November 26, 2013
- Too-big-to-fail banks see a looming threat… and double down!
- How to pull in a 9% payout from an obscure record set this year
- Are we there yet? Rick Rule on the bottom in gold stocks
- No one is safe: Strange tax man tales from the Philippines
- When readers are too literal… an old debate rekindled… Obamacare’s next wave… and more!
“Money is so cheap today,” says Michael Mroz, “people can splurge on $1,000 faucets.”
Mr. Mroz is a contractor in New Jersey. He’s feeling flush these days. “People don’t want granite countertops,” he tells Bloomberg — “they want marble costing at least 25% more.”
And they’re turning to home equity lines of credit — helocs — to make it happen.
“Helocs are making a comeback,” Bloomberg informs us, “as the housing market recovers enough to make the junior mortgages a safer bet for banks more than seven years after the beginning of the housing crash that saddled them with billions of dollars of losses.”
Heloc originations will likely total $91 billion this year — a post-2007 high — and grow to $97 billion next year, according to Moody’s Analytics.
The major players in the space are the usual suspects — Bank of America, Wells Fargo and JPMorgan Chase. The total amount of helocs on the books of U.S. banks peaked at $674 billion in 2009. Today, it’s still $529 billion.
And a huge chunk of that total is in danger of going sour.
“U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble,” says a Reuters story that ironically hit the wires this morning — only a day after Bloomberg’s marble-countertops-and-$1,000-faucet piece. Heh…
The typical heloc has a 10-year term. After 10 years, borrowers must start paying principal. On a $30,000 heloc, that works out to a monthly payment that leaps from $81.25 to $293.16.
Next year, $29 billion in helocs come due at the biggest banks. The figure will grow to $73 billion by 2017 — a “wave of disaster,” in the words of Amy Crews Cutts, chief economist at the consumer credit agency Equifax. “There’s no easy out on this,” she said in a recent speech.
No there’s not: “When the loans go bad, banks can lose an eye-popping 90 cents on the dollar,” says Reuters. That’s because helocs are second in line behind a primary mortgage in a foreclosure. If the outstanding loan value is higher than the home is worth? Poof — most or all of the heloc balance goes to money heaven.
But for now, it’s all good — banks can still assign full value to helocs on their books under mark-to-fantasy accounting rules approved in March 2009 — during the same week the Federal Reserve amped up “QE1” and the S&P 500 bottomed at the infamous 666 level. Just sayin’…
So what are we to make of this contradiction? Best we can figure, the banks are amping up the volume in new helocs to make up for the inevitable losses from the old ones.
And the beat goes on…
Major U.S. stock indexes are adrift in the proverbial “thin trading” before a “long holiday weekend.” The S&P is holding above 1,800. The Nasdaq couldn’t hold onto 4,000 by the close yesterday, but maybe it can today.
As it happens, there’s no shortage of housing numbers for traders to chew on this morning…
- Housing permits: Up more than the “expert consensus” was guessing for September, and way more for October. (The Commerce Department is catching up from the partial government shutdown, hence two months of reports.) Most of the strength is confined to apartments and condos
- Case-Shiller home price index: Still accelerating, now up 13.3% year over year as of September. All 20 metro areas in the survey have seen increases the last two months
- Pending home sales: Down for two straight months now; year over year, it works out to a 1.6% drop.
On that last number: Even the National Association of Realtors knows better than to attribute the slippage to the shutdown; it acknowledges rising prices and rising mortgage rates are both a drag.
“Investors crave yield,” says our Chris Mayer. “Nontraded REITs provide it.”
As you may know, real estate investment trusts own real estate and pay out most of their earnings as dividends. A “nontraded REIT” is one that does not trade on an exchange; investors put money in them in private deals.
“This year,” Chris explains, “nontraded REITs have raised a record amount of capital” — $12 billion through September, to be precise, eclipsing the previous record set in 2007. “When a financial record of any kind is set, that is usually a good sign to take a deeper look. It may mean some change is afoot and there is a profit in the seams.”
Nontraded REITs have been around for more than 20 years. “The performance of these vehicles has been OK,” says Chris. Studies have shown that nontraded REITs perform pretty much as most other REITs do — before fees.”
“Here is the thing,” Chris says, arriving at the A-ha moment. Nontraded REITs are fee heavy.
“Usually, there is a large upfront fee and ongoing asset management fees. This is why the best way to participate in the boom in nontraded REITs is to sell them and manage them.”
And yes, there are publicly traded companies doing just that. Let the hedge fund and private equity guys blow their billions on REITs. Chris would rather you profit via a backdoor way in that is safer, pays nearly 9% and surfs on the boom for nontraded REITs without taking downside risk. And it’s increased its payout by 110% over the last nine quarters.
And that’s just one of Chris’ favorite ideas to take advantage of bargains in the finance sector — without taking on the risks of the too-big-to-fails that are falling all over themselves to write new helocs. For still another excellent way to profit, look here.
Once again, gold trading was halted briefly overnight as a mystery seller decided to unload 1,500 contracts. It’s the fourth time since September that “circuit breakers” kicked in to put the market in pause for 20 seconds or so. There was no obvious news at the time.
The effect was limited; at $1,245, gold is actually a tad higher than when we wrote 24 hours ago.
“After three years of pain, I suggest it is in your interest to hang around for the gain,” says resource investing guru Rick Rule of gold stocks.
“I have not seen capital markets in the junior industry this gloomy for a decade,” Rick told his clients at Sprott Global Resource Investments last week.
“Twice before, I have been in a market this gloomy,” he explained, “in 1991 and 2000. Within a year and a half of both periods, the market went much higher. In 1991, the benefits to me were spectacular. And the recovery off the 2000 low was even better by a large margin.
“Once in a decade, natural resource markets fall by at least 50%. The best investors lose half their money even though they have the best positions. At the bottom, the best investors sell the worst of their stocks and redeploy the money among the remaining companies. When markets recover, those portfolios can be up dramatically, compensating them more than handsomely for their courage in the bear market days.”
Note: Rick is not calling a bottom. But some of the better names in the sector may have already turned the corner last summer.
“These types of moves,” he cautions, “may leave behind investors looking for a broad-based recovery in the resource sector, because the overall market will continue to decline, dragged down by the majority of stocks.” Beware tax-loss selling next month, he adds.
A lot of the worthless names sitting on nothing but moose pasture still need to be purged from the system. “This cleansing period could last another 18-24 months,” says Rick. So “this will be a ‘closet’ bull market because only the best will be moving up or going sideways.”
He holds world titles in eight boxing divisions… but the tax man has Manny Pacquiao on his back.
Only two days after a successful comeback bout, Pacquiao says the Philippine government has frozen all his domestic bank accounts. Seems the IRS believes Pacquiao owes $50.2 million in back taxes from his fights in the United States.
“He said he had broken no laws,” reports the AFP newswire, “because he had already paid taxes on those earnings in the United States, which has a treaty with the Philippines that allows citizens of both countries avoid double taxation. However, he said the tax bureau had rejected the documents he provided as proof that he had already paid to the U.S. Internal Revenue Service.”
What a mess. “This is harassment,” Pacquiao tells Philippine TV. “I am not a criminal or a thief. I am not hiding anything. I will face my problems as they come.” In the meantime, he says he’s borrowing money to come through with his promises of aid for victims of Typhoon Haiyan.
“The government,” AFP reports by way of background, “has been running an active campaign against high-profile tax evaders, targeting movie stars as well as businessmen who flaunt their wealth through flashy sports cars.”
And ordinary Filipinos, we hasten to add. A few weeks ago, the Philippines government began issuing unusual restaurant ratings — ranking them by the taxes they pay.
“The goal of this campaign,” said a statement issued by the presidential palace, “is to increase transparency on tax payments and to encourage the people to be conscientious in paying the right taxes.”
The rankings are published weekly in major newspapers. In one recent edition, the highest taxes were paid by the local franchises of international fast-food chains, along with Max’s Restaurant, a top Filipino fried chicken chain.
We’re perplexed, and the news coverage we’ve seen hasn’t cleared things up. Of course the biggest companies are going to pay the highest taxes. Does that make deadbeats of every little hole-in-the-wall family-owned joint? Very strange…
“You quote one of your readers, ‘In talking on the phone to people who said they wished Obama would not survive to finish his presidency, I suggested they might get a knock on their door from Big Brother, so yes, I have been guilty of self-censorship.'”
If you weren’t with us yesterday, we got some responses to the question of whether people censor themselves on the phone or via email in light of NSA surveillance.
“What kind of person,” this reader goes on, “is listening to low-class trash that wishes Obama dead? Is this typical of your readers? Quote me!”
The 5: Evidently, like George W. Bush, you “don’t do nuance.” We think the reader’s point is there could have been multiple interpretations — i.e., an impeachment that would cut Obama’s presidency short.
But in the paranoid mindset of the security state, such a statement might generate a visit from the Secret Service if overheard by the wrong people at the wrong time.
It’s not an unreasonable suspicion…
“Your presentation of The 5 Min. Forecast is, I believe, dishonest,” a reader writes.
[Ooh, we needed a little excitement…]
“I challenge anyone to get through an issue in five minutes with enough understanding and comprehension to then be able to explain the issues to someone else. If 5 Mins. were just a catchy name, that would be one thing, but you actually have a timeline within each issue!
“Come on, guys. If you want to produce a five-minute letter, get your editing tool out. Otherwise, be honest with yourself and your readers. It is not a five-minute read.”
The 5: Aw, bummer. We’ve heard this one before. What’s next, more complaints about feral hogs?
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. “Almost 80 million people with employer health plans could find their coverage canceled because they are not compliant with Obamacare,” according to a Fox News report today.
Let’s say Fox is engaging in hyperbole and the number is only half that. That’s still 40 million people. Probably someone you know or love. Or even yourself.
You don’t have to be blindsided. And better yet, you can be fully prepared. Start here.