Last Chance At the Steal of the Century

  • The real estate steal you couldn’t get in 2012…
  • … only now we’ve found a back door in 2015, and it’s not too late
  • Countdown to the next Fed meeting (ugh)
  • Why stocks might drop another 10% from here
  • Needing a passport for a domestic flight… “character or slime,” continued… real-life examples of slowing money velocity… and more!

“We spend a great deal of time, money and resources looking for new investment ideas that you, dear reader, can act on independently,” wrote our executive publisher Addison Wiggin in January 2012. “Sometimes what we find instead is outrage.”
In the gone-but-not-forgotten Apogee Advisory, we published one of the first exposes of a scheme in which “millions of foreclosed homes sitting on the federal government’s books are flipped at fire-sale prices to hedge funds and private equity firms with government connections.” The investors would then manage these properties as rentals.
This “REO-to-rental” scheme, as it was called, was available only to investors able to drop at least $1 billion on a bulk transaction with Fannie Mae, Freddie Mac or the Federal Housing Administration.
If you as a middle-income peon merely wanted to buy the foreclosure property down the block and rent it out in hopes of generating a bit more income than you could get from a 5-year CD, well, sorry — you didn’t qualify.
Fast-forward to this morning’s Wall Street Journal: “Two big owners of single-family rental homes said Monday they have agreed to merge, a bet that rents will keep rising and homes will remain difficult for many Americans to buy.”
Thanks to REO-to-rental, institutional investors now own about 200,000 single-family homes. And single-family rental properties now make up 13% of U.S. housing stock — up from 9% a decade ago, says Moody’s Analytics.
Here’s what’s happened since our January 2012 expose. The hedge funds and private-equity firms that picked up these properties for a song started cashing out. They formed real estate income trusts (REITs) that were made available on the stock market — for middle-income peons.
Addison anticipated the formation of these REITs. “Alas, by then,” he ventured, “the easy money will have been made.”
Indeed, it was. The first of these REITs began trading late in 2012 — Silver Bay Realty Trust Corp. (SBY). We present a chart of its performance with no further comment…

The rest of the sector has done little better.
American Homes 4 Rent (AMH) trades barely 3% higher than it did when it went public in mid-2013. And the company headlining this morning’s merger — Starwood Waypoint Residential Trust (SWAY) — is down 20% since it went public last year. (The firm it’s acquiring, Colony American Homes, is still private.)
As it turns out, there was a way for retail investors to profit from REO-to-rental… and it’s available right now at a considerable discount.
It’s not a “pure play” on single-family home rentals… but it’s one of the biggest players, renting out some 50,000 properties. Our income specialist Zach Scheidt sang its praises in The 5 last January. It’s one of his “Titans of Finance” — money managers who cater to the super-rich but who also float shares to retail investors. It’s Blackstone Group (BX).
BX soared from around $15 at the time of our 2012 expose to $35 when Zach alerted us to it in January. By midyear, it was up toward $45. Now it’s back around $35 again. BX is on sale.
“The share price for Blackstone ebbs and flows with the broad market,” says Zach. “Investors are worried that a broad market sell-off will make it difficult for the company to generate income selling its profitable investments.
“But Blackstone can actually generate income simply from running the companies and real estate investments it owns, and that income should help the company continue paying generous dividends.”
“It’s ridiculous,” Blackstone CEO Stephen Schwarzman says of his firm’s current share price. He ought to know, since he owns 23% of those shares.
And Zach agrees: “Blackstone generated a $4.3 billion profit last year, yet investors are paying only 8.6 times last year’s profits to own Blackstone.
“To put that number into perspective, bond fund manager BlackRock trades at 15.2 times last year’s profits, and mutual fund company T. Rowe Price trades at 15.5 times last year’s profits.
“If Blackstone were to trade at the same multiple as T. Rowe Price, shares would be priced near $60, more than 70% higher than today’s price. Now you can see why Blackstone’s so undervalued.”
BX’s 50,000 single-family homes are the likely catalyst to unlock that value.
“Today, these homes generate reliable income for Blackstone shareholders,” Zach explains, “and they’ll likely be sold for huge profits sometime in the next year.” Indeed, BX plans to spin off its Invitation Homes rental division through an IPO.
So for BX shareholders, not all the easy money has been made — yet.
And while you wait for that IPO to propel BX’s share price, you collect a yield of 8.7%. That’s more than four times the income you can collect from a five-year CD. Not bad, huh?
For access to all of Zach’s income ideas — including his one-of-a-kind strategy to “piggyback” Canada’s version of Social Security — look here.
For no obvious reason, the “risk on” trade is in play this morning. Major U.S. stock indexes are all up about 1%, the S&P 500 at 1,977.
Bonds are selling off, the 10-year Treasury yield now nearly 2.2%. Gold is likewise losing ground, at $1,132.
Crude is up nearly 3% and about to break through $46 again.
“Until the next Fed announcement on Oct. 28, markets are likely to experience more of the weakness and volatility we’ve seen over the past month,” advises macro researcher Dan Amoss — who works hand in hand with our Jim Rickards.
Aw, gee, just when we thought the drama was behind us last Thursday…
“Stocks haven’t fallen enough to reflect investors’ waning appetite for credit risk,” Dan says. “A good bear market warning signal is the appetite for credit risk in the junk bond market. Jim and I watch the junk bond market, and we don’t like what we see.
“If junk bond investors are gobbling up newly issued bonds, a torrent of cash goes into the balance sheets of the weakest companies, and stock prices rise. That’s what we saw from 2009 until early 2014. On the other hand, if investors have eaten their fill, the flow of cash to weak companies dries up. We reached this point in mid-2014.
“A year or two after the new cash from bond sales dries up, defaults tend to rise,” Dan goes on, describing a you-are-here moment.
“The junk bond market enters a vicious feedback loop: Defaults cause investors to flee from junk bonds, bond prices fall, credit supply to weak companies shrinks, defaults rise and another wave of investors flee the market.

“In past episodes of junk bond weakness, the S&P 500 has traded down. But from early 2014 to mid-2015, the S&P 500 was uncharacteristically strong. In August, stocks finally started catching up. To catch up with prior episodes of junk bond weakness, the S&P 500 would have to fall at least 10% from here.
“And with the Fed maintaining the status quo (no rate hikes but promising hikes at some point in the future), there is a good chance that over the next month, we’ll see another sharp decline in the S&P 500.”
Here it comes — the internal passport in the “Land of the Free.”
What follows is an update to a 5 travel advisory we first issued in August 2014. We’re now a year closer to the date when residents of four U.S. states will need a passport to take a domestic flight.
The story goes back to the enactment of the 2005 Real ID Act — requiring states to make their driver’s license photos compliant with facial-recognition software and to make their driver’s license databases available to the feds. In a glorious act of nullification, several states refused to go along.
But now comes the feds’ pushback: Come sometime next year — the date hasn’t yet been set — a driver’s license from those states will no longer be good enough to board a domestic flight.
We’re talking Louisiana, Minnesota, New Hampshire and New York — along with American Samoa.
“Here’s the breakdown,” says a report from Travel and Leisure magazine: “if you’re from one of these states, ‘acceptable’ IDs include passports and passport cards, as well as permanent resident cards, U.S. military ID and DHS trusted traveler cards such a Global Entry and NEXUS.”
“Character or slime,” says the subject line of a reader email — keying off a fellow reader’s remark here on Friday, as the controversy over our “Canadian Social Security” promotion has flared up again.
“While this could be a title associated with our current POTUS candidates, it was directed at The 5 from a Canadian citizen for piggybacking off of their equivalent of Social Security.
“In complete sincerity, I love our Canadian neighbors to the north and believe their system is far more stable and logical and well funded than our Social Security.
“However (I’ll bet you saw that coming), for anyone who can’t see this is actually a positive for their stock holdings by providing additional demand from their southern neighbors, they should probably not invest any of their own money in equities. The fundamental understanding just isn’t there.
“God save the queen!”
“I don’t understand how so many people get so highly offended by your hyperbolic marketing efforts,” writes another.
“Can’t they just view the ‘slime’ that comes as a way to help you pay for giving them a lively and informative daily newsletter? Are they so dense as to not be able to put words like ‘Shocking!’ and ‘Controversial!’ onto their aversion therapy lists?”
“The velocity of money will never be able to increase,” a reader writes — picking up on Jim Rickards’ post-Fed remarks here Friday.
”With the Fed adding trillions of dollars to the money supply in the past few years, my spending of $1 as soon as I get paid can’t even statistically help. Will we have to change this formula like we changed the unemployment formula? How can we increase the velocity of money? No one ever answers.”
“I guess I’m a prime example of sitting at home,” writes a reader who’s doing nothing to contribute to velocity.
“ I sold my fabulous home in the fall of 2013 after building a new building with living accommodation on the second floor so I could build a fortress with off-grid power, water and fuel for generators and room for all of our staff with their families to stay with us if needed.
“I sold business assets not being fully utilized, like a beautiful pressurized twin aircraft and other vehicles.
“We are sitting on a mound of cash, gold and silver with some annuities with guarantees.
“If things looked OK for the future, I would still be in my home. I would be flying to my customer base instead of driving, and it would be in a turboprop! My corporate vehicles would have been replaced (five pickups) and we would have embarked on some capital spending for new equipment.
“Instead, we’re holed up ready for a system collapse that may be imminent or maybe not, who knows? My money velocity is slowed way down!”
“This economy is a ‘dud,’” another reader affirms. “You guys — Jim and crew — have had it right for long time. No inflation, no growth, no spending by the credit card slaves!
“And it ain’t gonna happen soon. Drive around the ‘new malls’ and shopping centers! That’s how desperate savers are — investing in every developer with a reasonable plan of decent return, BUT it ain’t happening. People aren’t spending, because there’s no way out there for the little guy to make a buck. The best you can do is keep your money as safe as you can and hope for a miracle — the lottery, maybe?
“And as everyone tightens the checkbook and credit card, it continues to worsen — in spite of Wall Street’s exhortations. My best advice would be to listen to Rickards and Bonner and the folks at Agora — ’cause it’s like they are telling us — you ain’t seen nothin’ yet!”
The 5: We’re not quite ready to head to a bunker… but we’re taking Jim Rickards’ latest warning to heart.
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. As you might know, China was a “hot button” issue in last week’s Republican debate.
In case you missed it, here’s a quick recap:
One orange-haired candidate called the Chinese bullies…
A few talked about the Chinese president’s visit to the U.S…
And all of them skirted the real issue. (Surprise, surprise…)
But not to worry.
We’ve got the inside scoop on what’s really coming. And it ain’t pretty.
Click here to discover the story the Republican candidates won’t tell you about.
Say what you will about Donald Trump, but he certainly speaks his mind. And when even he won’t mention this story, you know it’s controversial. Click here now to learn the truth.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

Recent Alerts

Beyond the Good Job Numbers (Bad for Social Security)

When you drill down into January job numbers — among certain age brackets — a more interesting picture emerges. Read More

Artificial Intelligence Gets Woke

I can’t help wondering if today is the day ChatGPT jumped the shark. Read More

Two Defensive Plays for a Debt Ceiling Crisis

“Here we go again,” says our income-and-retirement specialist Zach Scheidt. “The United States is facing another budget crisis.” Read More

I Don’t Give a Flying Flip About AI

On a basic level, I don’t give a flying flip about AI… But there’s gotta be an investing angle somewhere, right? Read More

The New Recession Is Now

“It’s clear that the U.S. economy entered a new recession in late December,” asserts Paradigm Press Group’s macroeconomics maven Jim Rickards. And for confirming evidence of this recession call, Jim points to stresses in the trucking industry. Read More

So Now EVs Are Evil Too…

Here at Paradigm Press it’s not good enough for us to shake our heads at the hubris of the control freaks and power trippers… We seek to follow the money. Read More

“A Radical Environmentalist Government”

A spate of wind turbine collapses is indicative of Canada’s “Just Transition” legislation… Read More

The Weaponized Dollar Misfires

The weaponized dollar keeps misfiring… So what do you do about it? Read More

S&P 500 on Steroids

Why is the S&P holding up so well when everything else looks terrible? Read More

Update: Four Years (Max) to China War

If China were to make a move on Taiwan… this week might be as good a time as any. Read More