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DougD

Case Shiller Data Points to Real Estate Bottom.

Newsletter

Cheers went up from the real estate industry this morning when the Standard & Poor?s/Case Shiller data was released. It showed the first year-on-year increases in prices since 2006. Calls went out from real estate agents around the country announcing that the bottom was in and that you better buy now before prices shoot up.

Not so fast. Let?s look at the data first. Phoenix delivered a first class dead cat bounce with a +13.9% YOY gain. It was followed by Minneapolis (+5.7%), Miami (+4.4%), Washington DC (+3.9%), and Dallas (+3.7%).

But the recovery was uneven, with some parts of the country still suffering catastrophic declines. Atlanta is still drowning in subprime foreclosures and was off a gut churning -12.1%. New York City was cheaper by -2.1%, where the downsizing of the financial industry prompted by Dodd-Frank was having an impact, while Las Vegas was down by -1.8%. Apparently, all real estate is still local.

It is becoming increasingly clear the national indexes bottomed in the first quarter of this year, and have been picking up steam since. Much of the upturn has been driven by hedge funds which have soaked up homes in major markets for rental and future securitization.

In California, they have accounted for 60% of all buyers. Once they figured out the model and got their management companies in place, they have been a fixture on court house steps statewide, picking up every distressed property as it came up for auction. This is their way to play the current ultra-low level of long-term interest rates, with 30 year money still available at a subterranean 3.6%.

I would not rush to return your broker?s phone call. With the present demographic headwind expected to last another ten years, don?t expect any dramatic appreciation soon. Inventories are still gigantic. Some 80 million downsizing, empty nesting baby boomers are trying to sell homes to 65 million Gen Xer?s who earn half as much. There are 6 million homeowners late on mortgage payments or in foreclosure. There is a shadow inventory of a further 15 million that is available on the first uptick in prices. And who knows what the banks still really own.

If we go into recession next year and the stock market declines 25%, a strong possibility, this year?s recovery could go up in so much smoke. Best case, we keep bouncing along a bottom for five more years. Worst case, we see a secondary banking crisis, lose a few of the largest banks, leading to an additional 25% decline in home prices.

The sushi really hits the fan if we see Fannie Mae and Freddie Mac disappear, which are now in receivership and account for 95% of all conforming home mortgages. And don?t forget that the home mortgage deduction is costing the federal government $250 billion a year in lost tax revenues, and will become target number one in any budget balancing effort.

Rent, don?t buy, unless you intend to keep your new abode for at least a decade.

 

Is it the Bottom, or Not?

https://www.madhedgefundtrader.com/wp-content/uploads/2012/08/th_Burning-House.jpg 106 160 DougD https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png DougD2012-08-28 23:02:322012-08-28 23:02:32Case Shiller Data Points to Real Estate Bottom.
DougD

August 29, 2012 - Quote of the Day

Quote of the Day

?Central banks can do whatever they want. But there is no monetary policy powerful enough to prevent the U.S. from going into recession in the first six months of next year if the fiscal cliff happens,? said strategist, Dan Greenhaus.

https://www.madhedgefundtrader.com/wp-content/uploads/2012/08/th_CLIF.jpg 160 105 DougD https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png DougD2012-08-28 23:01:202012-08-28 23:01:20August 29, 2012 - Quote of the Day
Mad Hedge Fund Trader

Trade Alert - (TLT) August 28, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2012-08-28 12:08:232012-08-28 12:08:23Trade Alert - (TLT) August 28, 2012
DougD

Lunch With the Army Chief of Staff

Diary, Evening VIP

I can?t tell you how many times I have received a call from the Joint Chiefs of Staff asking ?if country ?A? attacks country ?B? what is the effect on country ?Q? and ?Z?? After all, there is a pretty short list of those monitoring the global macro economy for 40 years with direct experience in the Middle East since 1968. So when I saw the 703 area code for the Pentagon light up on my caller ID, I thought ?Who is it this time??

It was the office of Army Chief of Staff, General Ray Odierno, calling, wondering if I would be free for lunch that day in San Francisco. The General had expressed interest in my recent piece, ?The Declining America Myth? and wished to explore my ideas further (click here for the link). General Odierno is the commander of the most effective fighting force in the history of warfare and has access to massive intelligence resources, so I thought I?d pick up some information useful to my readers.

Then I thought, ?Yikes!? I was already committed to some speaking engagements at the San Francisco Money Show that day. But duty calls. So a quick call to the organizer and my friend, Charles Githler, and I was able to roll over everything to the next day. That was fine, as long as I didn?t mind giving four speeches and doing three TV interviews in one day.

Hours later, I was briskly walking up Sutter Street to the Marines? Memorial Club. For good measure, I stopped at a barber shop and cut off all my hair. I have learned over the years that the more you look like someone, the more likely they are to confide in you. So it was ?number two buzz cut? here we come. The unexpected dividend of the move was that there was a definite upsurge in interest from the ladies, now that all the white hair was gone and I looked ten years younger.

When I saw the grey GM Suburbans out front and the attendant armed bodyguards, I knew he was early. General Odierno is a thickset man with a handshake like a vice grip. The hash marks practically made it up to his elbow. His uniform displayed a chest full of campaign ribbons and awards. His epaulettes displayed the four starts of a general. But I also noticed that he lacked the ones for Vietnam, his first action coming with Desert Storm. I must be getting old, I thought. Note to readers: much of what we discussed was classified and this piece has been cleared by Army censors.

The general was spending a few hours in the city on his way to visit Larry Paige and Sergei Brin at Google headquarters in nearby Mountain View. There he hoped to learn of the strategic value of the company?s newest online tools. Technology is now developing so fast that it is a challenge for the military to integrate it in to operations fast enough to have an immediate impact. In the aftermath of the Arab Spring, Facebook is now seen as being worth 10 divisions.

The present size of the army is 490,000, down from 1 million at the end of the Vietnam War. Plans are to reduce the force by 80,000 over the next decade, partly made possible by the withdrawal of troops from Iraq and Afghanistan. The goal is to offset this decline with stepped up training and education of the remaining soldiers to accept greater responsibilities. The challenge is to achieve this without ?hollowing out? our forces.

The Joint chiefs are well aware of the fiscal and deficit problems plaguing the US. During the Cold War, the base defense budget peaked at $400 billion, fell to 310 billion by 2001, and ratcheted back up to $510 billion after 9/11. Spending for Iraq and Afghanistan are separately appropriated funds that go on top of this. The target is to lower this to $489 billion over the next ten years. Manpower accounts for 50% of the defense budget, and the cost per soldier has doubled since 2000, making it far and away the biggest cost driver. If budget sequestration comes into force after November ?it will be difficult for the Army to accomplish its mission.?
Odierno says that the Army has made ?incredible progress? training local forces in Afghanistan.

The recent upsurge in suicide bombings and ?insider? attacks prove that the Taliban is losing and is being forced to retreat from the field. This should enable a cut in our forces there from 80,000 to 50,000 by 2014, reducing their role to counter-terrorism and training. While the drone attacks in Pakistan were controversial, they were bringing results, and a major part of the Taliban leadership has been wiped out.

He was optimistic about the future of Iraq. The country is expected to increase oil production from 3 million barrels a day to 5 million, making it the world?s fourth largest producer. If they share the wealth they can look forward to a more stable future. If they don?t, then the internal strife will continue. He wouldn?t get into whether it was a good idea to invade Iraq or not. But removing Saddam Hussein from the global stage has been good news for everyone, especially the Iraqis themselves.

Regarding Syria, Odierno said that he had prepared a list of options for President Obama, and it was up to him to decide what to do. It starts with the existing humanitarian aid and escalates in intensity from there. Next on the list is the enforcement of a ?no fly? zone. I asked why we didn?t just supply the rebels with hand held ?stinger? ground to air missiles, as we did in Afghanistan 25 years ago, with great success. He said it is unclear who the rebels really are and what they represent.

We know that Al Qaida is certainly on the ground in Syria, as foreign fighters account for 10% of the rebel force. The concern is that terrorists could get their hands on these missiles and use them against our own civilian airliners. Odierno chose his words very carefully, as if gingerly stepping through a minefield. Past experience tells me this means that action is imminent.

The general indicated that the Army was making a substantial investment in cyberwarfare. This goes far beyond simple antivirus protection and now includes protection of American financial and industrial networks. It also includes offensive capability. The next war may not start with flying bullets, but with a volley of pernicious computer files that disable enemy communications networks, military, and industrial facilities.

There are hints that this is already underway against Iran, which recently sustained serious damage to its nuclear program from the Israeli ?stuxnet? virus. One of his aides suggested that we now have the ability to ?fry? a country in ten minutes.

I asked the general about the upsurge in army suicides, which are now occurring in record numbers. He said that it was a reflection of American society as a whole, which is seeing a nationwide increase in suicide rates. These are not the fallout from post-traumatic stress, because over half of the deaths have been by soldiers who have never seen combat. The Army is now conducting educational programs to allow officers to identify those at risk. That is tough to do in a profession that values strength and sacrifice.

General Odierno graduated from West Point in 1976 with a commission in field artillery. He has commanded units in Germany, Albania, Kuwait, Iraq, and the US. He commanded the 4th Infantry Division during the invasion of Iraq, and years later became the operational commander for the highly successful ?surge? there. He has been the Army Chief of Staff since 2011.

When I got up to leave, he thanked me for my service. I said that his contribution had been infinitely greater. I reminded him that he had my number and could call at any time, and that I considered the opportunity to serve the country an honor and a privilege. With that, his security guard hustled him out of the room. I wondered how soon the next call would come.

 

 

Now Better Trained and Educated

 

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 DougD https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png DougD2012-08-28 00:30:282012-08-28 00:30:28Lunch With the Army Chief of Staff
DougD

August 28, 2012 - Quote of the Day

Quote of the Day

?The strength of the Army must be credible enough to keep the knuckleheads abroad from miscalculating and instigating conflicts which they can?t win,? said Army Chief of Staff, General Ray Odierno.

https://www.madhedgefundtrader.com/wp-content/uploads/2012/08/LieutenantGeneralRayOdierno.jpg 210 173 DougD https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png DougD2012-08-27 23:01:512012-08-27 23:01:51August 28, 2012 - Quote of the Day
Mad Hedge Fund Trader

Trade Alert - (YCS) August 27, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2012-08-27 13:17:202012-08-27 13:17:20Trade Alert - (YCS) August 27, 2012
Mad Hedge Fund Trader

Trade Alert - (AAPL) August 27, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

https://www.madhedgefundtrader.com/wp-content/uploads/2011/10/slider-05-trader-alert.jpg 316 600 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2012-08-27 11:27:412012-08-27 11:27:41Trade Alert - (AAPL) August 27, 2012
Mad Hedge Fund Trader

Trade Alert - (GLD) August 27, 2012

Trade Alert

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. Read more

0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2012-08-27 10:34:022012-08-27 10:34:02Trade Alert - (GLD) August 27, 2012
DougD

Gold is Just Getting Started

Diary

One of my best calls of the year was to plead with readers to avoid gold like the plague, periodically dipping in on the short side only. The barbarous relic has been in a bear market since it peaked at $1,922 an ounce at the end of August last year. Gold shares have fared much worse, with lead stock Barrack Gold (ABX) dropping 36% since then and the gold miners ETF (GDX) suffering a heart rending 43% haircut.

However, the recent price action suggests that hard times may be over for this hardest of all assets. Despite repeated attempts, the yellow metal has failed to break down below the $1,500 support level that I have been broadcasting as the line in the sand.

It has rallied $170 since the last try a few weeks ago. (GDX) has performed even better, popping 20%. For the last month, the entire precious metals space has traded like it was a call option on global quantitative easing (see yesterday?s piece). Dramatically worsening economic data is increasing the likelihood of further monetary easing generating a nice bid for gold.

Now the calendar is about to ride to the rescue as a close ally. It turns out that in recent years, there has been a major seasonal element to the gold trade, almost as good as the November/May cycle that drives the stock market. Gold typically sees a summer low. Then traders start anticipating the September Indian wedding season when the purchase of gifts and dowries become a big price driver. That explains why India, with a population of 1.2 billion, is the world?s largest gold buyer.

Next comes the Christmas jewelry buying season in western countries. That is followed by the gift giving and debt repayments during the Chinese Lunar New Year, during which we see multi-month peaks in the yellow metal. That is exactly what we saw this year. The only weakness in this argument is that a slowing Chinese economy could generate less demand this time.
These are heady inflows into such a small space. All of the gold mined in human history, from King Solomon's mines, to the bars still in Swiss bank vaults bearing Nazi eagles (I've seen them) would only fill 2.5 Olympic sized swimming pools. That amounts to 5.3 billion ounces, about $8.6 trillion at today's prices. For you trivia freaks out there, that is a cube with 66 feet on an edge. China is the largest producer (13.1%), followed by Australia (10%) and the U.S. (8.8%).

Peak gold may well be upon us. Production has been falling for a decade, although it reached 94 million ounces last year worth $153 billion at today?s prices. That would rank gold 5th as a Fortune 500 company, just ahead of General Electric (GE). It is also only .38% of global public debt markets worth $40 trillion.

That is not much when you have the entire world bidding for it, governments and individuals alike. Talk about getting a camel through the eye of a needle! We may well see the bull market end only when those two asset classes, government bonds and gold, see outstanding values reach parity, implying a major increase in gold prices from here. That is well above my own personal target of the old inflation adjusted high of $2,300. No wonder buying is spilling out into the other precious metals, silver (SLV), platinum (PPLT), and palladium (PALL).

The thumbnail technical view here is that we have broken the 200-day moving average at $1,649, so we may have a clear shot at a new high. There may be an easy $100 here for the nimble, and more if we break that. The current global mood for more quantitative easing and lower interest rates certainly help. If you had any doubts for the need for such easing, taking a look at the chart below showing global Purchasing Manager Index?s heading in a clear southerly direction.

Not that it needs it, but gold is about to get some free advertising at this week?s Republican national convention in Tampa, Florida. The right wing of the party has long advocated a return to the gold standard, and a Romney win could take us closer to that goal. I don?t think there is a chance in hell of this ever happening, as it would be hugely deflationary. Still a vocal and very public discussion of the topic can?t be bad for gold prices.

When playing in the gold space, I always prefer to buy the futures or the (GLD), the world?s second largest ETF by market cap, either outright or through a longer dated call spread. The dealing costs are far too high for trading physical bars and coins, and can run as high as 30% for a round trip.

Having spent 40 years following mining companies, I can tell you that there are just way too many things that can go wrong with them for me to risk capital. They can get nationalized, suffer from incompetent management, hedge out their gold risk, get hit with strikes or floods, or get tarred by poor equity market sentiment. They also must endure the highest inflation rate of any industry, around 15%-20% a year, which hurts the bottom line.

Better just to stick with the sparkly stuff.

 

 


 

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 DougD https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png DougD2012-08-26 23:04:072012-08-26 23:04:07Gold is Just Getting Started
DougD

How U.S. Job Losses Will End

Newsletter

I was researching comparative Asian wage data the other day and was astounded with what I found. Textile workers earn $2.99 an hour in India (PIN), $1.84 in China (FXI), and $0.49 in Vietnam (VNM). This is an 18-fold increase in labor costs from $0.10 an-hour since Chinese industrialization launched in 1978.

This compares to the $8 an hour our much abused illegals get at sweat shops in Los Angeles, and $10 in some of the nicer places. What?s more, the Indian wage is up 17% in a year, meaning that inflation is casting a lengthening shadow over the sub-continent?s economic miracle. A series of strikes and a wave of suicides have brought wage settlements with increases as high as 20% in China.

This is how the employment drain in the US is going to end. When foreign labor costs reach half of those at home, manufacturers quit exporting jobs because the cost advantages gained are not worth the headaches and risk involved in managing a foreign language work force, the shipping expense, political risk, import duties, and supply disruptions, just to get lower quality goods. Chinese wage growth at this rate takes them up to half our minimum wage in only five years.

This has already happened in South Korea (EWY), where wage costs are 60% of American ones. As a result, Korea?s GDP growth is half that seen in China. These numbers are also a powerful argument for investing in Vietnam, where wages are only 27% of those found in the Middle Kingdom, and where Chinese companies are increasingly doing their own offshoring.

This is why I have pushed the Vietnam ETF (VNM) on many occasions. I know every time I do this I get torrents of emails from that country bitterly complaining how difficult it is to do business there, and how the hardwood trees are still full of shrapnel left over from the war, and why I shouldn?t buy a 50 acre industrial park there.? But, the numbers don?t lie.

 

 

 

 

 

 

 

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 DougD https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png DougD2012-08-26 23:03:032012-08-26 23:03:03How U.S. Job Losses Will End
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