Posts Tagged ‘Usa Today’

David Rosenberg Explains the Housing “Recovery”

Thursday, July 5th, 2012

Confused by all the amusing arguments of a housing “recovery” (because if you believe in it, it just may come true…. maybe) in the sad context of a reality in which the economy is once again turning from bad to worse missing expectations left and right (for every report surprising to the upside, two do the opposite), corporate earnings and margins have rolled over, US states and cities and European countries are filing for default or demanding bailouts at an ever faster pace, and only headlines such as “stocks rise on hopes of more central bank easing” appear in the good news columns of mainstream media? Don’t be: David Rosenberg explains it all.

From Gluskin-Sheff

HOUSING DATA SKEWED BY “UPSIDE-DOWNERS”

What is really driving whatever recovery we are seeing in terms of home sales and prices are the units that are so ridiculously priced — like at less than $125,000. These are where the multiple offers are coming into the fore — and then to be rented out. The reason is that this is the only part of the market that is truly “tight” because almost 30% of American homeowners either have no equity in their homes or less than 5% skin in the proverbial game (according to CoreLogic). These folks have to write their lenders a cheque to make a sale, so many are holding out until they can get a better price and the all-cash deals being placed by investors are allowing for this (note too that 45% of the nation’s homeowners have less than 20% of equity in their homes).

According to data cited by the USA Today, the supply backlog where over half of homeowners are “upside down” on their mortgage is at 4.7 months’; in areas where “upside down” borrowers make up less than 10% of the market, the listed inventory is closer to 8.3 months’ supply — it is in this mid-to-high end where prices are still vulnerable to downside potential — this is not the sliver of the market where vulture funds are looking to pick up a cheap unit to then rent out to the “boomerang” crowd.

As the charts below visibly illustrate, it is probably a little early to be celebrating the recovery in the U.S. housing market, despite the exuberance in the homebuilding stocks which only capture a small share of the overall industry. The market is healing to be sure, but is far from healed. Look at these graphs and draw your own conclusions.

Tags: 7 Months, American Homeowners, Backlog, Boomerang, Borrowers, Cheque, Corporate Earnings, Crowd, David Rosenberg, Downside, Economy, European Countries, Lenders, Mainstream Media, Margins, Months Supply, Mortgage, Pace, Sliver, Stocks, Usa Today, Vulture Funds
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David Rosenberg: The Truth On Sideline Cash

Wednesday, March 21st, 2012

The money-on-the-sidelines argument has reached deafening and self-confirming as anchoring bias among any and every swollen long-only manager seems to have made them ignore the realities of the situation. David Rosenberg, of Gluskin Sheff to the rescue with good old fashioned facts – as much as they might disappoint the audience. Barton Biggs quote in the USA Today article points out how bullish he is and how cash levels are very high and “idled money is ready to be put to work”. However, as Rosie points out equity fund cash ratios are at a de minimus 3.6%, the same level as in the fall of 2007 and near its lowest level ever. The time when cash was heavy and ‘ample’ was at the market lows in 2009 when the ratio was very close to 6%. Bond fund managers, it should be noted this includes the exuberant HY funds, are now sitting on less than 2% cash so if retail inflows continue to subside as they did this week, buying power could weaken over the near-term. What David points out that is more interesting perhaps is the converse of most people’s contrarian dumb money perspective – the household sector appears to have used the rally of the past three years, for the most part, to diversify out of the equity market (getting out at price levels they could only dream of seeing again). As we have pointed out again and again, the retail investor has been a net redeemer in equity funds for nine-months running and has been rebalancing since the March 2009 lows in a clearly demographic shift towards income strategies as the memory of two bursting bubbles within seven years is seared into most private investors’ minds.

Tags: Article Points, Bond Fund, Bursting Bubbles, David Rosenberg, Demographic Shift, Dumb Money, Equity Fund, Equity Funds, Fund Managers, Household Sector, Hy, Income Strategies, Lows, Private Investors, Redeemer, Retail Investor, Sheff, Sideline, Sidelines, Usa Today
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Richard Bernstein’s Top Picks for 2012

Monday, December 19th, 2011

In the following video clip, Richard Bernstein, CEO and Chief Investment Officer of Richard Bernstein Advisors, discusses his top equity picks and investment stories for 2012.

Source: USA Today – Investment Roundtable, December 16, 2011.

Tags: Ceo, Chief Investment Officer, Equity Investment, Investment Advisors, Investment Themes, Richard Bernstein, Stock Investment, Top Picks, Top Stock Picks, Top Stories, Top Themes, Usa Today, Video Clip
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Things I Believe (Hussman)

Tuesday, December 21st, 2010

by John P. Hussman, Ph.D., Hussman Funds

1) Investors dangerously underestimate the risk of an abrupt and possibly severe equity market plunge

Look back over history at points in time where stocks were trading at a rich multiple to normalized earnings (the Shiller multiple is a useful gauge here, as forward operating and price/peak earnings are both corrupted by profit margins that are about 50% above their historic norms). Combine that with overbought, overbullish conditions and rising interest rates. What you will get is a list of most historical pre-crash peaks. Depending on precisely how you define your classifier, you may pick up one or two benign outcomes, such as April 1999 (which I noted in the Hazardous Ovoboby piece in early 2007), but ask whether, on average, you would have knowingly chosen to take market risk at those points.

2) Agreement among “experts” is not your friend

“Tarnished! Nobody expects gold prices to turn up soon: It’s difficult to find any positive news in the depressed gold market. At around $260 an ounce, the metal continues to trade near its cost of production, and almost no one believes it will rally soon. ‘Financing is tough to come by these days’ in the unpopular gold-mining sector, says Ferdi Dippenaar, Harmony’s director of marketing. ‘Unfortunately, there is nothing positive on the horizon.’”

Barron’s Magazine, Commodities Corner: February 12, 2001

“Not a Bear Among Them”

Barron’s Investment Roundtable, December 1972 (at the beginning of a 50% market plunge – No intent to pick on Barron’s – they’ve just been around the longest, so we have lots of back-issues)

“Wall Street Heavyweights Agree: Time to Get Back Into Stocks!”

USA Today Investment Roundtable, December 2010

3) Downside risk tends to be elevated precisely when risk premiums and volatility indices reflect the most complacency

I could go on, but nobody cares.

4) We did not avoid a second Great Depression because we bailed out financial institutions. Rather, the collapse in the economy and the surge in unemployment were the direct result of a gaping hole in the U.S. regulatory structure that prevented the rapid restructuring of insolvent non-bank financials. Policy makers then inappropriately extended the “too big to fail” doctrine to ordinary banks. Following a striking loss of public confidence that resulted from arbitrary policy responses, coupled with fear-mongering by exactly those who stood to benefit from public handouts, the self-fulfilling crisis was contained by a change in accounting rules that effectively disabled capital requirements for all financial companies. We are now left with a Ponzi scheme.

While it’s clear that the four-second tape in Ben Bernanke’s head is an endless loop saying “We let the banks fail in the Great Depression, and look what happened,” any disruption caused by the “failure” of a financial institution is not due to financial losses to bondholders, but is instead due to the necessity of liquidating the assets in a disorganized, piecemeal way, as was the case with Lehman Brothers. Large, sometimes major banks fail every year without a material effect on the economy. The key is to have regulations that allow these failures to occur with the minimal amount of disruptive liquidation.

It is important to recognize that nearly every financial institution has enough debt to its own bondholders on the balance sheet to absorb all of its losses without any damage to depositors or customers. These bondholders lend at a spread, and they knowingly take a risk.

Bank regulations intelligently allow the FDIC to cut away the “operating” portion of a financial institution from the obligations to its bondholders and stockholders. Consider a bank with $100 billion of assets, against which it owes $60 billion of customer deposits, $30 billion of debt to its own bondholders, and $10 billion in shareholder equity. Now suppose those assets decline in value to just $80 billion, creating an insolvent institution ($80 billion in assets, $60 billion in deposit liabilities, $30 billion in debt to bondholders, and -$10 billion in equity). The “operating portion” is the $80 billion in assets, along with the $60 billion of customer deposits, which can be sold as a “whole bank” transaction for $20 billion to another institution. The stockholders are wiped out, while the bondholders get the $20 billion residual and take a loss on the rest. Depositors and customers now get statements with a different logo at the top. The seamless “failure” of Washington Mutual is a good example of this in action.

The problem with Bear Stearns and Lehman was that no equivalent set of regulations was in place to allow “cutting away” the operating portion of a non-bank institution. Instead, the Fed illegally expanded the definition of the word “discount” in Section 13(3) of the Federal Reserve Act and created a shell company to buy $30 billion of Bear Stearns’ questionable long-term assets without recourse. The remaining entity was sold to JP Morgan, where Bear Stearns bondholders still stand to get 100 cents on the dollar plus interest. Lehman was allowed to “fail,” but because there was still no set of regulations that allowed cutting away the operating entity, it had to be liquidated piecemeal.

Importantly, and even urgently, it was not this “failure” that produced the economic downturn. If you carefully observe what happened in 2008, the large-scale collapse of the financial markets and the U.S. economy started literally sixty seconds after TARP was passed by Congress on October 3, 2008. At that moment, the world was told not that the smooth operation of the global financial system would be ensured by taking receivership of failing financial institutions; not that the focus of policy would be the protection of depositors, customers, and U.S. fiscal stability; but instead that insolvent private balance sheets would now be defended, subject to the arbitrary decisions of policy makers in which nobody had confidence. Lehman’s failure simply told investors that these decisions could be completely arbitrary, since there was really no operative distinction between Bear Stearns, which was saved, and Lehman, which was not. Moreover, in order to pass TARP, the public had to be convinced that a global meltdown would result if financial institutions weren’t preserved in their existing form. In this way, policy makers created a crisis of confidence.

Skip forward and carefully observe what happened in 2009, and you’ll see that the crisis was suspended once the FASB threw out rules requiring financial companies to report their assets at market value, while at the same time, the Federal Reserve illegally broadened the definition of “government agency” in Section 14(b) of the Federal Reserve Act in order to purchase $1.5 trillion of Fannie Mae and Freddie Mac obligations. These actions replaced the arbitrary discretion of policy makers with confidence that no major institution would be at risk of failing because, in effect, meaningful capital standards would no longer apply.

Thus, our policy makers first created a crisis of confidence, and then resolved it by legalizing a global Ponzi scheme.

As David Einhorn at Greenlight Capital has noted, “We learned the wrong lesson.” We should have learned that existing capital standards were insufficient and that there was a large, gaping hole in our regulatory structure that failed to provide “resolution authority” for non-bank financial companies. Instead, we’ve learned the dangerously misguided notion that some institutions are simply too big to fail. This inevitably creates a situation where reckless misallocation of capital continues to be subsidized at increasing public cost, while bondholders go unscathed and insiders take bonuses with the same alacrity as Bernie Madoff’s early investors.

In short, the downturn in the real economy occurred because regulators refused to take receivership of insolvent institutions, while pushing a story line that the entire global economy would crumble if bondholders had to take losses. This created a fear among depositors and consumers that the entire system was arbitrary and unstable, fueled periodic runs on various financial institutions, tightened the availability of credit to companies having nothing to do with real estate, and created a self-fulfilling prophecy of global economic weakness. Had our policy makers said “depositors and customers will be protected, we will immediately exercise resolution authority over insolvent institutions, and bondholders will not be spared” we could have simply had a “writeoff recession” in paper assets, rather than an implosion of the real economy and an explosion in public debt.

The facts simply do not support the idea that taking receivership of insolvent financials leads to economic distress. Rather, it properly rests losses on the bondholders, and preserves the operation of the financial system by bolstering its solvency. One might argue that we could not possibly let bondholders take the trillions of dollars of losses that would have been required in order to restructure debt and get the bad obligations off the books. This is absurd. A 20% stock market decline wipes out about $3 trillion in market value. Indeed, given the size and average maturity of the U.S. bond market, just the increase in interest rates that we’ve observed over the past 6 weeks has knocked off trillions in market value.

The financial markets are perfectly capable of taking losses. They don’t do well with disorganized piecemeal liquidation – where perfectly good loans are called in and countless positions have to be unwound – but that isn’t required if your regulatory structure allows receivership/conservatorship that can cut away and gradually transfer the operating portion of an institution. What the global economy is not capable of taking is the uncertainty that results when policy makers apply arbitrary rules, leaving all other decision makers in the economy frozen at the edge of their seats to discover what the results of those arbitrary decisions will be. We have learned the wrong lesson, and we continue to pay for it.

5) The U.S. economy is recovering, but that recovery is vulnerable to even modest shocks.

As I noted a couple of weeks ago, in the ideal case where the economy grows continuously without further credit strains, the “mean-reversion benchmark” scenario would be for GDP growth to approach an average rate of 3.8% annually for about 4 years, followed by about 2.3% annual growth thereafter. The corresponding mean-reversion benchmark for employment growth would be an average of about 200,000 new jobs per month on a sustained basis.

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Tags: Classifier, Commodities, Dippenaar, Director Of Marketing, Downside Risk, Ferdi, Financial Institutions, Gold Market, Gold Prices, Great Depression, Hussman Funds, Market Plunge, Market Risk, Points In Time, Positive News, Price Peak, Profit Margins, Rising Interest Rates, Risk Premiums, Shiller, Usa Today
Posted in Commodities, Credit Markets, Gold, Markets | Comments Off

Get Over Your Fears, Get Back into Stocks, say experts (USA Today Investment Roundtable)

Monday, December 20th, 2010

Five Wall Street commentators – Abby Joseph Cohen, Bob Doll, David Bianco, Richard Bernstein and Dan Chung – say it’s time for individual investors to shun the perceived safety of bonds – and get over their fear of the U.S. stock market – so they can take advantage of what they predict will be a third straight year of solid gains for stocks in 2011.

“The major theme from USA Today’s 15th annual Investment Roundtable is that the bond market is looking riskier amid signs the economy is gaining traction. The five panelists say stocks, which get a boost from stronger growth, will post better returns than bonds in 2011. They are advising investors, many still leery two years after the financial crisis, to start shifting some investment dollars out of bonds and back into stocks,” reported USA Today.

In the five video clips below, each of the panelists share their specific views. [PduP: Wow, what a bullish bunch! I'm concerned about the timing of some of these recommendations.]

Abby Joseph Cohen
Abby Joseph Cohen, senior investment strategist and president of Goldman Sachs’ Global Markets Institute, recommends the information technology, energy and financial services sectors.