 | | The Daily Reckoning | Thursday, October 7, 2010 |
- Real estate hunting in the emerging markets and a few warning signs for US equities,
- The Daily Reckoning Video Series returns with Part II of Bill and Eric's interview,
- Plus, Bill's thoughts on premeditated currency assassination, Greenspan-sized jail cells and terrorist warnings at the Louvre...
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|  | | Shorts in Cold Weather
| A few reasons to anticipate a stock market downturn
| |  | | Eric Fry |
Reporting from Laguna Beach, California...
US stocks didn't do much of anything yesterday. They spent the entire trading session dancing around the unchanged level like Victorian schoolgirls around a Maypole. The Dow Jones Industrial Average gained a smidgen, while the S&P 500 Index slipped a skosh.
The commodity markets danced a little more purposefully - perhaps like a couple of junior high kids "grinding" at a school dance. The RJ/CRB Index of Commodity Prices advanced to a new 9-month high, while gold jumped to a new all-time high. The now-and-again precious metal tacked on $8.00 to $1,348.70 an ounce. Nothing new there...Gold is going up because the world is full of well-meaning central bankers who mean well to debase their national currencies in the pursuit of economic vitality. Sounds wacky, we know; but that's what the top universities are teaching these days. The top universities are also teaching that a few highly educated men in nice suits can turn enough dials and pull enough levers to cure recessions and create non-inflationary recoveries.
The men in nice suits are busily turning nobs and pulling levers, but the economy still flounders and gold still soars. Apparently, gold didn't go to college.
Turning our attention back to the stock market, yesterday's subdued trading action might soon yield to something a bit more raucous. At least that's the informed opinion of two guys who monitor this kind of thing. First up, Jay Shartsis, a seasoned options trader from R.F. Lafferty in New York, has identified a few "cracks in the wall" of the recent stock market rally.
Shartsis, who has been expecting an intermediate-term market top for more than a week now, is finding more evidence in support of his caution. He observes that many of the high-profile stocks that have been leading the market higher suffered big sell-offs yesterday. Netflix (NASDAQ:NFLX) slumped 4%, Salesforce.com (NYSE:CRM) dropped 8%, VMware, Inc. (NYSE:VMW) fell 9% and Citrix Systems (NASDAQ:CTXS) tumbled 14%. "These are leading stocks and have market-wide implications," Shartsis warns.
"I was also surprised to see only 272 new highs on the NYSE Tuesday," Shartsis continues, "versus 674 last April 26 and 306 recorded on Sept 20. That's a non-confirmation of importance. Further, as the S&P 500 has continued higher, the VIX Index - aka, 'Fear Gauge' - has not continued lower, as would be expected. In fact, the VIX bottomed at $20.93 on Sep 13 and has not made new lows as the S&P has made new highs. This non-confirmation suggests the VIX will soon rise and stocks will fall."
Picking up on this same bearish theme, Dan Amoss, editor of The Strategic Short Report, remarks, "The September rally looks tired... The market is at risk of another sharp move lower. The S&P 500 is encountering strong 'resistance' at 1,150. One can easily imagine a return back to 1050 - the starting point of the latest sprint."
Amoss believes the recent rally has less to do with underlying economic trends than it has to do with the Fed's easy money tactics - both actual and anticipated. He suspects the stock market has already priced in the Fed's next round of quantitative easing - the process by which the Fed conjures money out of thin air.
"Because the markets have already anticipated 'quantitative easing 2' by pushing up stocks and Treasury bond prices," says Amoss, "the actual implementation of 'QE2' is less likely to be imminent.
"Here's another ominous sign for stock market bulls," he continues, "the darling momentum stocks are looking weaker. Ridiculously overvalued stocks (but good businesses) including Priceline, Amazon, Netflix, and Salesforce.com are weakening. Perhaps traders don't want to own these stocks at triple-digit P/E multiples heading into earnings season...
"There's plenty of room for 2011 earnings estimates to come down," Amoss concludes. "This market is not cheap. I'm evaluating several short ideas..."
So there you have it; the stock market will fall very soon...unless it doesn't.
| | | | A Daily Reckoning Video Series Announcement: |
As our Facebook friends were made aware yesterday, Part II of Bill and Eric's interview, recorded on the sidelines of our annual investment conference in Vancouver earlier this year, is now online.
In Part I, if you happened to miss it, they spoke about the death of the dollar and the long road to Japan, among other things. This time around, the tone is a little more upbeat as they hash out some of the opportunities in emerging market real estate and discuss the buy-side of Bill's "Trade of the New Decade."
But before we get to all that, take a good look at the screenshot, below. Having caught Bill and Eric mid-conversation, we decided to take advantage of the situation by running a "funniest caption" competition.
To enter, simply click through to the free video on YouTube, Facebook or The Daily Reckoning and submit your wittiest comment at the bottom of the page (but please, keep it clean). We'll take a look at all the comments and send out a prize to the winners. We can't tell you what it is, but we can say that it's something almost every single employee at the DR HQ keeps on their desk...
Here she is, Part II of the Daily Reckoning Video Series:
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| | The Daily Reckoning Presents | The Four Pillars of Successful Real Estate
Investing
| |  | | Ronan Mcmahon |
When sizing up a potential real estate location, I always look for one of four strategies that indicate a potential rise in property values:
- A new, emerging middle class
- The Path of Progress
- An influx of foreign buyers
- Distressed or crisis opportunities
One of my hottest locations for real estate opportunities right now is Fortaleza, on Brazil's northeast coast. I identified two strategies at play when I first scouted this city more than two years ago, and they still hold true today.
A new, emerging middle class means new consumers. These new consumers buy cappuccinos, refrigerators, cars, vacations, new homes and second homes. This started happening in the US in the 1950s.
We can profit by owning the condo this new middle class lives or vacations in, or the building that houses the coffee shop where they sip coffee.
Brazil has become a middle-class country. Car sales were up 17.9% for the first quarter of this year. Domestic budget airlines are growing exponentially, as this new middle class takes flight to various business and vacation destinations. In the first eight months of this year, 1.95 million new jobs were created - double the figure for the same period last year. The latest forecast for GDP growth this year is 7.3%.
Fortaleza is Brazil's biggest domestic tourism destination. Brazilians come here to relax, sip cocktails by the beach, enjoy an evening meal and some entertainment. Passenger traffic at Fortaleza airport increased 23% year-on-year to the end of August 2010, and cargo traffic rose by 40% in the same period.
Anything that improves the accessibility of a piece of real estate increases its value. Infrastructure like roads, bridges, airports, and rail routes. Anything that improves amenities in an area will also increase real estate values...like resorts, golf courses, theme parks and conference centers.
We can profit by positioning ourselves ahead of this Path of Progress...
Fortaleza is enjoying a Path of Progress story today. Soccer's Confederations Cup comes here in 2013 followed by the World Cup the following year. 9.8 billion reais ($5.7 billion) will be spent improving infrastructure and tourism amenities in the run up to 2014. Airport capacity will be increased from five million to thirteen million passengers annually. A new metro system will provide modern and reliable public transport. The first of the routes are already operational. The new stadium will be world class, the new conference center will be the second biggest in Brazil and the city will be home to South America's largest aquarium.
Outside of all this tourism-related development, Fortaleza is also seeing development associated with a new industrial center at Pecem port. Earlier this year, the government announced a duty-free zone, alongside Pecem and forty minutes west of Fortaleza. The scale is massive: the zone is more than 10,500 acres in total. Businesses located within this area will pay practically no taxes on inputs purchased and finished goods exported. There will be less bureaucracy and customs procedures for its exporters.
Buying in Fortaleza could position you ahead of the Path of Progress. There is currently a lack of both short-term rentals or office space in the city. You could do well if you buy here with a view to filling that gap in the market, particularly if you buy close to the new convention center or the metro line.
And now for the two strategies that don't apply to Fortaleza...
In countries like Nicaragua and Panama, large numbers of foreign buyers (mainly North American) pushed property prices rapidly upwards in a relatively short timeframe. These buyers used equity in their properties back home to finance their overseas property purchases. With the global slowdown, those buyers have gone...and the markets that relied on them have suffered.
Brazil's real estate market is driven by the local middle classes. Less than two percent of property sales in the country's northeast are to foreign buyers. Thanks to the growing Brazilian middle classes, the real estate market in Fortaleza is still buoyant.
Crisis investing means buying when everyone wants (or needs) out. There are no buyers on the ground...and the few that remain are afraid. You get to name your price. This happened in Argentina during its financial crisis in 2001. Today, you'll see distressed deals, mainly in Europe and the US. Banks are fire-selling units at prices as low as 30 cents on the dollar. You need to be careful if you are considering this play. You need to focus on quality, and finished units.
The market in Fortaleza however is strong. Prices are rising and there are a lot of buyers. This isn't the type of market where we see distressed or crisis sales.
These four strategies don't just apply to Fortaleza. You can (and should) use them when investigating any real estate purchase overseas, especially when you are buying for investment.
Ronan McMahon,
for The Daily Reckoning
Joel's Note: When Bill fist started International Living, some thirty years ago, it must have seemed a crazy idea to many Americans. "Who would want to move out of the US?" folks must have asked themselves at the time. "Why would we want a holiday home or investment property outside of these borders?"
Well, three decades of gross governmental mismanagement later, many are asking the opposite questions. "How CAN I get at least some of my assets out of here?"... "How CAN I protect my wealth and enjoy the good life without Uncle Sam breathing down my neck?"
Want to live the International Living life? We suggest you start where Bill did, right here.
| | | | | | Bill Bonner
| Central Bankers: The REAL Rogue Traders
| |  | | Bill Bonner |
Reckoning from Paris, France...
Frankie looked up at the judge
Judge, what will be my fine?
And the judge looked down at Frankie...
Girl, you got 99
- Frankie and Johnny
We feel sorry for Jerome Kerviel. Such a good-looking young man. With such a promising future. He was the trader with Société Générale who lost 4.9 billion euros in unauthorized trading.
Now, the poor fellow has faced the music. Trouble was, it wasn't a tune he wanted to hear. And it seemed a little inappropriate to the occasion to us too. More below...
The news yesterday was mixed. Unemployment increased in September. The dollar and US bond yields hit new lows. And China said that trying to force it to revalue its currency would be a "disaster for the world."
Hmmm...
Stocks rose 22 points on the Dow. Gold went up another $7.
Gold must be ready for a correction. Or else we really have reached the final stage...the runaway stage in the great bull market.
Back to Kerviel...
Kerviel drew a five-year sentence (two years suspended.) Plus, he's supposed to repay 4.9 billion euros...
"By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part and whose future was threatened," said the judge.
Well, we're sure he didn't do it intentionally. We mean, he didn't intend to bring down the bank.
Besides, a lot of other people made authorized trades that were much bigger...which also put their banks in jeopardy. In fact, some of the CEOs of the world's largest banks also put their institutions in harm's way. And then, when the banks ran into the ditch, these guys didn't get five years and a $7 billion fine. Instead, they got a $50 million bonus!
Kerviel recalled a card trick at a corporate party:
"Ladies and gentlemen, it's up to you and our clients to find the margin. It has disappeared. Where's it gone? Not here. Not there. Aha! Here it is, in my pocket!"
It didn't go into Kerviel's pocket. He's penniless. The fine is about $6.7 billion. The man is said to earn about $3,000 a month. Talk about debt repayment! Let's see, if he saves half his money each month. And he puts it all to paying off his debt to Société Générale... that's $36,000 per year.
Hmm... If the poor man lives for 200,000 years...he'll still be paying.
But wait. Suppose this quantitative easing thing takes off....
Yes, dear reader, central bankers are probably the biggest rogue traders of all. Remember Alan Greenspan? He has an opinion in The Financial Times today. We read it twice. Neither time did we discover anything new. He says the problem is fear. Until the fear diminishes...don't expect businesses to start many new projects or hire many new employees. Thanks a lot for that insight, Alan.
Alan Greenspan is probably more to blame than any other human being for today's financial crisis. He made a huge bet and put the whole world economy at risk. He bet that he knew better than the market. He put the Fed's key lending rate below the rate of consumer price inflation...and left it there for four years. Over $12 trillion was lost - in America alone. Where's the jail cell waiting for him? Where's the $12 trillion fine?
And now central bankers are betting big again...BIG...and they risk not only putting the 140,000 employees of Société Générale out of work...but hundreds of millions of other people all over the world.
Central bankers are betting that they can add billions in QE money to the world's money supply, without causing a calamity. Maybe they can. Maybe they can't. It's never been done before.
But every previous experiment with paper money has ended in disaster. Paper money never survived an entire credit cycle. When credit was expanding, people were happy to take the paper. When it shrank, they became fearful of the paper and wanted something more substantial. Paper money always ends up worthless.
Kerviel's bets went well as long as credit was expanding. He was up more than $1 billion at one point. Then, when the markets began going down, so did his gambles.
Will it be any different for the central banks? Will their bets go bad too - perhaps in a spectacular blow-off in which the dollar itself becomes almost worthless. Remember, if the dollar loses just the equivalent of 5% of its 1900 value - there's nothing left. It will be completely worthless.
Could it happen? Central bankers risk a full-blown currency calamity, worldwide, with full knowledge aforethought... This is premeditated currency assassination, in other words.
Where's the jail cell waiting for Bernanke? Who's going to fine him $10 trillion? How's he going to pay?
So cheer up, Jerome. You might be able to pay your debt to society with a postage stamp... We have in our wallet a 10 trillion dollar note from Zimbabwe. Why not a 10 trillion dollar note from the US? We're not predicting it...we're just trying to keep the young man's hopes up. And you never know...
And more thoughts...
Amid the flotsam and jetsam when Lehman went down was a copy of The Decline & Fall of the Roman Empire by Edward Gibbon. The company must have had it in its library.
We wonder how many Lehman employees read it. And we wonder if Lehman could have saved itself if more of them had. If anything was too big, too successful, too long-lived to fail it was Rome. And yet, down it went.
How many of the hotshots at Lehman Bros. suspected...for just one minute...that the Masters of the Universe might someday become its slaves and bootblacks?
*** Yesterday, we went for a drink at the Café Marly at the Louvre. A very nice place to meet someone after work. You sit in the arcades...looking at the glass pyramid in the center.
According to our sources, the Louvre has been targeted by terrorists. They figure they could get a lot of press if they could blow it up and take out some tourists too.
Looking at it as a casual reader of the newspaper, it appears to us that terrorists' damage could be reduced by forceful and determined action on the part of bystanders. Rather than lie down and let yourself get shot, for example, it might be better to mount a counter-attack.
We imagined how we would leap over the ramparts of the Café Marly onto the unsuspecting terrorists below...disarm them...and turn their guns on them. After our recent automatic weapons training by the Chinese army we felt fully qualified to take on a few terrorists.
Fortunately, while we were engaged in this sort of daydreaming, the threat passed. Well-armed security forces took up their positions. No terrorists appeared.
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | The Maryland Millionaire Exodus
Expatriation. It’s happening. Thousands of people are picking up stakes and leaving. They’re leaving their high-tax home states. “I’m outa here. I’ve had enough,” said a friend at dinner last week. “[Maryland Governor] O’Malley thinks he can tax us all he wants. But I don’t have to put up with it. I can move. We bought a place in Florida.
Feds Plan to Duplicate the “Success” of Quantitative Easing
Millionaires Collect Unemployment. Zombie Takeover Spreads. | The Incredible Two-Day Jump in US Treasure Debt
To show you that I am not over-reacting...here is an example of the corrupt, game-playing crap going on with the Federal Reserve and the Treasury: On Wednesday, 9/29/10, the national debt was $13.466 trillion. The next day, 9/30, it goes to $13.561 trillion. Again, “the next day,” 10/1, the start of the new federal fiscal year, it rises to $13.610 trillion!
Holding Gold in the Face of Hyperinflation
Connecting the Dots of Chinese Gold and Currency Reserves | Central Bankers are Paid to Lie – Buy Corn
Federal Reserve Chairman Ben S. Bernanke has talked about the 1970s, the decade associated with “stagflation.” This word (originally applied to the United Kingdom in 1965) fuses recession with price inflation. He brushes off comparisons between then and now, as he should, but not for the reasons he gives.
Daily Show Interview: Elizabeth Warren on the “Hacked at” Middle Class
Emerging Market Infrastructure Set to Drive Demand for Commodities | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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