- Three years of profits from the world’s most boring financial crisis
- The chart that says everything about the housing market at year-end 2014
- Why one of Uncle Sam’s most powerful agencies is about to be reined in
- Double trouble in the shale patch
- Now that The Interview has been released, the truth can come out
The few traders on duty today have sent the major U.S. stock indexes down a bit this morning. As we write, the S&P 500 has shed five points, to 2,085.
“Greece remains in focus,” says an alert from CNBC — forever in search of a “reason” behind every blip in the market.
Indeed, Greece will hold parliamentary elections on Jan. 25 — earlier than expected. The left-wing Syriza party is leading in the polls. Its leader says “austerity will be history” if Syriza wins.
And with that, the “world’s most boring financial crisis” — our executive publisher Addison Wiggin’s description of Europe — is back in view as 2014 draws to a close.
Curiously, currency traders don’t sniff out trouble this morning: The euro is up a bit as we write, to $1.216. The dollar index is back a hair below 90. Maybe they’re coming around to the view EverBank’s Chuck Butler expressed in today’s Daily Pfennig — it’s a Greece problem, not a Europe problem.
“In 2011, things were different,” says Chuck, “and Greece weighed heavily on the eurozone and the euro. But this is NOT 2011! The eurozone is much stronger, and better suited to deal with a Greek exit, should they decide that’s what they want to do. There’s no contagion problem, at this point, and I doubt if there will be one.”
Our own Chris Mayer shed light on the matter back in January: “A lot of investors,” he said, “think of Europe as one monolithic thing, like the United States. They think of maybe fussy countries with a lot of bureaucracy, high taxes, men with girly shoes. But Europe is very different.”
We hash over developments in Europe this morning by way of examining a big call Chris made at the beginning of 2014: “Act II of the biggest fire sale in history is underway,” he said in this space on Jan. 8.
Chris spotted Act I in early 2012 — when he tipped us off to how Europe’s banking sector needed to raise cash to stay afloat. And so the banks were starting to sell off assets — especially real estate — at fire-sale prices.
“There is no better, more reliable way to make money than to buy something from someone who has to sell,” he said at the time. “Bankers are the best people in the world to buy from.” If they need cash, they won’t quibble too much about price.
Fast-forward to the start of 2014: “The European banking system is in worse shape than it was in 2008,” said Chris. European banks held 1.2 trillion euros on “nonperforming loans” — those at least 90 days in arrears.
“Banks have to get rid of these loans,” Chris went on to explain.
“There are new rules taking effect in 2014, called Basel III. They tighten every year through 2018. To meet these hurdles, the banks must clean up their books. This means they have to sell a bunch of assets. And they are selling them at deep discounts. You want to be a buyer of these assets.”
Chris’ favorite vehicle for doing so continues to outperform the broad market. Kennedy Wilson (KW) is up 138% from his initial recommendation three years ago. That compares with the S&P 500 up less than 70%. At the moment KW is about a buck above his buy-up-to price… but he still considers it a long-term hold.
If you want to check out an idea of Chris’ that you can act on right now, we direct your attention here.
Home prices are growing at their slowest rate in two years, according to the latest Case-Shiller home price index. The year-over-year growth works out to 4.5%.
The more interesting housing-market development from where we sit is found in this chart…
The U.S. homeownership rate rose more or less in tandem with home prices for nearly two decades… and the two fell in tandem from 2007-12. Since then the numbers have diverged, says the Federal Reserve Bank of St. Louis.
“This current episode could solidify the idea that it is possible to have housing booms driven entirely by investors,” says the St. Louis Fed’s Carlos Garriga.
Indeed, the lines began to diverge at the very moment private equity players like Blackstone Group started buying up single-family homes as rental properties — usually foreclosures, bought at fire-sale prices from Fannie Mae, Freddie Mac and the Federal Housing Administration.
It was easy money in 2012 — for those with the right connections. For you and me, not so much. After the easy money was made, the big players suckered in retail investors with a new type of real estate investment trust (REIT) focused on single-family rental properties.
Every one of them has been a turkey, starting with the first — Silver Bay Realty Trust (SBY). It went public at year-end 2012. For most of its existence it’s traded below its IPO price.
So who’s left now to prop up the housing market?
Well, as we noted two weeks ago, Fannie and Freddie are bringing back 3%-down mortgages.
Oy…
Bonds are benefiting as stocks slip today: Prices are rising and yields are falling, the yield on a 10-year Treasury note now 2.18%.
At the start of 2014, the mainstream said this would be the year of rising bond rates. That was when the 10-year was yielding 3%. Heh.
As it turns out, TLT, the ETF that holds Treasuries with a maturity of 20 years or longer, is up 23% this year. The S&P 500 is up a bit less than 14%.
“I predict that the Republican Congress is going to gut the FDA,” says our Paul Mampilly.
If you were with us yesterday, you know Paul declared a “golden age” of biotechnology last spring… practically at the moment the biotech sector put in its bottom for the year. Today, he’s back with a look at a catalyst for next year.
“What will change,” he explains, “is the way that the FDA judges a drug.
“Right now, the FDA must say that a drug is safe and effective to approve it. However, the FDA is poor at determining what is effective and keeps too many lifesaving medicines away from patients who need them. Doctors are too fed up with the FDA’s rejection of many good drugs.
“Patients and doctors are going to find a sympathetic ear among Republicans. And by the end of next year, Republicans will pass legislation saying the FDA should check only for safety. Effectiveness will become something that patients, doctors and companies work out through tests and other scientific methods.”
Paul will expand on this forecast tomorrow. But it’s so huge we couldn’t resist giving you a preview today. In the meantime, there are still ample profit opportunities from the FDA’s authority to pronounce judgment day on a drug. Learn how Paul gets a jump on the FDA’s decisions, to the benefit of subscribers like you, right here.
Gold has pushed itself back above $1,200. At last check, the bid was $1,204. The Midas metal is likely to end the year flat.
Crude tried and failed to rally this morning: As we write, a barrel of West Texas Intermediate fetches about what it did 24 hours ago — $53.49.
Natural gas prices, which tested the $3-per-million-BTU level on Friday, are back to $3.09 at last check.
“Up until now,” writes Matt Insley of our energy desk, “expectations were high that a colder-than-average winter would help draw down natural gas stockpiles and keep the price of natural gas in the $4-5 per MMBTU range.”
But despite an arctic blast in the upper Midwest today — it’s 5 above in the Twin Cities as we write — the overall forecast is for a milder winter.
“It’s the second blow to America’s shale boom,” says Matt. “Not only are prices for crude oil down — along with ‘wet’ byproducts like condensate, propane and ethane — but now it looks like natural gas prices could head much lower.
“If January and February turn out mild? WATCH OUT BELOW! Natural gas prices could fall well below $3 per MMBTU. That’s the next pothole we’ll have to avoid in America’s shale boom.”
Matt hastens to add, “It’s not all dark skies in the U.S. shale patch.” More about that as we slip into the new year…
At last, the truth can come out.
“FBI agents investigating the Sony Pictures hack were briefed Monday by a security firm that says its research points to laid-off Sony staff, not North Korea, as the perpetrator,” reports Politico.
This is infuriating… not least because we’ve been on the cybersecurity-investing beat here at The 5 for nearly two years now.
A quick recap of recent events: On Thursday Dec. 18, we pointed out there was nothing other than circumstantial evidence pointing to North Korea. The following Monday, we cited cybersecurity experts who said the evidence was lacking. That was before Sony decided to go ahead and release the sophomoric Seth Rogen movie (but we repeat ourselves) The Interview on Christmas Day after all.
Once the movie was released we began to notice mainstream news stories catching up with our skepticism, viz the BBC: “However, many cybersecurity experts have come forward to dispute this assertion.”
And now comes word the cyberintelligence company Norse says all the evidence points to “some combination of a disgruntled employee and hackers for piracy groups,” says Politico.
But hey, it’s the holidays and no one’s noticing. In the run-up to Christmas, the feds “controlled the narrative,” as they say inside the Beltway: Boobus Americanus thinks those dastardly Norks are to blame, and they even went to see the movie to stand up against “censorship.”
[Totally quirky aside: We recently came across a Tumblr page called “Kim Jong Un Looking at Things.” As these things go, it’s not on the same level as “How High Are Xi Jinping’s Pants Today?”, which we spotted last year… but it’s oddly mesmerizing.
Looking at a computer screen…
Looking at plastic products…
Looking at bread twists.
No, there’s no point to our bringing this up. It’s the week between Christmas and New Year’s, and we’re reaching to fill our 5 Mins. It’s a lot more entertaining than coming up with some lame top-10 list for year-end, wouldn’t you agree?]
Best regards,
Dave Gonigam
The 5 Min. Forecast
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