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January 6, 2020

Global Market Comments
January 6, 2019
Fiat Lux

2020 Annual Asset Class Review
A Global Vision

FOR PAID SUBSCRIBERS ONLY

Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE), (AMLP), (USO), (UNG),
(GLD), (GDX), (SLV), (ITB), (LEN), (KBH), (PHM)

December 19, 2019

Global Market Comments
December 19, 2019
Fiat Lux

Featured Trade:

(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)
(PLAY IT SAFE WITH ANTHEM), (ANTM), (CI)

September 11, 2019

Global Market Comments
September 11, 2019
Fiat Lux

Featured Trade:

(HAS THE VALUE OF YOUR HOME JUST PEAKED?),
(ITB), (PHM), (KBH), (LEN), (DHI), (NVR), (TOL),
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA CONFERENCE, OCTOBER 25-26, 2019)

Has the Value of Your Home Just Peaked?

Lately, my inbox has been flooded with emails from subscribers asking how to hedge the value of their homes. This can only mean one thing: the residential real estate market has peaked.

They have a lot to protect. Since prices hit rock bottom in 2011 and foreclosures crested, the national real estate market has risen by 50%.

I could almost tell you the day the market bounced. That’s when a couple of homes in my neighborhood that had been for sale for years suddenly went into escrow.

The hottest markets, like those in Seattle, San Francisco, and Reno, are up by more than 125%, and certain neighborhoods of Oakland, CA have shot up by 400%.

The concerns are confirmed by data that started to roll over in the spring and have been dismal ever since. It is not just one data series that has rolled over, they have all gone bad. One bad data point can be a blip. An onslaught is a new trend. Let me give you a dismal sampling.

*Home Affordability hit a decade low, thanks to rising prices and interest rates and trade war-induced soaring construction costs

*July Housing Starts have been in a tailspin as tariff-induced rocketing costs wipe out the profitability of new homes

*New Home Sales collapsed YOY.

*14% of all June Real Estate Listings saw price cuts, a two-year high

 *Chinese Buying of West Coast homes has vaporized over trade war fears

Fortunately, investors have a lot of options for either hedging the value of their own homes or making a bet that the market will fall.

In 2006, the Chicago Mercantile Exchange (CME) started trading futures contracts for the Corelogic  S&P/Case-Schiller Home Price Index, which covered both U.S. residential and commercial properties.

The Case-Shiller index, originated in the 1980s by Karl Case and Robert Shiller, is widely considered to be the most reliable gauge to measure housing price movements. The data comes out monthly with a three-month lag.

This index is a widely-used and respected barometer of the U.S. housing market and the broader economy and is regularly covered in the Mad Hedge Fund Trader biweekly global strategy webinars.

The composite weight of the CSI index is as follows:

  • Boston 7.4%
  • Chicago 8.9%
  • Denver 3.6%
  • Las Vegas 1.5%
  • Los Angeles 21.2%
  • Miami 5%
  • New York 27.2%
  • San Diego 5.5%
  • San Francisco 11.8%
  • Washington DC 7.9%

However, these contracts suffer from the limitations suffered by all futures contracts. They can be illiquid, expensive to deal in, and you probably couldn’t get permission from your brokers to trade them anyway.

If you want to be more conservative, you could take out bearish positions on the iShares US Home Construction Index (ITB), a basket of the largest homebuilders (click here for their prospectus). Baskets usually present half the volatility and therefore half the risk of any individual stock.

If real estate is headed for the ashcan of history, there are far bigger problems for your investment portfolio than the value of your home. Real estate represents a major part of the US economy and if it is going into the toilet, you could too.

It is joined by the sickly auto industry. Thanks to the trade wars, farm incomes are now at a decade low. As we lose each major segment of the economy, the risk is looming that the whole thing could go kaput. That, ladies and gentlemen, is called a recession and a bear market.

On the other hand, you could take no action at all in protecting the value of your home.

Those who bought homes a decade ago, took a ten-year cruise and looked at the value of their residence today will wonder what all the fuss is about. By the way, I met just such a person on the Queen Mary 2 last summer. Yes, ten years at sea!

And the next recession is likely to be nowhere near as bad as the last one, which was a twice-a-century event. So it’s probably not worth selling your home and buying it back later, as I did during the Great Recession.

See you onboard!

 

 

In Your Future?

 

February 20, 2019

Global Market Comments
February 20, 2019
Fiat Lux

Featured Trade:

(THE NEXT COMMODITY SUPER CYCLE HAS ALREADY STARTED),
(COPX), (GLD), (FCX), (BHP), (RIO), (SIL),
 (PPLT), (PALL), (GOLD), (ECH), (EWZ), (IDX),
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)

January 9, 2019

Global Market Comments
January 9, 2019
Fiat Lux

2019 Annual Asset Class Review
A Global Vision

FOR PAID SUBSCRIBERS ONLY

Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLI), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE),

(DIG), (RIG), (USO), (UNG), (USO), (OXY),
(GLD), (GDX), (SLV),
(ITB), (LEN), (KBH), (PHM)

August 17, 2018

Global Market Comments
August 17, 2018
Fiat Lux

Featured Trade:
(DON’T MISS THE AUGUST 22 GLOBAL STRATEGY WEBINAR),
(HAS THE VALUE OF YOUR HOME JUST PEAKED?),
(ITB), (PHM), (KBH), (LEN), (DHI), (NVR), (TOL),
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA CONFERENCE, OCTOBER 26-27, 2018)

June 1, 2018

Global Market Comments
June 1, 2018
Fiat Lux

SPECIAL REAL ESTATE ISSUE

Featured Trade:
(TUESDAY, JUNE 12, 2018, NEW ORLEANS, LA, GLOBAL STRATEGY LUNCHEON),
(WHY YOUR FANG STOCKS ARE ABOUT TO DOUBLE IN VALUE),
(FB), (AAPL), (NFLX), (GOOGL), (LMT), (ROKU),
(HERE IS YOUR TOP-PERFORMING INVESTMENT FOR THE NEXT FIVE YEARS),
(ITB), (PHM), (KBH), (DHI), (AVB), (CPS)

Why the Real Estate Boom Has a Decade to Run

Real estate brokers are still reeling from the news that December existing home sales rocketed by a blockbuster 14.7%, to an annualized 5.46 million units.

And now I hear that Apple (AAPL) is planning on building a second new research and development campus that will need 20,000 new high tech workers. The housing crisis here in the San Francisco Bay area just went from bad to worse.

It is all fresh fuel for a continuation in the bull market for US residential real estate, not just for this year, but for another decade.

Friends in the industry tell me the eye popping numbers were due to the implementation of the TILA-RESPA Integrated Disclosure (TRID) in October.

Dubbed the ?Know before you owe? requirement, TRID is the inevitable outcome of the 2008 subprime housing crash.

If you weren?t born yet in 2008, or were living in a cave on a remote Pacific island back then, go watch the movie ?The Big Short? for a further explanation of those dark days.

As a result, real estate closings now take at least a week longer, and sometimes more, thanks to a new requirement for several three day ?cooling off periods.?

When the new law kicked in, TRID nearly brought he industry to a halt, and firms were sent scurrying to their attorneys to draw up the new disclosure forms to stay within the law.

TRID undoubtedly was responsible for the slowdown in the market in the run up to December.

Although prices seem high now, I am convinced that we are only at the beginning of a long term secular bull market in housing. Anything you purchase now is going to make you look like a genius ten years down the road.

The best is yet to come.

The big driver will be demographics, of course.

From 2022 onward, 65 million Gen Xer?s will be joined by 85 million late blooming Millennials in bidding wars for the same houses. That will create a market of 150 million buyers, unprecedented in the history of the American real estate market.

In the meantime, 80 million baby boomers, net sellers and downsizers of homes for the past decade, will slowly die off and disappear from the scene as a negative influence. Only one third are still working.

The first boomer, Kathleen Casey-Kirschling, born seconds after midnight on January 1, 1946, will become 76 years old by then. A former school teacher, she took early retirement at 62.

The real fat on the fire here is that 5 million homes went missing in action this decade, thanks to the financial crisis. They were never built.

This is the result of the bankruptcy of several homebuilders, and the new found ultra conservatism of the survivors, like DR Horton (DHI), Lennar Homes (LEN), and Pulte Group (PHM).

Did I mention that all of this makes this sector a screaming ?BUY?, once the market moves into ?RISK ON? mode later in the year?

Talk to any real estate agent and they will complain about the shortage of inventory (except in Chicago, the slowest growing market in the country).

Prices are so high already that flippers have been squeezed out of the market for good. Bottom feeders, like hedge funds buying at the bankruptcy auctions, are a distant memory. Some now own more than 20,000 homes.

Income taxes are certain to rise in coming years, and the generous deductions allowed homeowners are looking more attractive by the day.

And let?s face it, ultra low interest rates aren?t going to be here forever. Borrow at 3% today against a long term 3% inflation rate, and you are essentially getting you house for free.

The rising rents that are turning Millennials from renters to buyers may be the first sign of real inflation beyond the increasingly dear health care and higher education that we’re are already seeing.

And Millennials are having kids that demand a bigger living space! Who knew?

I may become a grandfather yet!

DHI 1-27-16

PHM 1-27-16

LEN 1-27-16

Home-HouseLooks Like a ?BUY? to Me

Real Estate Bidding Wars Go National

Two years ago, there was an open house listed in the San Francisco Chronicle in my neighborhood for $1.8 million. It offered a cavernous 6,000 square feet, five bedrooms, a generous den I could use as a home office, a gourmet kitchen, and a spectacular view of the entire bay area. It was a slow Sunday, so I went to check it out.

The home offered every imaginable upgrade, including a four-car garage, elevator, and beveled glass windows in the 1,000-bottle temperature and humidity controlled wine cellar. Nobody cared. The building was deserted except for a lonely and depressed listing agent. The only visitors had been a handful of other real estate agents.

The seller gave up, pulled the listing, and rented it to a visiting Oracle executive for two years. I heard the agent got so fed up dealing with people in bad moods that she left the industry.

Last weekend, another open house was advertised for the same exact house. I thought I would drop by and see how the market had changed. There was not a parking spot to be found on the street. After quite a hike, I made it to the house, only to be told to wait in line to gain entry. The rooms were as crowded as a Tokyo subway car at rush hour. I briefly lost the kids in the shuffle. And this was at the new listing price of $3.5 million. Yikes!

I asked a younger, slimmer, better looking listing agent if there had been any interest. She answered abruptly that there had been three all-cash offers since the morning. Unless I wanted to pay over the asking price, I shouldn?t waist my time. Double yikes!

The bottom line of this little interchange is that the recovery in the residential real estate market is real, has legs, and will have a major positive impact on the US economy. The implications for the rest of us are huge.

The turnaround came much earlier than many analysts expected, and has proceeded with an amazing ferocity. Demographic data suggest this wasn?t supposed to happen until 2022, when most of the Baby Boomers have retired and a new generation of homebuyers appears. Home mortgages, especially jumbos, are still hard to get. The banks are still laboring under a stock of 5 million foreclosed homes. Some 20% of homeowners are still underwater on their mortgages and are unable to trade up or out.

It appears that the prospect of the end of the ultra low interest regime offsets all of this. The Fed is certainly putting the pedal to the metal, with 3.5% interest rates charged for 30-year mortgages. Everyone knows these are a once a century occurrence, hence the bubble 2.0. Buyers are ducking credit issues by paying all cash for 50% of recent closing. Hedge funds, private equity funds, and other long-term investors are still generating 30% of purchases, as they see this a one great big yield play.

We learned as much yesterday when the January S&P-Case Shiller data was released. It was a blowout report, with the 20-city index showing an eye popping 8.1% YOY gain in prices. This is three-month-old data, and February and March are expected to be stronger still.

The basket cases of yesterday are delivering the headiest gains, with Phoenix up +23.2%, San Francisco, +17.5%, and Las Vegas, +15.3%. The foreclosure capital of the United States only a year ago, Atlanta, showed a robust +13.4% improvement.

The residential real estate market is not without its shortcomings. First time homebuyers have been conspicuously absent, accounting for only 30% of new deals, instead of 60% during the last cycle. They are, no doubt, being shut out by credit issues. What will happen to the millions of homes that institutions bought, once their have substantial capital gains? My bet is that they sell to realize profits, capping further appreciation.

The snapback in new construction has been even more dramatic. Monthly new housing starts have soared from the low 300,000?s to 800,000 in the last three years, a jump of 167%. That?s still a fraction of the 2.2 million peak we saw in 2006. Surviving homebuilders like Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH) so dramatically shrank their cost basis during the dark days that they are unable to meet current demand.

The obvious benefit for the rest of us is the addition of 50-75 basis points to the US GDP growth rate this year. We?ll get a better read with a future GDP announcement, which could bring in a preliminary Q1 number as high as 3%. That will most likely take us to the Fed?s target of a headline unemployment rate of 6.5% sooner than later.

There is a greater advantage for we stock investors. Some two thirds of the home equity lost since the 2008 crash has been recovered. The total value of the US housing stock has bounced back from $10 trillion to $17 trillion. That creates a huge ?wealth effect? that steers more individual investors back into risk assets generally, and shares specifically. Should anyone be surprised that the Dow average is grinding to new all time highs every other day?

Not a day goes by when you don?t hear of shortages of workers in the building trades, such carpenters and plumbers. As a result, the shares of this sector have been the best market performers over the past 18 months, with some issues rising sevenfold. Whatever you do, don?t rush out and buy these stocks. They have run too far, too fast, and the risk/reward is terrible here. You missed it. I missed it.

Better just to bask in the glow of a home that it rising in value daily, and a retirement portfolio that is doing the same.

LEN 3-27-13

PHM 3-27-13

KBH 3-27-13

S&P Case Shiller Home Price

House Keys

What Am I Bid?