makes it tough for local families to buy.  Many pre-bubble buyers are caught in a golden castle but unable to unlock the money until they sell, a similar condition to many baby boomers here in California.

It is important to note that there was no correction in home values even during the Great Recession in Canada:

canada home prices

Canada home values have increased by close to 80 percent in the last decade.  For the U.S. over this same period of 1994 to 2004 home prices are up (adjusting for inflation) by a modest 10 percent even after the 2013 mania:

us home values

The housing market in Canada has been split in many areas between mass produced cheaper condos versus single family homes:

“(CBC) One market is facing too much supply, while another appears to be heating up,” the bank said. “The GTA housing market is a tale of several markets with divergent conditions.”

There are certainly changes in the wind but bubbles can go on for much longer than you think.  How are Canadians keeping this thing going?  For one, they are going into massive debt and putting the consumer hungry Americans to shame:

Debt-to-disposable income ratio

The above chart is very important.  The U.S. hit an apex in terms of how much household debt would tip an economy over.  Debt-to-personal income in the U.S. hit a peak of roughly 125 percent during 2007 at the height of the housing bubble.  You can see the correction that followed in the U.S. and many have felt on a personal level.  Yet Canadian’s continue to pile on debt beyond their actual incomes.  As of more recent data, they are closer to a 150 percent ratio.  Which leads us to those golden real estate handcuffs in Canada.  A great piece on the Great Fool blog highlights this generational divide:

“(Greater Fool) Cheryl and Paul are 57 and 60 and live in a Mississauga house they figure is worth $900,000. They’ve spent the last 14 years paying down the mortgage and have about $80,000 yet to go. She’s been at home since the last kid left the nest six years ago. He sells real estate, made $126,000 last year and has no pension. Between them they have$37,000 in TFSAs, $160,000 in RRSPs and about forty grand in a high-yield savings account.

“How we doing?” Cheryl asked, hopefully. I paused to collect my thoughts. “Oh,” she said. “That bad?”

Of course she knew the answer. The Boomer couple has just over $1 million in net worth, but 80% of it’s in one asset. Paul has no pension. Worse, as a commissioned salesguy, he has no business to sell. And he’s just as good as his last deal – which means any housing correction will not only sideswipe his income, but also his family’s net worth. It’s double jeopardy. And then there’s the nature of their liquid investments – the bulk of which sits in high-cost mutual funds inside an RRSP, meaning the money’s fully taxable.”

This is an interesting situation very similar to our struggle for housing for younger professionals today in many high priced metro areas.  The couple in the story above is massively house rich.  80 percent of their net worth is tied up in housing.  Their retirement accounts are paltry assuming they will be living off this amount for 15, 20, or even 30 years.  The house does not throw off any income.  The only way to unlock the money is to sell.  A home equity loan essentially means resetting the clock on additional debt.  Downsizing or moving to a cheaper area is the only way to leverage that massive gain in housing.  But how many people actually move?  In the U.S. we pointed out that most people are home bodies that would rather eat cat food in their million dollar home versus selling and using the money to live a decent retirement.

Canada’s economy is too focused on residential investment:

US vs Canada resi investment

Canada has been investing too much into real estate going back to 2002.  You can see the correction for the U.S. but is there something else going on here?  The article highlights a reality that many even in the U.S. will face when they are house rich and cash poor:

“But it’s a house. No dividends or interest. Just property taxes, maintenance, insurance and eight hundred grand of locked-in equity which must be released, or these folks are going to run out of money before they run out of time.

This brings us to Jason. Their kid. He’s 28. A member of Gen Y which, at 27% of the population is almost as big as the Boomers (32%). Jason rents in Toronto, makes $52,000 as a IT guy, rides a bicycle and the TTC, likes being urban, has no debt and puts money monthly into a TFSA with $18,000 in it. That makes him typical, too.”

This story is all too familiar to people in high priced Southern California.  The vast majority of people in SoCal that bought pre-bubble have locked in some solid games.  Yet how do you unlock those?  Heck, the advice is to stretch to the limit (meaning forego the retirement accounts or other alternatives) and double-down on housing.  We have seen the resurgence of adjustable rate mortgages (ARMs) to stretch the budget even further.  So all the money goes into this one asset.  But then what?  The truth is most will want to move up with that equity they build up (the average hold time in housing is seven years across the U.S.).  So many simply kept resetting the clock up on the property ladder.  Age doesn’t care about your new 2,000 square foot house with granite countertops and if you have a mortgage, you’ll need to continue generating income to pay the bills.

The story above also highlights the story of one of their “kids” at 28 that has a job in IT and makes $52,000 a year.  How in the world is an $800,000 home even feasible for their son?  Even a $400,000 condo would be a stretch.  Should he save for a down payment?  If he starts now he might be able to buy in his forties.  But then a home will cost $1.2 million according to some analysts based on future projections (simply using the current trajectory in Canadian home values).

The young in Canada seem to be facing similar predicaments to those in the United States:

“Incredibly, almost 45% of all young people between 20 and 29 live at home. The jobless rate for the cohort is about 14%. Student debt averages $37,000 after a four-year degree. Underemployment is endemic.

And this is the big hope for so many Boomers – that the ‘next generation’ will pony up and bail them out? Good luck with that.”

Living at home and massive student debt!  A story near and dear to our hearts.  As much as some Canadians would like to believe they are different from their neighbors to the south we are very much alike in our addiction to debt.  We also apparently have a large portion of youth living at home.  I can imagine this is more pronounced in high priced areas.  Just look at the L.A. region in SoCal versus Vancouver in terms of prices:

home prices los angeles

Going back to 2004 home prices in L.A. adjusting for inflation are up 30 percent.  A pretty big jump considering household incomes have not gone up in tandem.  But just look at Vancouver:

vancouver

Home prices are up 110 percent during this similar period!  Vancouver makes SoCal look like an affordable paradise.  It is interesting to know that Canadians are basically facing similar demographic challenges and have a massive amount of young people living at home.  They beat us in hockey and they certainly beat us in going into massive debt.

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When $1 Billion “Public Short” Backfires

Hedge fund manager Bill Ackman has hit Herbalife (HLF) with everything he’s got over the last few months to ensure the profitability of his $1 Billion short position against the company.  To no avail. The stock price continues with it’s general uptrend. Whether or not Ackman is fundamentally correct is irrelevant here. He already made two massive mistakes that will cost him a boatload of money. 

    • Never advertise your short position. You risk a short squeeze more than letting others know that the company you are shorting is either fundamentally weak or overvalued. 
    • Timing is the most important element. Don’t short the stock until it breaks down. 

Herbalife might very well be “a scam” as Ackman claims, but it’s share price will only collapse when the time is right. In fact, it might very well be after Ackman covers his short position in disgust or after some sort of a short squeeze. That is why proper timing becomes so important. On the watch list you go HLF. 

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When $1 Billion “Public Short” Backfires Google

BOSTON (Reuters) – Hedge fund manager William Ackman renewed his attack on Herbalife on Tuesday and said he has evidence the U.S.-based nutrition and weight loss company is breaking direct-selling laws in China, its fastest growing market.

Ackman, who has placed a $1 billion short bet against Herbalife, said the company was making recruits pay an entry fee and letting distributors recruit new members, activities he said were illegal in China. He also said the company is disguising its sales to distributors as hourly consulting fees.

Herbalife said it follows local laws. Chinese regulators have yet to comment on the matter but direct sales models have recently come under fire in China, where authorities launched a probe in January into Herbalife’s rival NU Skin Enterprises Inc after state media reported that it brainwashed its members.

In a telephone presentation which lasted more than two hours and drew some 300 listeners, Ackman said the findings were a first step towards bringing his concerns about Herbalife to the attention of Chinese officials.

Ackman, who heads Pershing Square Capital Management, hired research firm OTG to collect the evidence through interviews with Herbalife distributors in China. He was joined on the conference call by one of his lawyers, David Klafter, who said Herbalife is violating Chinese law.

“My understanding of the facts and law in China is yes, they are violating both civil and criminal law,” Klafter said on the conference call.

Legal experts in China, however, say laws governing direct selling are unclear and enforcement is often lax, which makes any tough regulatory action against Herbalife unlikely.

Some Chinese laws allow direct selling under limited conditions, while others ban so-called pyramid selling, when members make more money recruiting new members than selling the actual product.

“These firms are operating in a regulatory grey area in China, which gives less protection because you’ve got an uncertainty hanging over it,” said Ben Wootliff, Hong Kong-based general manager for global risk consultancy Control Risks.

“The law in China says one thing, if it’s actually enforced is a completely different thing.”

Corey Lindley, chief cfinancial officer at direct sales firm dōTERRA and a former NU Skin executive in China, also said the regulator was unlikely to take strong action against Herbalife any time soon.

“I don’t doubt that because of all of this attention there will be some modest movement of some sort with the regulators just trying to be responsive to all of this, but I don’t think it will be material at all,” Lindley told Reuters.

Herbalife said sales in China rose more than 120 percent in the fourth quarter of 2013, the fastest of any region worldwide, contributing about 10 percent to global sales last year. The company has 200,000 sales representatives in the country and uses a “unique marketing program” to meet Chinese regulations, it said in its latest annual report.

Herbalife has said it remains confident in its business in China and said it is in compliance with local laws.

IN THE SPOTLIGHT

Ackman publically accused Herbalife of running a pyramid scheme in December 2012 when he unveiled his $1 billion short position in the company’s shares. So far he has lost money on the bet as rivals such as Carl Icahn took the other side.

The company says its business is not a pyramid scheme.

Despite the paper losses, Ackman has said that he has found fresh evidence nearly daily that is convincing him to stick by his original bet. If Herbalife ceased to exist right now he would make a few billion dollars, he said.

But there is no sign yet that Herbalife is near collapse, particularly since no regulator has yet commented publicly about its intentions in spite of heavy lobbying from Ackman.

During the conference call, many participants asked why there are virtually no public stories about people who have lost their life savings on investments in Herbalife.

Ackman said civil rights groups have identified over 1,000 victims and that this firm has found roughly 200 victims. But he said many victims are reluctant to go public because they do not realize they have been cheated or are embarrassed about it. Also “a lot of Latino victims are undocumented and the last thing they will do is complain to the government,” Ackman said.

Fresh media attention, including a front page article in the New York Times on Monday, should help galvanize regulators into reviewing the matter, he said.

Herbalife’s share price closed down 1.16 percent at $65.39.