With Rents On The Rise Can Home Prices Get Any Cheaper?

I've been slammed lately with the day-in, day-out of running an investment firm hence the lack of blog posts. However, I ran across this chart last week in the Wall Street Journal and thought it deserved at least a note here.

For the first time in as long as most people can remember houses are now cheaper to own than to rent. This is a major development for the industry and the economy at large because I believe this means we are, at the very least, near a floor for housing prices.

If housing prices get any cheaper they just become too attractive for investors to ignore. When cash-on-cash yields for investing in residential property approach 2x long-term treasuries (not including any appreciation at all in the value of the underlying property) they simply can't be ignored. Factor in simply the inflation rate as an appreciation variable and the asset class becomes even more attractive.

This is why I believe home prices just can't go much lower. Having said that they may not immediately go higher, either. In fact, the prevailing sentiment towards home ownership may prevent them from doing so. It seems everyone and their mom is now happy to rent for eternity. Housing today, in such stark contrast to the view of only five or so years ago, is seen as a bad investment which is precisely why it is so cheap.

Still, if housing can find a bottom then the economy may find itself freed from its biggest anchor. If housing were to simply be upgraded to a recessionary condition from its current depressionary one the economy may finally start to show real signs of life.

I Read The News Today, Oh Boy: The American Criminal Class

• How can these elected officials do “the people’s business” when they have a personal, vested interest?
• Eurozone prophet of doom: "The current policy of lending plus austerity will lead to social unrest" 
• The great de-leveraging
• Self truth (and the best violinist in the world)
• Every stock market cliche came true this year
• "Games of Chicken" - Tim Duy on the European debt crisis
• Eurozone debt markets in "mayhem"
• What's the matter with Spain?
• FRBSF: "the odds are greater than 50% that we will experience a recession sometime early in 2012"
• At Google X, a Top-Secret Lab Dreaming Up the Future
• The US is ramping up attempts to safeguard its financial system from a worsening of Europe's debt crisis
• Even as Governments Act, Time Runs Short for Euro
• Calculated Risk: Considerable Downside Risks to an Already Very Weak Economic Forecast

What's Ailing the Economy

Warren Buffett told CNBC earlier this week that the residential real estate industry, and those with economic ties to it, were in a "depression." If not for the weakness in this sector the broader economy would be humming right along.

Today, the Wall Street Journal exposes one of the main reasons housing just can't seem to get up off the mat: it's just too tough to get a mortgage.

Lenders are offering 30-year fixed-rate mortgages below 4%. Compared to typical family incomes, houses are more affordable than in decades. Yet home sales are languishing. A National Association of Realtors' survey found 15% of real estate agents said their last contract didn't close because the buyer couldn't get a loan... If some Americans can't get mortgages because they don't have steady jobs or down payments or agreed to pay for more than a house is reasonably worth, OK. But if the pendulum has swung so far that creditworthy borrowers are turned away, that does unnecessary harm to the economy.

Clearly if loans, for either purchase or refinance, were just a bit easier to qualify for the residential real estate industry and the economy at large would benefit. Maybe then housing could finally find a bottom. But how do we get there? I think it needs to begin with Freddie and Fannie and the FHFA.

Larry Page's Prodigious Pension

So I guess Google CEO Larry Page wants to be the next Steve Jobs. But after reviewing his insider filings I think I want to be the next Larry Page.

Turns out he's selling a little over 80,000 shares of his $600 stock each and every month for proceeds of roughly $50 million. Think about that: $50 MILLION EACH AND EVERY MONTH! It's like winning the lottery every fricking time!

And the best part is... because he owns over 8% of the company Larry can cash out like this every month for the next 30 years before he runs out of stock.

Disclosure: Long $GOOG

Traders Tripping the Triangle

"Technicians are all agog today about a triangle pattern in the S&P 500 that could mean a big breakout to the upside." -Wall Street Journal

"The S&P 500 has formed a 'triangle' pattern, a sign to analysts who study charts that the rally is about to resume after the benchmark gauge for U.S. stocks rose as much as 20 percent last month." -Bloomberg/BusinessWeek

My friends over as Aspen Trading yesterday drew my attention to the fact that the chart pattern below has been getting plenty of mainstream attention of late as evidenced by the quotes above.

First, it is rare for the WSJ or the FT (Financial Times) to comment on technical patterns.  Second, as Joe Granville stated many years ago, "If it's obvious, it's obviously wrong.".  It does not get more mainstream then having this pattern highlighted in the WSJ.  It does not mean it is invalid or won't play out, one has to wonder if the triangle will even play out or if it does it will likely morph and throw a few curve balls at us first.

Or in the words of Bob Dylan, "All of the people can't be all right all of the time."

The Power of "New Retail"

Yesterday I ran over to Macy's to do a little Christmas shopping for my better half. I heard the department store was running their "1-Day Sale" which they advertise as their biggest sale of the year and actually runs two days. That juxtaposition should have tipped me off.

Because she reads this blog I can't say what I bought but I will say that it was marked 50%-off and I had a 25% off coupon which was good even on top of their already discounted products. I was in a rush so I paid for my items and then had a funny feeling that I overpaid.

I looked at my receipt and noticed that the clerk only took 20% off of my purchase so I turned around and asked the clerk about it. She told me that the 50%-off only applied to certain styles and my coupon wasn't valid until November 30. 20%-off she said was the correct discount.

So I, the customer, walk away feeling deceived after getting a 20% discount, a discount that under normal circumstances would make me feel pretty good about a purchase. So why didn't I feel good about it? I thought about it and realized I couldn't feel good about it because I couldn't be sure I got the best possible price.

And this is the problem with "old retail" or the old way of selling things. Old retail starts with an outrageous price trying to get people to drastically overpay. We discover this when we see these same items go on sale for far less than when they first hit the shelves. This causes us to distrust this source the next time they try to sell us something. In this way, old retail teaches us not to trust them and when we do overcome this distrust we still don't feel good about doing business with them.

Not only do most department stores operate this way. Car dealers, supermarkets, jewelers, etc. all work this way. Think of any purchase that you've made where you didn't feel 100% great about it after you handed over your hard-earned cash. It's got to be a majority of your purchases, actually. I know it is for me.

This is where new retail has taken advantage in the marketplace. New retail only has one price and it never goes on sale. New retail has a set profit margin and makes a commitment to their customer that it will never gouge them. In response we, as consumers, trust new retail and feel good about purchasing anything we can from them because we never have to wonder if we overpaid or were taken advantage of.

This is where Costco has taken market share from everyone from Sears to Safeway. My guess is that companies that apply the Costco model to other industries will be the retailers of the future because they build a unique bond with consumers built on trust. Companies that are married to the old retail model will continue to slowly go tits up and wonder where they went wrong.

What Europe Really Needs Is 'Economic Rehab With Dr. Koo'

Business Insider's Joe Weisenthal interviewed Richard Koo last night. Regular readers will recognize Mr. Koo as the author of "Balance Sheet Recession." For years Koo has been teaching the basic tenets of his famous theory: regular monetary policy is useless during periods of deleveraging. When people, whether they are governments or consumers or both, are singularly focused on paying down debt central banks have very little power to stimulate a weakened economy.

When asked about the situation in Europe, Koo responded:

Well, I think Europe is in a pretty grave situation. When their own banks don't trust each other, and having funding problems, that's a pretty serious situation already... bond [yields] have skyrocketed and that's forcing the countries to cut budget deficit further, but these guys who are already experiencing a balance sheet recession, when the government tries to deleverage at the same time, the economy just gets worse and worse and worse... when the Maastricht Treaty was put together, the concept of balance sheet recesion didn't exist in Europe, only in Japan. And the treaty is completely defective in the sense that it has no provisions for balance sheet recession.

It seems to me that the EU doesn't even have the willingness to accept the fact that they are, indeed, facing a balance sheet recession. The austerity programs being put into place today will only make matters worse. Koo's remedy requires governments to spend enough to make up for the drop in private sector spending. Without such a remedy an economy enters a death spiral (slowing growth means lower government revenues which force even greater austerity slowing growth further, etc.).

Europe is essentially a debt addict right now hitting bottom (we hope). The first step in any 12-step program is to first admit that there is a problem. In the case of Europe the problem is too much debt resulting in a balance sheet recession. European leaders have to come to an agreement on this before they can even begin steps two through twelve (beginning with modifying the Maastricht Treaty so that a Koo-style remedy can be implemented). Until this happens, I'm afraid very little progress will be made in the Euro Zone.

Warren Buffett on the Euro Crisis and the Bifurcation of the US Economy

In the following interview, Warren Buffett makes two key points:

• First, he tells CNBC's Becky Quick that the current crisis in Europe amounts to a very large bank run. The only way to stop such a run is to assure the investing public that the powers that be are both capable and willing to do whatever it takes to keep the banks solvent. As of today, that's not quite happening. Thus the spread of PIIGS yields over German yields continue to widen.
• Second, currently the US economy is clearly bifurcated. Housing and related industries are in a "depression." Everything unrelated to residential real estate, however, is doing very well. Buffett illustrates the point by revealing that Berkshire's five largest companies outside of insurance, which represent a broad array of industries, will all turn in record earnings for 2011. Once housing recovers the economy will perform very strongly and jobs will come roaring back.

Hat tip, Pragmatic Capitalism

Stock Market Symmetry

A while back I posted a chart showing the importance of the 1,150 level for the S&P 500. Well, I was studying this chart again recently and discovered another symmetry. The first major rally since this bear market began in 2000 ran from 768 to 1576, or 105.2%. The rally that began in 2009 started at 666 and has so far topped out at 1371, or 105.8%.

Interestingly, that prior bear market rally topped in a head and shoulders pattern the neckline of which was clearly tested before stocks dove deeper into the bear market decline that coincided with the financial crisis:

After our most recent 105% runup stocks are once again dealing with a very similar setup:

Stock market history may not be repeating right now but it will be interesting to watch over the next few months to learn just how closely it ends up rhyming.

UPDATE:

For those that don't remember precisely what happened immediately after that prior setup in the summer of 2008 the SEC banned short selling in the financial sector and stocks were more than cut in half over the next few months:

Porsche GT3 R Hybrid: "Genius-level technology in the service of stupid fast"

This car is crazy-awesome. It will be pretty amazing to see this technology make its way into production Porsches eventually.



Read the full article at the Wall Street Journal

I Read The News Today, Oh Boy: Deus Ex Machina

• A bipartisan proposal for more government spending 
• Comstock: Euro Crisis Enters Dangerous Stage
• There is no potential for a happy ending in Europe
• According to Data Explorers, Groupon's entire float has been sold short
• Larry Page Wants To Be The Next Steve Jobs
• Amazingly, AOL still has 3.5 million dialup subscribers
• It Is 1931. We Are Austria. If The Fed Doesn't Save Us Here Comes Another Great Depression... 
• On the importance of the 200-DMA
• When Michael Lewis met Daniel Kahneman
• Fannie and Freddie Got Us Into This Mess But FHFA Won’t Let Them Help Get Us Out
• Chart of the Century: 4 Major Secular Bear Markets, 1900-2011
• Jim Rogers on the Greek Bailout
• Thousands Ditch Big Banks Over Weekend

Beware Flying PIIGS

So we get a couple of new governments in Greece and Italy that will implement austerity programs in their respective countries and the Euro crisis is solved! The stock market surges and things are swell again for equity investors... until they aren't.

And it seems to me that the risk that things aren't as swell as Mr. Market seems to think is very real. The Economist comes to a similar conclusion:

I have been examining and re-examining the situation, trying to find the potential happy ending. It isn't there. The euro zone is in a death spiral. Markets are abandoning the periphery, including Italy, which is the world's eighth largest economy and third largest bond market. This is triggering margin calls and leading banks to pull credit from the European market. This, in turn, is damaging the European economy, which is already being squeezed by the austerity programmes adopted in every large euro-zone economy. A weakening economy will damage revenues, undermining efforts at fiscal consolidation, further driving away investors and potentially triggering more austerity. The cycle will continue until something breaks. Eventually, one economy or another will face a true bank run and severe capital flight and will be forced to adopt capital controls. At that point, it will effectively be out of the euro area. What happens next isn't clear, but it's unlikely to be pretty.

The contrariain-minded money managers over at Comstock seem to agree:

We see no easy way out of the current turmoil.  The result of enough fiscal austerity to relieve the debt pressures is a severe recession or depression.  Historically, independent nations undergoing austerity have accompanied the policy with monetary ease and a devaluation of their currency.  This is something EU members cannot do as they share a common currency and therefore do not run their own monetary policy.  Default would cause havoc in the EU banking system that holds a significant share of the sovereign debt.  A bailout would require at least two trillion euros, a sum that no one wants to pay.  And breaking up the EU would cause major turmoil in global financial markets and economies.

Like these guys, I just can't see the painless solution that the stock market seems to be lauding right now. If anything, it seems that the likelihood of an unpleasant endgame is only increasing. In fact, Jim Rogers told CNBC this week that he puts this probability at 100%. He further said that the coming crisis will make the previous ones seem like child's play.

Below is the video of an interview Rogers gave a week ago on the subject:

via ritholtz.com

Ultimately, I would strongly caution investors right now to beware flying PIIGS.

New World Record Set For The Largest Wave Ever Ridden: 90 Feet

Trying to understand the size of this wave is like trying to understand the actual size of the national debt. It's really inconceivable to anyone who isn't very intimately involved (like Garrett McNamara and Ben Bernanke, respectively).

Hat tip, Gizmodo

Buffett Backs Up the Berkshire Truck in Q3

It turns out that Warren Buffett, like Joel Greenblatt and I, noticed just how cheap the stock market got into the end of last quarter and took serious advantage of it. Bloomberg reports:

Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) invested $23.9 billion in the third quarter, the most in at least 15 years, as he accelerated stock purchases and broadened the portfolio beyond consumer and financial-company holdings. Berkshire bought almost $7 billion of equity securities in the three months ended Sept. 30, compared with $3.62 billion in the second quarter and $834 million in the first, the Omaha, Nebraska-based company said Nov. 4 in a filing. Stockholdings labeled “commercial, industrial and other” soared 62 percent in the three months to $17.4 billion on a cost basis, surpassing equity investments in financial and consumer-product firms... Buffett, 81, drew down Berkshire’s cash as Europe’s debt crisis and Standard & Poor’s downgrade of the U.S. pushed stocks to their worst quarterly performance since 2008. The investments disclosed Nov. 4 include $6.9 billion of equities, $5 billion for preferred shares and warrants in Bank of America Corp. and the acquisition of Lubrizol Corp. for about $9 billion.

It was definitely a good time to be bullish. Stocks are up 20% or so since then. Berkshire still has $35 billion or so in cash and it would be even more telling if he were continuing on his buying spree at today's higher prices. However, I imagine it's been, at the very least, tempered by the recent gains.

Hat tip, Crossing Wall Street and The Reformed Broker

Triumph Visits Occupy Wall Street

Hat tip, Eddy Elfenbein

The Two Types of Markets

I believe there are only two phases of financial markets. These two archetypes apply to stocks, bonds, commodities, real estate, etc. At any given point the stock market is either FUBAR (not what you think) or trading on FUMES to one degree or another.

The FUBAR market reaches its maximum at a bear market bottom:

Fear
Uf
Buying
And
Regretting

Conversely, the market trading on FUMES reaches its maximum at a bull market top:

Fear
Uf
Missing
Equities
Surge

Because these two phases hold the key to the market's future direction it's of paramount importance to every investor or trader to identify whether the market is currently FUBAR or trading on FUMES and to what degree.

Quiz: (a) is today's stock market FUBAR or trading on FUMES and (b) to what degree?

I Read The News Today, Oh Boy: Scoop.it

Last night I came across a new curation service called Scoop.it. I spent a little time playing around with it and it's pretty cool. So below are the stories of the past week that intrigued me presented by Scoop.it (click anywhere on the image to access them):

http://www.scoop.it/t/jessefelder

Look How Far We've Come Now Baby

I'm a little embarrassed to be quoting Shania Twain but the album did sell more copies than any Queen, Nirvana or Bruce Springsteen record and it fits what I'm about to discuss...

...which is the stock market. Just about a month ago I penned a piece arguing that the stock market was damn cheap. Its was. Since then, it's rallied nearly 20% making it that much more expensive.

Such a massive rally in such short a time frame makes me much less bullish. You know what they say about bear market rallies. There are a couple of other factors I'm looking at, as well.

Let's take a look at the big picture first: 

Above is a monthly chart of the S&P 500 Index. Clearly for the past decade that 13-month moving average has acted as pretty good support and resistance. We've recently broken below it and are now testing the underside.

On a weekly timeframe the index looks like it could be forming a loose head and shoulders top. The moving averages have also crossed down for the first time since this bull market began in 2009 - a red flag for me.

The daily chart shows us that the index remains below key resistance at 1260, a level which acted as support for most of the year prior to the latest selloff. The index is also looking up at the 200-dma, another key level overhead. So let's look at one more time frame:

The chart above plots the index on an hourly time frame. It shows another potential head and shoulders pattern with the right shoulder now testing that 1260 resistance line I mentioned above.

All of this is not to say I'm bearish here. However, I am reducing my equity exposure which feels like the only prudent thing to do.

Those Greeks Love Their Porsches

So much so that a massive number are willing to dodge the taxman so they can afford them. The Telegraph reports:

Jubilation about the German deal to save the euro could prove short-lived if fresh news of Greek tax evasion gains wider currency. There are more Porsche Cayennes registered in Greece than taxpayers declaring an income of 50,000 euros (£43,800) or more, according to research by Professor Herakles Polemarchakis, former head of the Greek prime minister’s economic department.

Those new Cayennes are, indeed, gorgeous and Porsche's earnings are killing it due to the growing demand for them. But this is crazy - commit tax fraud for an SUV? Now if there were more 918 Spyders in Greece than taxpayers claiming 50k, that would impress me.


Source: Fast cars and loose fiscal morals: there are more Porsches in Greece than taxpayers declaring 50,000 euro incomes


Hat tip, @GSElevator