Chris B

Visualizing Job Losses and Gains in U.S.

It's interesting that the New Orleans, Oklahoma, Kansas and Texas regions feature the largest concentrations of job growth in the country.

It makes one wonder if we are about to see a new wave of homesteaders from Detroit, Orlando, LA, and Boston moving to places like Oklahoma City, Baton Rouge, and Austin.

Perhaps the lack of a property bubble plus right-to-work laws have ensured the success of these regions.

Commercial Real Estate: From 'Best' to 'Worst of Times' in Seven Months Flat

I have no real desire to get into office, industrial, retail, or residential real estate.

1) The sector is overbuilt for an economy that is slowly reverting back towards the long-term consumer savings rate of 10%. There are too many retail stores, restaurants, marginal businesses, and luxury apartments to be supported by the high-savings economy of the future. Worse, this supply is impossible to remove from the market, unless an earthquake or something occurs. Bottom line: take everything built since 2003 or so, subtract 10%, then add back 2% population growth. That's the scope of the overcapacity.

2) Most REIT's used short term financing on their properties and are dependent on refinancing in the future. In fact, refinancing cash-outs were actually a source of "income" during the go-go years and much of their leverage is based on property values at the peak. As the article points out, refinancing becomes impossible when the value has dropped below the loan amount.

3) Competitors can easily enter these markets, buy up distressed or foreclosed properties, and, thanks to low mortage rates, finance them at cheaper fixed costs than the existing publicly-traded REIT's. Thus they can undercut the established players on price.

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Healthcare real estate however, lacks many of these downsides and may represent an opportunity.

1) Demographic graying means demand will expand, not contract.

2) Healthcare is not generally a discretionary purchase compared to fashion merchandise, fancier apartments, manufactured trinkets and luxury items, or other services.

3) Healthcare properties have custom designs and fixtures (e.g. oxygen plumbing, different building codes) and are not easily substitutable.

4) More reliable revenue streams mean they are more likely to be able to obtain financing.

Example: finance.yahoo.com/news...

5) Finally, political changes are unlikely to harm the REIT's that rent out medical offices, hospitals, and nursing homes. Those arrangements will remain in place even if some sort of national health insurance plan is enacted. In fact, revenues for the renters may even become more reliable under such a plan (fewer write-offs).

Life Insurers Face 'Unprecedented Stress' - S&P

Of course, anybody who owns bonds or other fixed income securities is underwater right now because of market prices. However, those securities are still producing cash to some extent (default rates still <10%).

Banks have been sunk because they have had to mark these paper losses as negative income and balance sheet reductions, even for securities that have low default rates. The rules for insurance companies (AIG aside) are less clear. If they are able to hold their securities to maturity rather than being forced to sell at below PV, they might turn out to be great for investors. I suspect that the premium-collecting nature of life insurance companies, coupled with the predictability of their expenses, will allow them to do exactly that.

GM (GM) may drop its Pontiac and GMC brands as part of broader cost-cutting moves. Sources say GMC has a better chance of surviving than Pontiac but decisions haven't been finalized.

None of them have a chance. Those brand names are liabilities.

"Hey, that's an attractive car. Oh wait, it's a <insert GM brand here>. Oh well."

Sucker's Rally Approaching an End

Thanks for the link dcb.

However, a historical chart does not predict very much about the future. Imagine the predictions people would have made about the zig zags of the 1900's, 1960's, and 2003!

Plus that strangely straight red line seems a bit suspicious to me. It's obviously not statistically derived, so what is it? Just an end to end line?

People tell me I'm crazy when I say that triple digit returns over a 5 year period are likely after such a massive crash. I'd say that the chart shows they are very likely. People's perception of "fair value" changes fast when earnings go up and higher P/E's become the new normal. Seen the P/E's of great ETF's like VWO, VTI, EWY, EWA, or EWZ lately?




On Apr 15 04:17 PM dcb wrote:

> this has some very interesting charts.
> www.businessinsider.co...
>
>
> Impt: on it's long term inflation adjusted average the market i approximately
> fair value right now.
> from about 1990 until now the market has been above trendline
>
> if you buy right now you have about a 50% chance of winning or loosing
> long term
>
> What will happen in the next few years I do not know, but please
> lets be clear, from a long term perspective the market is only fair
> valued. Unfortunately big ben and the governemnt appears to be determined
> to always keep the market above fair value regardless of the effect
> on the macro economy.

The Baltic Dry Index Gets Moving

I took a cruise on ESEA a while back and decided the waters were a bit choppy for me, so I sold out at breakeven.

Revenues for bulk shippers are totally dependent on an index that nobody seems able to adequately predict. The best information I've seen has been anecdotal accounts of ships being scrapped or new orders being cancelled. An evidence-based case is lacking. The application of technical analysis to the BDI makes about as much sense as a 50 day MA on U-haul rentals. The BDI and bulk shippers are little more than a leveraged bet on the return of the commodity bubble PLUS shipping shortage.

The likelihood of both of those situations occurring again - simultaneously - seems fairly low. The likelihood of EITHER occurring seems low for the near future unless you're counting on one whopper of a summer recovery.

Sucker's Rally Approaching an End

"Unemployment is still rising, house prices are still falling, and the fundamentals of bank balance sheets are still deteriorating with total bad debts unknown except that we know they must be getting worse."
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Unemployment and home prices are always lagging indicators. Expect them to improve 6-12 months after the recovery has begun. That's basic economic history.


"What possible reason is there for optimism to believe that history will not repeat itself? "
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This crisis and the great depression had virtually identical causes: investment arms of banks made bad investments that shut down commercial lending. Govt. response in the early 30's included tariffs, taxes, reducing money supply, raising interest rates, and talk from officials about how things will sort themselves out. Govt. response in this crisis is the exact opposite of those discredited approaches. That's a very significant reason.


"At the commonsense level you have to ask why should an economy show signs of recovery as it lays off hundreds of thousands of people: the unemployed are not big consumers, and it frightens the hell out of people left in work who stop spending and save."
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I agree. The unemployed do not spend, and the scared tend to save. I predict that we are reverting to the long-term sustainable mean consumer savings rate of 10% - a big increase from negative one percent just a couple years ago. If people quit spending 10% of their income, that alone would reduce GDP by about 7-10%.

Yet, this downward feedback loop cannot continue forever, or the great depression would never have ended. As marginal producers exit markets, more efficient producers become even more efficient and pick up market share. As wages, prices, consumer indebtedness, and interest rates fall, incentives increase to produce and to purchase.

Who Would Have Guessed Mortgages Would Be Such a Troubled Investment for Banks?

The difference between mortgages and treasuries is that mortgages can be defaulted on, but treasuries cannot (the govt. can just create the money used to pay them.)

Thus treasuries are 99.9% safe for those who plan to hold until maturity. Those who plan to sell their 10-year, 2% treasuries before maturity, however, face interest rate risk. They will have to sell for less if the fresh treasuries issued by the govt. are yielding 4% or 7%.

Because the discount rate has such a large influence on present value calculations, banks trying to unload low-yielding treasuries in an environment of higher interest rates 2-4 years from now could suffer significant losses. As with mortgages, higher overall returns could be realized by just holding until maturity. However, the current crisis was caused by banks being forced to sell their mortgages in order to meet capital adequacy requirements that had been damaged due to mark-to-market writedowns. Will such forced write-downs cause a treasury crisis among the banks?

I doubt it. Treasuries won't decline to $0.30 on the dollar like mortgages did. They don't require a specialized management arrangement, their yields are totally predictable, and they are not bundled into opaque, scary securities costing hundreds of millions of dollars each so market liquidity is assured.

Yet they could decline significantly in market price - perhaps to $0.90 on the dollar. Could this cause the same banking implosion as mortgages? We will see.

Yahoo (YHOO) is suffering from 'reorg fatigue' - oh, and lots more layoffs are coming too.

Such a future is Google's destiny too. We're just waiting for the next innovator to arrive.

The Unexpected Retail Decline

Retail sales aren't coming back for a long time. Consumers are reverting back to the long-term mean savings rate of around 9-10% after an orgy of spending this decade lowered the savings rate to negative numbers. That means the current 4% isn't the top by any means.

The conclusion is that you don't want to be in retail stocks - or anything connected with US consumer spending. There is just too much retail capacity right now, and a lot of stores will have to go out of business because the demand is not coming back. The consumer is deleveraging and this is inevitable.

The good news is that this will improve the trade deficit and consumer debt levels.


On Apr 14 04:01 PM Cetin Hakimoglu wrote:

> No they aren't. The savings rate is +4% which means they are hoarding
> money. They need to do their duty and spend more. As long as wages
> keep rising the credit card debt is sustainable.

PIMCO's Kiesel: Three Reasons to Buy High-Grade Corporate Bonds Now

Would you have made the following investment plan a year ago?

I'll jump out of stocks and get into bonds IF stocks go down. Then I'll jump back into stocks in a couple years IF they go up.

Of course not. How about this one instead?

I'll jump into stocks when they get cheap, buy up a few irrationally discounted shares at low P/E's and ride them up into the recovery. After 1-2 years, I will have enjoyed massive gains. By then, interest rates and inflation will be on the rise. I'll switch into bond ETFs at low prices after the fed has raised rates to deal with the risk of high inflation.

As you can see, this is a buy-high, sell-low decision.

Deflation's Not Quite Dead, Again

I view this as confirmation of my suspicion that the consumer savings rate is correcting back towards the long term mean of about 10%.

This change is caused by:
-demographic graying / retirement approaching
-investment losses
-home price declines, mortgage payment resets
-record low savings
-increased unemployment risk

The consequences would be:
-reduced retail supply (many retailers will have to go out of business)
-a period of deflation as retailers cut prices in an attempt to clear inventory, but consumers still won't buy.
-a 7-10% decline in GDP from this effect alone.
-healthier consumer balance sheets
-reduced trade deficits

A Few Thoughts on the Upcoming Auto Sector Implosion

The Chinese certainly are waiting in the wings. They aren't interested in buying the factories, headquarters, or employees though. Post-bankruptcy, what you'll see is thousands of idled GM, Chrysler, Dodge, Saturn, Buick, Mitsubishi, Hummer, Chevy, etc. dealers begging the Chinese to allow them to sell their cars (for thousands less than the competition).

The Chinese will pick up a massive dealer network out of this, perhaps the nation's largest dealer network, and instead of paying for it, they will be paid for it. From the dealers' perspective, it sure beats losing everything. They're up against a wall.

GM/Chrysler bondholder who were expecting salvation from a Chinese buyout will be sorely disappointed.

The $8,000 - $12,000 Chinese cars start arriving in 2010. Expect brisk business in the sign-changing industry.





On Apr 14 02:09 PM User 357705 wrote:

> More likely that the Chinese will get GM and Chrysler for pennies
> on the dollar. Why else all the talk about a "good GM" and a "bad
> GM" coming out of "restructuring"? When that happens the hate China
> first crowd will be hopping mad!

Three Fundamental Reasons to Favor the South Korean Index Fund ETF

"Currently, it is overbought, but any pullback at or near the January or March highs or the 50 day moving average should be considered for potential buying opportunities."
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EWY is hard to resist with a P/E of <10 and a yield that beats treasuries. I accumulated some a bit early and I'm now up only slightly. That P/E is heading towards 15 when the recovery is well underway a year from now, raising the price by 50% plus whatever S. Korea's earnings growth rate is. When that happens, you might regret waiting for the moving average to sort itself out or market timing instead of buying a bargain when you saw it!

Mad Hedge Fund Trader,
I'd agree that EWY should be a core holding for small individual investors. I'd go a bit further and recommend a diversified low cost international portfolio comprised on EWY, EWA, EWZ, and VWO. Non-US markets fell the furthest going into this recession and they will rise the fastest coming out of it.

Percentages are deceptive when trying to analyze how much further shares could rise. Example: if the market price for something changed from 10 to 5, that's a loss of 50%. If it goes from 5 back to 10, that's a gain of 100%. So you lost 50%, gained 100%, and broke even. If you were reluctant to buy at 6, because it had already gone up a whopping 20%, you'd fall victim to this common investment fallacy.

10 Green Energy Gambles for 2009: 3 Month Update

Nuclear would not be economically competitive if it wasn't massively subsidized by taxpayers. Taxpayers cover the vast majority of expenses for security, research, safety assurance / inspections, fuel and waste transport, and fuel and waste storage - which is the biggie, hundreds of billions of dollars sunk into Yuca Mtn. Add the taxpayer expenses together and nuclear becomes a very expensive energy source.

Oil is subsidized too. When's the last time Exxon sent an army and navy to the Persian Gulf to protect oil supplies or sent billions of dollars in foreign aid to area regimes? A "free market with no government interference" price for oil would be at least double the current levels.

The effect of all these direct and indirect subsidies is that part of our national energy cost gets billed to us through payroll taxes and the national debt.

Of course, this creates the economic incentive to freeload and use as much energy as you can, because much of the additional cost will be paid by the government, not by you directly. I suspect we're nearing the end of the financial sustainability of this tax-paid-energy model.

Maybe instead of looking for "green" energy solutions, we should start looking for "economically sustainable" energy sources that reduce our economic dependence on depleting fossil fuels but don't depend on an invisible flow of tax dollars to sustain them. Geothermal, wind, and even some forms of solar energy are rapidly approaching that point. Costs for each of these energy harvesting systems have dropped exponentially in the last 20 years and will continue to do so as economies of scale and fresh technologies are realized.

For example - the one-off, custom built binary geothermal generators used in 1970's research projects have recently been replaced by off-the-shelf modular units from United Technologies (UTX), Ormat (ORA), and others.

The people who in the 1970's said that computers were too expensive for home use made the mistake of underestimating the scale of industrial production and improvement. However, computers in the 1970's weren't competing against taxpayer-subsidized typewriters, slide rules, and graph paper.