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John Gilluly

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  • A Picture History Of The Housing Recovery [View article]
    As a postscript to investing when terrified (see: http://bit.ly/KOlzAj), I might add this July, 2010 comment by John Paulson, the hedge-fund seller who shorted the mortgage market in 2006-2008 and made billions.

    "“If you don’t own a home, buy one; if you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home. This is the best time in 50 years to buy homes, to issue 30 year mortgages ... as your debt and interest payments get locked in at record lows, while the price of your home will rise.”

    Now he was early on that comment, about 16 months to be exact, and Paulson got his clock cleaned for another -50% afterwards, forcing him to sell his homebuilders for redemptions and posting one of the worst records of his career (2010-2011). But he was right in the long run, even though he couldn't own as much of it as he wished.

    He was also very wrong about gold in 2010 (it didn't go to $2,400-$4,000); and wrong about an imminent crash in the bond market (it rallied another 2 years), but in the long run, he got 2 out of 3 right. Housing rallied first and bond yields followed.

    But anyone who took his advice back then and bought a home in 2010-2012 - with a down payment of 20% or less - is now up a full 100% on that down payment. For example: a $300K house bought in 2011-12 with a $60K down payment (20%). Home prices have risen 23%. The $300K home is now worth $369K. $69K/$60 downpayment = 115% return. Paulson was right.

    It just goes to show that the "when" of investing is as important as the fundamentals. You can be "right" but early, and thus "dead right", but you also can be a little late, but right, and right on.

    That is how I feel about the Mortgage REIT market right about now (NLY, WMC, AGNC, TWO), believing that investors in mortgage-backed securities have a unique once-in-a-decade opportunity to pick up real estate-related fixed income at a very attractive entry point, and then re-invest the dividends as they occur. It might be possible to double the share count and cut the cost-basis in half in less than 4 years. One cool thing about fixed income - as long as the dividend is preserved - is that market sell-offs create lower entry points and more shares, and thus, more income.

    Western Asset Management (WMC) is a good example. It lost $5.10 a share in 2013, arguably one of the worst years on record (percentage-wise) for fixed income. But it also paid out $5.10 in dividends, completely negating the capital loss. As I write, the shares are on sale at 52 week lows at $14.72.
    Jan 23 12:45 PM | 2 Likes Like |Link to Comment
  • Builders Prepare For A Blowout Spring Selling Season [View article]
    I just increased my Brookfield at 22.70. Even with the 13% sell-off since January 1st, you are still up 15% on that November purchase.
    Jan 19 03:41 AM | Likes Like |Link to Comment
  • Builders Prepare For A Blowout Spring Selling Season [View article]
    Yes. there is quite a difference of opinion on this score, almost diametrically opposed. I knew that when I wrote the article. My own viewpoint is that there is a mindset of loss and skepticism since the real estate bust that is very pervasive. Data is filtered through it, like a tea bag.

    In the Credit Suisse report linked in the article, real estate agents across 40+ metro areas in the U.S. were bemoaning the lack of quality inventory available for buyers.That's called demand. Who creates new inventory (supply)? Builders!

    Builders have a simple technique for choosing buildable geographies: Average building permits /ratio-ed to new jobs per zip code. Tri-Pointe (TPH) typically picks locales where the ratio is very strong, and even then, in California, builders are building less than half of what the new demand is. Location location location is very important . There is no mystery to why these homes sell out so quickly. It's the location where they are being built.

    Let's take where I live for example: Marin County, CA. Population 256,069. Just north of the SF Golden Gate Bridge. Let's say a typical family is 3, maybe 4 people. I think that's kind a high, but let's be conservative, say 4, and call it 64,000 families. As I write, there are 897 homes for sale at the beginning of the Spring selling season. That's one home for sale for every 71 families existing. Think that's enough to go around? Ownership rates usually hover around 60%. In my neighborhood of 280 homes, there is exactly one home for sale. Last summer there was 20. The year before (2012) about 30.

    Somebody is buying these homes, and its not ghosts.
    Jan 19 03:35 AM | Likes Like |Link to Comment
  • Builders Prepare For A Blowout Spring Selling Season [View article]
    I mentioned three of them in the article (above), and this information is also available in the recent conference calls. Each conference call for a builder will include their land spend for the quarter, estimated land spend for the year, and updated number of lots under control: either owned outright, or through option. See the tail end of this article: http://bit.ly/1aAUA4R,
    Jan 19 02:59 AM | Likes Like |Link to Comment
  • Trying A Little Too Hard [View article]
    If the suppositions in this article turn out to be true, there is not much out there to push rates higher, and plenty of headwinds to push them lower.

    That's all the more reason that mortgage rates will continue to stay below 4.5% (or go lower) as the Fed tapers. Every time the Fed has tapered or stopped QE since 2010, long rates have gone down, which is stimulative for housing.

    See Quantitative Easing Myths, by Scott Grannis: http://bit.ly/1i8ddlh
    Jan 18 02:00 AM | 3 Likes Like |Link to Comment
  • An Early Real Estate Warning Signal May Have Just Sounded [View article]
    How do you square up this economic activity? (1): http://bit.ly/1awAYi8; (2): http://bit.ly/1awB09D; (3): http://bit.ly/1awAYi9); (4):http://bit.ly/1awBqwZ.

    Ghost aren't buying this stuff.
    Jan 17 01:41 PM | 4 Likes Like |Link to Comment
  • Housing: The Last Time Low Interest Rates Got 'Less Low,' It Wasn't 'Different This Time' [View article]
    Hal,

    I read your historical charts somewhat differently from you. At the beginning of each recession back then, interest rates rose (presumably to cool an overheated economy), but housing starts rose concurrently at that time also.

    Why? Economic movement flowed into housing starts as "first movers" or "early stage" investments at the beginning of those historical recessions, and continued on in strength for several months as the economy exited the recession into recovery. It just goes to show that there is a "timing" for the best time to both build and buy a house.

    Your charts show that housing starts (and the real estate cycle) are tied to the business cycle, not just to the interest-rate cycle. This appears like I am making kind of a "slight of hand" comment, because interest rates truly follow the growth of credit in the business cycle.

    But the builders exclaim that jobs - rather than the cost of a mortgage - are the real reason behind home purchases. In other words, you have to have a chicken in order to lay the egg. The chicken comes first, because she can continue to lay eggs (a salary to pay the mortgage). The ability to lay the egg (a job) is more important than the cost of maintaining the cage. A crude comparison, but you get the idea.

    But NONE of that happened this time around. Unlike every other previous recovery in the U.S - housing starts did not lead the way out. They kept going down. In fact, some commentators believe the valuation low (not the nominal low of March, 2009) of the stock market - and the valuation low for housing starts - are actually concurrent at October 4, 2011. In that regard, housing is truly "different this time (2009-13)" because it has completely lagged the business cycle for 5 years
    Jan 17 01:59 AM | 1 Like Like |Link to Comment
  • Housing: The Last Time Low Interest Rates Got 'Less Low,' It Wasn't 'Different This Time' [View article]
    In the last year, interest rates have been rising: See (http://bit.ly/1dW5oYE); and now Housing starts have spiked to the upside (See: http://bit.ly/1dW5oYG).

    So Interest rates are rising and housing starts are rising dramatically. This is not what you are arguing for, yes, what is actually happening? Although I truly can see your point - it's right there in the stats from the past.

    Maybe there is something different afoot.

    And that something is there are too many people (population that is 2x post WW II) and not enough new-quality housing to live in (See: http://bit.ly/1dcrm8R). See also: (http://bit.ly/1dW5oYJ).

    You have to go back 50 years on those FRED graphs (http://bit.ly/1kFCDZe) to find a time where there were so few housing starts and so few new homes for sale, in a population that has had the same run-rate (growth curve) for decades (http://bit.ly/1dW7Ezb).

    Maybe if we viewed the financial crisis as a tsunami that wiped out real estate in the United States - a truly one-off event - a financial 911 - and now we must rebuild - it might make for a more sanguine (accurate) use of historical charts?
    Jan 17 01:34 AM | 1 Like Like |Link to Comment
  • Real Estate 2014 - The Stealth Bubble [View article]
    Zoo,

    The ideas you've espoused have been enforced again and again throughout modern history - usually following a financial calamity - and always with disastrous results:19th century France; 1920s Russia; 1940s China, 1970s Cambodia. The list could go on and on, but the main takeaway is the amount of cruel misery caused by plutocrats and their social experiments, abetted by ambitious amateurs.

    "The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding." (Louis Brandeis, Justice, U.S. Supreme Court)
    Jan 14 12:48 PM | 2 Likes Like |Link to Comment
  • Real Estate 2014 - The Stealth Bubble [View article]
    People have to live somewhere - foreclosed or not. Is there evidence that foreclosed homes have stopped selling to willing buyers?

    When the price is right, investors have continued to gobble up foreclosures and then rent them out. The cost of renovation, property management, mortgage (if there is one), insurance and maintenance for these rental homes is covered by the monthly rental agreement, with a little left over as profit for the owner. How much profit? Here in CA it is about 20%/yr (fixed). The total (all-included) costs for a 4 bedroom home in coastal CA are about $2,500/mo. The rental cost, a little under $3,000.

    If investors do not want to buy these foreclosures, then regular home buyers have shown a willingness to buy them. 80 cents on the dollar is a compelling sales price.

    There is great value in your information because it shows what happens when assumptions based on price-appreciation do not pan out. Then the leverage falls apart like a house of cards. The same might be said of the current stock market which has continuously rallied under the pressure of 60 months of Federal Reserve Quantitative easing.

    That's why I think tapering will eventually "cool" the economy (at least the Wall Street version of it) and mortgage rates will stay in a 4.1 to 4.9 range for the remainder of the decade. Like you, I don't see "normal" out there for any reason and for a long long time too, and thus I cannot understand predictions that the 10 year (TNX) is going to 4.5% soon. Why would it do that? What would take it there?

    We have an economy that is part life-support, part American Renaissance, and need a sustained low cost mortgage environment for a long long time before we ever get back to normal. The Fed knows this; Japan proves it (33 years and counting): and in the aftermath of the Great Depression, mortgage rates under stayed under 5% for 25 years.
    Jan 13 12:43 PM | 2 Likes Like |Link to Comment
  • Meritage Supersizes Its Warchest On The Heels Of Another Outstanding Quarter [View article]
    Short interest in BRP is similar - has fallen 56% since September, 2013. (See: http://bit.ly/1eObL2n)
    Jan 13 02:09 AM | Likes Like |Link to Comment
  • Debunking Real Estate Myths - Part 1: House Price Indexes [View article]
    You might like this: http://bit.ly/1cOSm2B

    BTW...I know the American Enterprise Institute is known for its conservative views, but this exegesis is one of the best and most cogent ones I've read to explain what happened between 2000 and 2006. Underwriting - the severe lack of it - was the cause of the bubble,

    Good people - yet subprimers nevertheless - would not have had their momentary shot at dishonesty if bankers hadn't completely abandoned all prudence in underwriting loans for them. I suppose you could throw the Clinton and Bush administrations both in as a chaser to this laughable lack of prudence - which, by the boatload - is what was then sold to investors; and the rest is history.
    Jan 4 01:42 AM | 1 Like Like |Link to Comment
  • Assessing The Q4 2013 Dividend Of Western Asset Mortgage Capital [View article]
    Scott,

    I think you did a nice job of explaining the facts. However, my exegesis is willing to bet more on one team's winning-ability than another team's safety.

    First off, it seems to me that ACAS, AGNC, and MTGE should be considered a unit because are all under the same management/corporate umbrella.

    WMC is under a different umbrella, externally managed by Western Asset Management Company, which itself is a wholly-owned subsidiary of Legg Mason, Inc. (NYSE: LM).

    As it says on its website: " Western Asset is committed to being the leading fixed-income investment management firm in the world." They are big - $442ML in assets under management.

    If I read your story correctly, ACAS-AGNC-MTGE played it safe, and suppressed their dividend payout in the quarters of occurrence in order to backstop future dividends - thus having a protective cushion from the past to sauce those future dividends. That looks quite favorable for their investors going forward. Not only is the worst case baked-in to the price already; the best case potential is not baked into the future dividends either.

    On the other hand, WMC did NOT play it safe and paid it all out - almost 2.5 quarters in dividends in a single quarter. Wild cowboy move? Or just giving to investors the fruit of the year?

    I think it's the latter.

    WMC overvalued? Okay. But why? There is a reason for it: Investors over-value companies that pay out rich earnings and capital gains. (It's not a sin to be good at what you do). In short, I don't think WMC's success is a reason to be paranoid about their prospects.

    WMC compensated its investors in 2013 by paying out $5.10 in dividends. Interestingly enough, this matched the $5.10 capital loss in the share price in 2013. (Near today's low - at $14.67 - WMC was exactly $5.10 from the December 31, 2012 close).

    So an investor could have owned WMC in 2013 - a MREIT - in one of the worst years for MREITs in 2 decades - and come out the back end of the year with a miniscule loss on his original investment.

    You couldn't say that about any of the others.

    I'm sticking with my shares and reinvesting the dividends.
    Jan 3 03:21 AM | 2 Likes Like |Link to Comment
  • Calculated Risk And I Have Made A Bet On Housing's Direction In 2014 [View article]
    These last two comments - and your bet with Calculated Risk - seem to frame perfectly the conversation: is the glass half-full (Calc Risk); or half-empty (Hal Stewart)?

    At a certain point, the 1% can only buy so many Gucci bags and Teslas.

    There is a limit to everything - even this - http://bit.ly/1eBL1n6
    Jan 3 02:58 AM | 2 Likes Like |Link to Comment
  • American Capital Just Can't Resist Buying Cheap Stock [View article]
    I think you did a nice job of explaining the facts. However, my exegesis is willing to bet more on one team's winning-ability than another team's safety.

    First off, it seems to me that ACAS, AGNC, and MTGE should be considered a unit because are all under the same management/corporate umbrella.

    WMC is under a different umbrella, externally managed by Western Asset Management Company, which itself is a wholly-owned subsidiary of Legg Mason, Inc. (NYSE: LM).

    As it says on its website: " Western Asset is committed to being the leading fixed-income investment management firm in the world." They are big - $442ML in assets under management.

    If I read your story correctly, ACAS-AGNC-MTGE played it safe, and suppressed their dividend payout in the quarters of occurrence in order to backstop future dividends - thus having a protective cushion from the past to sauce those future dividends. That looks quite favorable for their investors going forward. Not only is the worst case baked-in to the price already; the best case potential is not baked into the future dividends either.

    On the other hand, WMC did NOT play it safe and paid it all out - almost 2.5 quarters in dividends in a single quarter. Wild cowboy move? Or just giving to investors the fruit of the year?

    I think it's the latter.

    WMC overvalued? Okay. But why? There is a reason for it: Investors over-value companies that pay out rich earnings and capital gains. (It's not a sin to be good at what you do). In short, I don't think WMC's success is a reason to be paranoid about their prospects.

    WMC compensated its investors in 2013 by paying out $5.10 in dividends. Interestingly enough, this matched the $5.10 capital loss in the share price in 2013. (Near today's low - at $14.67 - WMC was exactly $5.10 from the December 31, 2012 close).

    So an investor could have owned WMC in 2013 - a MREIT - in one of the worst years for MREITs in 2 decades - and come out the back end of the year with a miniscule loss on his original investment.

    You couldn't say that about any of the others.

    I'm sticking with my shares and reinvesting the dividends.
    Jan 3 02:31 AM | Likes Like |Link to Comment
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