Friday, October 16, 2009

Not Quite Right

(c) copyright View from Florida, 2009. All rights reserved.

A nagging, persistent feeling of something "not quite right" hangs over recent market events.

The dollar hits a new 52-week low while the market hits a new high? (OK, that one's felt so wrong for so long that people are now explaining it via carry trade, HFT & several other machinations that don't "feel" like the whole story.)

The market hits a new high while bonds continue to flirt with their highs? (Don't these entities classically move in opposite directions? Isn't that history the point of all the "money on the sidelines" touts?)

Bonds stay high (aka, rates stay low) while several commodities remain strong and gold hits a new all-time (nominal) high? (But why are bonds still strong?)

Depending on what or who you believe, at least one, probably two, of the above trends is "wrong." The big question now is which one???

Zero Hedge publishes pieces from a Nic Lenoir. Ignoring the run-on sentense, he seems to explain the contradiction below:
* * * * *
Let's recap a little bit what China's economic policy has been: buy and store large amounts of commodities, to a point where recent reports indicate the country is freezing steel production capacity for 3 years because of fears of price collapse, peg the Yuan to the USD, buy EURUSD everytime the uptrend is threatened in order to de-facto devalue their currency, while being hedged by the stockpiles of commodities purchased prior to that, and make the most of the explosion in monetary growth (28% annually) necessary to keep the peg going to further buy commodities and stimulate the economy because 14% of GDP in stimulus might not just be enough. About China buying EURUSD by the way, if anybody has doubts talk to your nearest FX dealer and you will see: the PBOC supported the market at 1.4480 when we threatened the uptrend, and at 1.47 when we tried to reverse after hitting 1.48 the other day. These actions are not only visible by anybody in the market, they are also market-timed and clearly part of a plan a lot more elaborate than just diversifying currency reserves. I forgot to mention the talks of side deals with Russia to settle energy purchases in Ruble and Yuan. This has nothing to do with paranoia or conspiracy theory, in fact if I were the Chinese government I would probably do the same thing. After all China is simply trying to run a policy that maximizes the country's economic power. It's a perfect set-up for a bubble and implosion, but when it comes to the intentions behind the policies it's hard to blame China.

On the other end, it is absolutely unbelievable that anybody in the US government would be cheering about this. The game plan for the demise of the US economy might is being laid out in front of our eyes, and officials cheer about it? Are we that worried about European competition that we are actually winking at other countries in Asia organizing the USD devaluation for us so we gain a competitive advantage? Certainly concerns are rising in Europe that there is a secret handshake agreement between the US and China regarding an organized and controlled currency devaluation. Hard not to wonder about it at the very least looking at the facts.

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Maybe I'm too unsophisticated to see through this as a false or irrelevant argument, but it does help explain recent dollar /bond /gold trends. (i.e., China is selling dollars via futures but "protected" by hedges in gold and commodities. A convenient side-effect of such selling is the reduction in Yuan printing, thus dampening inflation inside China.)

The above reinforces my concerns that long-term bonds may not behave as they did in previous recessions /depressions and might be a poor bet going forward.

As always, invest at our own risk.

Sunday, October 11, 2009

Smart and Thorough -But Wrong

October 11, 2009

Smart and Thorough -But Wrong

© copyright View from Florida, 2009. All rights reserved.

Back on October 2, Zero Hedge put out a link to a 17-page piece by Bob Kessler (*) which I finally got around to reading at length this evening. He makes smart and thorough points about the economy and likely durability of the current rally. Many of them are “against the grain:” which is always interesting to find in this day and age of economist herding and everyone going along to get along. (Or going along to stay employed, as we often opine.)

However, one important but caught our eye:
“So we go back to basics. We remind our investors that the short end of the U.S. Treasury yield curve anchors all maturities governed by U.S. central bank monetary policy observed in its most basic form as a transparent Fed funds target rate. We contend that the long end of the yield curve is substantially governed by inflation (and only to a lesser extent the component inflation expectations), plus the available real rate of return (as calculated against measured inflation).”

Based on this foundation, he posits with “mathematical rigor” that long-term bond rates will inevitably stay low, and should be even lower, due to lack of CPI inflation. (He specifies CPI as his measure of inflation –several times.)

Since there is no history with today’s trillions in debt being issued, the “mathematical rigor” in his model is immediately suspect. (Even if the politicians do show some guts and rein in deficits, Treasury must still roll out unprecedented oodles of long-dated bonds for years to come.)

This alone doesn’t disprove his argument. A commentator I respect argues there will be plenty of safe-haven demand during a protracted bear market and “real men trade the long bond.” Despite predicting the same low-yield result for different reasons, both Kessler and one of my favorite commentators may be correct.

However, both overlook an issue not much in play during previous bear markets --currency valuation.

I could go on and on about the relevance of CPI. We could moan about the value of your 1930’s long bonds before and after FDR raised the price of gold from $20 to $35. If it wasn’t late evening, I imagine there are a half-dozen more points to be made…

The essential point remains, never before were global participants able to switch massive holdings back and forth among USD, EUR, JPY, AUD, CAD, etc. (Not to mention gold, oil, copper,) at the click of a mouse. Never before was there credible risk major USD holders might choose to hold something other than USD –or instantly –and quietly-- dispose of USD they hold. (Yes, we concede that just because they can switch doesn't mean they will.)

Long bond yields may or may not stay low. Citing CPI and inflation expectations as “mathematical proof” of this prediction ignores the risk of currency devaluation.

Ignore this consideration at your own peril!

Ps, this comment belongs over at ZH, but there are so many, many comments –often just rants—it feels like a waste.

*= http://www.zerohedge.com/sites/default/files/KESSLERcommentary-0820200KESSLER_9.pdf

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The above is not intended as advice to buy, sell or hold any stock, bond nor any other financial product. Invest at your own risk.

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Monday, August 3, 2009

Dinosaur Egg Pluots, Part II

While we're on the subject of well-named programs, let's chat for a brief minute about California's state employee "furloughs."

Nobody in Sacramento has the guts to push for serious "layoffs" but apparently "furloughs" are OK.

The astonishing thing with the current two-day-per-month furloughs (a 9% cut) is we hear zero --and I do mean zero-- complaints about unavailability of state services. (DMV was already so difficult that it doesn't count.)

So far, the increase to three days per month (14% cut) has not been portrayed in the press as unduly depriving California taxpayers of our precious public services.

This leads to a series of suggestion that will surely help balance the California budget:

1) "Taxpayer Fridays"
Raise furloughs to four days per month (20% cut), effective October 1st. (About when the next budget "crisis" arrives.)

Not only are state labor costs now cut 20%, but Friday rush hours are easier to navigate!

2) "Golf Course and State Park Relief"
Add Wednesday afternoons as furlough days. As partial offset to the 30% in taxpayer savings, give furloughed workers their choice of discount passes to the muni golf courses littering the state or to state parks where the entry fees were jacked up to preserve state worker headcount and pay.

Assuming this 30% cut finally causes some ruckus from taxpayers:

3) "California Carbon Credit and TAxpayer Relief Program" or "C-3 TARP!"
Renegotiate all state labor contracts so that office hours are 30 hours per week (25% cut), scheduled either 6am -1pm or 12N -7pm. This way, state workers are relieved from being on the road during rush hour. (Before you object, note these are not terribly different schedules than those forced on some students due to budget maneuvers concocted to preserve teacher and administrator salary and retirement packages.)

Think of all the gas money taxpayers also save since we will be driving to work with ~105,000 state employees off the roads at rush hour. Think of all the road projects which could be avoided (many of which are already delayed, and possibly lost anyway) when rush hours loads are reduced.

Finally, a TARP program working for taxpayers instead of against them!

If you don't absolutely love these ideas, then we suggest:
4) "California taxpayer savings" (CATS)
Let the layoffs begin! Keep cutting until the budget balances. When it gets out of balance again next quarter, go back and cut again!

Saturday, August 1, 2009

Dinosaur Egg Pluots, Part I

Walking through the produce aisle a couple weeks ago, we found "Dinosaur Egg Pluots." These were not ordinary plum-apricot hybrids mind you, these were "special." They were so rare (but hopefully not so old!) they were called dinosaur eggs.

I had to explain to my daughter a couple times they were the same pluots we saw in California but sometimes, when you give something a really snappy name, people think it's "special."

Today's example of this effect is from a WSJ article describing the gnashing of teeth and rending of garments over cuts in California's "Medi-Cal" which is typically described as "free medical coverage for poor children."

Doesn't that sound special? What heartless bastard would publicly vote against, "free medical coverage for poor children?" With a description like that, it must be good, right?

There is no sense using the more accurate description of "free medical coverage for children of illegal aliens." Otherwise, ordinary people might question if California can really afford to cover all children of all illegal aliens. Without limits. For free. Forever.

The WSJ article concludes by describing a family with two kids earning $23,000 but no insurance and a son who was bitten by a dog and required $26,000 dollars in plastic surgery. The $26,000 bill was apparently 100% paid by California taxpayers. The family was presumably extra grateful since this $26,000 of free money was on top of the $170 per month in medications they already received from the state for only $10. (Admittedly, not quite free.)

As reported by WSJ, the debate in Sacramento revolved only around how much to fund the program. The choices seem to be "heartless" or "continued funding" (aka, "eventual bankruptcy").

At risk of provoking an argument (or proving myself stupid!), one "alternative" inundates Florida billboards and TV ads where Florida lawyers aggressively solicit personal injury complaints. Because of the cumulative case volume, liability rates are higher than California but, over time, settlements can be almost cookbook. Injury type "xx" is typically awarded "$yy" by a jury. Except in extreme cases, lawyers prefer to settle quickly, which limits costs and liability while putting money into the hands of victims fairly quickly.

Whatever you think of this system, the owner of a Florida dog causing $26,000 in medical bills generally ends up on the hook for the $26,000 --instead of Florida taxpayers. In addition to having one less dog running loose in Florida, the settlement takes victims off the indigent roles, at least for awhile, thus taking medical expenses off the backs of Florida taxpayers (at least momentarily).

Admittedly, Florida's auto and liability insurance rates are higher than California's. However, it at least points risk at the responsible party instead of leaving the state to bail out everyone.

Is there some solution for California in Florida's tort and liability system? Hmmm...

Friday, July 17, 2009

Precipice of the Exact Cliff

(c) copyright View from Florida, 2009. All rights reserved.



The real estate cartel is out in full force touting this or that metric as "proof" that "now!" is a great time to buy a house. Supposedly, price-to-income, "affordability index" and rent-to-sales prices are all at attractive, even "bargain," levels.

Since a number of View from Silicon Valley readers, not to mention the author, are waiting for the "right" time to buy a house, it's useful to really "know" if these claims are true.

Today, we turn to the latest from T2 Partners. (Highlights and comments added...):

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California housing – at the low end – is 'bottoming' mostly (only) because: a) median prices are down 55% from their peak over the past two years, thereby making the low end affordable; b) foreclosures have temporarily been cut by 66% through moratoriums reducing supply; and c) demand is picking up going into the busy season.

But the moratoriums are ending and the number of foreclosures in the pipeline is massive (!)– they will start showing themselves as REO over the near to mid-term. The Obama plan held the foreclosure wave back, creating a huge backlog and now the servicers are testing hundreds of thousands of defaults against the new loss mitigation initiatives. We presently see the Notice of Defaults at record highs and Notice of Trustee Sales back up to nine-month highs – there is no reason for a loan to go to the Notice of Trustee Sale stage if indeed it wasn't a foreclosure. However, the new 'batch' are not only from the low end but a wide mix all the way up to several million dollars in present value.

Because the majority of buyers are in ultra low and low-mid prices ranges, the supply demand imbalance from foreclosures and organic supply will crush the mid-to-upper priced properties in 2009. We already have early seasonal hard data proving this. As the mid-to-upper end go through their respective implosions this year and the volume of sales in these bands increase as prices tumble, the mix shift will raise median and average house prices creating the ultimate in false bottoms. We also have data proving this phenomenon. (We warned about this awhile ago: Total sales and median prices turn up --as they reportedly did in June -- just as high-end house prices collapse. We don't want to be "early" to this party!)

After a year or so the real pain will occur when the mid to upper bands are down 40% from where they are now, and the price compression has made the low to low-mid bands much less attractive – the very same bands that are so hot right now. Rents are tumbling (crushing those knife-catcher "investors") and those that bought these properties for investment will be at risk of default (investors have been buying all the way down). Investors have just started to get taken to the woodshed from all of the supply and this will get much worse. Mid-to-upper end rental supply is also flooding on the market making it much better to rent a beautiful million dollar house than putting $300,000 down and buying.

After investors are punished -- and with move-up buyers gone for years – it will leave first-time homeowners to fix the housing market on their own. (i.e., buyers will have real leverage). Good luck and good night. Five years from now when things look to be stabilizing, all of these terrible kick-the-can-down-the-road modifications that leave borrowers in 5-year-teaser, ultra-high-leverage, 150% LTV, balloon loans will start adjusting upward and it will be Mortgage Implosion 2.0. These loan mods will turn millions of homeowners into over-levered, underwater, renters and ensure housing is a dead asset class for years to come. (THEN, it will be a good time to invest! You won't have much competition...)

Due to a confluence of events including a national foreclosure moratorium and near-zero sales in the mid to upper end during the off season, the broader housing data show signs of stabilization. Taken in context, it is a blip.(!!) There are no(!) silver linings or green shoots in housing whatsoever other than by these first-time homeowners – former renters – who now find it cheaper to own than rent. (Yes, this is still the best metric for "when" to buy.) This is a very good thing, but it only applies to a small segment of the population and will not be able to support the market.

In addition, the first-time buyers who come out of the rental market put continuous pressure on rents. Our data shows that the mid-to-upper end housing market is on the precipice of the exact cliff that the market fell off of in 2007, led by new loan defaults. What happens to the economy when you hit the mid-to- upper end earners the same way the low-to-mid end was hit with the subprime implosion? We will find out soon enough. When we look back on housing at the end of 2009, anyone that made positive housing predictions this year will not believe how far off they were.
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Conclusion: Stay strong. Protect your capital. Better opportunities are coming!

Sunday, July 12, 2009

Same Story, Different Place

© Copyright, View from Florida, 2009. All rights reserved.



Greetings from our new digs in Florida! We hope you enjoy the insight and common sense we tried to apply in Silicon Valley, now emanating from ~2,800 miles east.

This is a trial effort. I’m not sure how frequently we will post, but here goes.
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The numbers change, but the story is the same here. We’re not surprised, but we thought you might enjoy the deconstruction of a front-page “woe is me” article from our new local paper(*). The general topic was the (largely self-inflicted) difficulty suffered by local golf courses but the chutzpah of some homeowners, left unchallenged by the local reporter, cried out for extra attention.

The money quote was:
* * * *
In Oldsmar's East Lake Woodlands, Jon Nelson and his wife want to move to a smaller home because their children have grown up and moved away. But their Arthur Rutenberg home — $599,000, down from $625,000 — won't budge.

"It's just a terrible time to be selling any house," Nelson said. While he enjoys the golf course, he said, "It's a selling point if somebody wants to belong to a country club and play golf."

* * * *
Oh, puh-leeze!

A quick search of public records finds they are the original owners and bought this house allegedly “worth” $625K for only $390K of real money in 1996. There is nothing(!) to stop them from lowering their price to attract a buyer. This is a classic example of greedy owners trying to cash out. (For reference, this house is five beds, four baths, 3,490 square feet, pool, built in 1993.)

As an aside, we might cut the owners a little break by observing Zillow shows the peak “value” was $776K (in ~mid-2006). We then take the little break back by noting today’s Zestimate is only $550K with a “value” range of $470K to $608K.

Zillow also shows this house on the market at $599K for 151 days. Did anybody get a clue during the last five months to lower the price?

Attacking from a different direction, if we mirror California and assume the annual “value” increases 2% per year, today’s “value” projects out to ~$504.5K.

In short, crying about not selling at $625K is equivalent to demanding a greater fool step up in the middle of this severe recession and fund your retirement. (Editor’s note: Such a strategy actually seems to work for local public employee unions, but that’s a rant for another day.)

Based on living on the same county and shopping for a house in 1997, I have to say even "only"
$390K seems a bit stiff for that part of town in those days. I could be convinced they over-paid by $40 -$50K in 1996 from which you then project a “value” at ~$450K in 2009 –or whatever year they eventually “get real” on the price. Fortunately for these owners, the intervening housing bubble may help them overcome the rule, “You make money when you buy real estate, not when you sell it.” However, they may "only" gain $50 or so instead of the $200K implied by their 151-day-old asking price.

As an aside, implying folks who refuse to lower their asking price when they could are in anywhere near the same boat as the tens (hundreds?) of thousands who are underwater and/or unable to make payments does a terrible disservice to the public debate. (However, do not for a minute imagine we agree anyone “deserves” to be bailed out at the behest of the government. That’s also a rant for another day.)

Conclusion:
For crying out loud, just lower the price and sell the dang house already! Regardless of politicians trying to support house prices and bail out all the losers, house prices are not coming back. The longer you wait before lowering your price, the farther you have need to lower it to catch up with the market and close a sale.

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*"At Tampa Bay country clubs, golf hits a rough patch"
http://www.tampabay.com/news/business/realestate/article1017542.ece