 | | The Daily Reckoning | Friday, February 11, 2011 |
- The "Magazine Cover Indicator" and what it's screaming right now,
- Contrarian Alert: The 5-point case for investing in US real estate,
- Plus, Bill Bonner on never ending deficits and marrying off the kids...
| | Magazine Covers and Their Poor
Predictions
| What NOT to Believe About the State of the Housing Market
| |  | | Eric Fry |
Reporting from Laguna Beach, California...
The Wall Street Journal says it's time to buy a house. Time magazine says houses are still for selling. Which distinguished publication has the right call?
To begin answering that question, a brief retrospective may be helpful.Time magazine - like its kindred spirits, BusinessWeek and The Economist - is infamous for its epic wrong calls. So much so that Legg Mason strategist, Paul McRae Montgomery, came up with the "Magazine Cover Indicator."
The logic behind Montgomery's unique contrarian indicator goes like this: By the time a particular investment trend reaches the cover page of a major publication, it is so widely embraced by the public that "everyone is in" - i.e., there is no one left to perpetuate the trend. Therefore, the trend is close to reversing...often with a vengeance.
No one can say for certain when Time, BusinessWeek and The Economist began establishing their "indicator" credentials. Examples of very poorly timed cover stories date back to the 1930s. But BusinessWeek holds title to the most infamous cover story ever.
In August of 1979, the cover of BusinessWeek proclaimed, "The Death of Equities." As it turned out, equities were far from dead. In fact, they were on the verge of a major rebirth. Stocks bottomed early in 1980, before taking off on the biggest bull market in history. Just three years after this cover story appeared, the S&P 500 index had doubled. And three years after that, the S&P 500 had tripled.
But in the dark days of 1979, after equities had languished for more than a decade, no one wanted to touch the things.
"The masses long ago switched from stocks to investments having higher yields and more protection from inflation," The BusinessWeek article observed. "Now the pension funds - the market's last hope - have won permission to quit stocks and bonds for real estate, futures, gold, and even diamonds. The death of equities looks like an almost permanent condition - reversable someday, but not soon."
Twenty-three years after the "Death of Equities" cover story, BusinessWeek cemented its "indicator" credentials for all time by running a cover story entitled, "The Angry Market." During the two years that preceded this story, the stock market had been very angry indeed. An epic bear market had erased nearly half the S&P 500's value. But during the two years that followed this story, the S&P soared more than 40%. Three years later it was up 60%, five years later it was up 100%. In fact, the S&P hit the exact low of its 2000-2 bear market on the day "The Angry Market" cover story hit the newsstands!
But BusinessWeek cannot claim all the accolades for poorly timed cover stories. Time magazine also deserves a dishonorable mention...particularly when it comes to stories about the housing market.
In September, 1977, Time's cover story lamented, "Sky-High Housing." And while it's true that the median price of an American home had doubled over the preceding decade, the median home price would double again over the following decade...and would quintuplebetween September 1977 and September 2005!
Then, just as this once-in-a-lifetime housing boom was ending, Time hit the newsstands with a cover story entitled, "Home Sweet Home - Why We're Going Gaga Over Real Estate."
"Ah, the blistering real estate market," the Time's story gushed in June of 2005, "where dreams of big bucks come wrapped in aluminum siding... Your house is now your piggy bank, ATM and 401(k)... Folks brag about having bought their home in the '90s the way they used to brag about having bought Microsoft in the '80s. Even if you're not contemplating buying or selling anytime soon, the amazing lift in home values is changing the way we think about the roofs over our heads. Real estate isn't so much about nesting today as it is about nest feathering."
But at that very moment, the spectacular American housing boom was already on its way toward an equally spectacular bust. Condominium prices topped out in the identical month this Time cover story appeared - June 2005. Single-family home prices topped out shortly thereafter.
"Homebuilding Stocks went a bit higher during the month or so subsequent to that cover story," Paul MacRae Montgomery relates. "[But] from that point they crashed 78%-90%... Housing prices per se [have fallen] a more modest 28%... But this drop was still enough to constitute the worst drop ever in home prices - worse than in the Great Depression."
Now comes the Time cover story of last September, "Rethinking Homeownership: Why owning a home may no longer make economic sense."
"Homeownership has let us down," the cover story lamented. "For generations, Americans believed that owning a home was an axiomatic good... A house with a front lawn and a picket fence wasn't just a nice place to live or a risk-free investment; it was a way to transform a nation... [But] The dark side of homeownership is now all too apparent: foreclosures and walkaways, neighborhoods plagued by abandoned properties and plummeting home values... If there ever were a time to start weaning America off the idea that homeownership cures all our ills, now...would be it."
"According to the Magazine Cover Indicator," Montgomery relates, "this dour treatment [of the housing market] suggests that it is now time to begin considering investments in real estate related assets."
The Wall Street Journal's Brett Arrends agrees. In an article entitled, "10 Reasons to Buy a Home," Arrends proclaims, "Enough with the doom and gloom about homeownership. Sure, maybe there's more pain to come in the housing market. But when Time magazine starts running covers to declare, 'Owning a home may no longer make economic sense,' it's time to say: Enough is enough. This is what 'capitulation' looks like. Everyone has given up..."
Arrends makes a compelling contrarian argument, which Chris Mayer examines in the column below.... |  |
| The Daily Reckoning Presents
| Housing Is a Buy
| |  | | Chris Mayer |
In a recent Daily Reckoning column, "Buy a House...Then Buy Another," I told you about John Paulson, the billionaire hedge fund manager who switched from betting against housing to now telling people they should buy a house...or even two houses.
Bill Ackman, the successful hedge fund manager behind Pershing Square Capital Management, is another case in point. He, too, saw the housing bubble before it popped. He made a now famous argument as to why the stock of MBIA, which guaranteed the slop coming out of the mortgage factories during the bubble, was going to crumble. And it did, netting Ackman more than $1 billion. MBIA was, at the time, one of the five biggest financial institutions in the US.
But now, like Paulson, Ackman is bullish on US housing. He recently made a compelling case focused on five key areas. Let's take another look at the case for housing and add more meat to the bones.
First, housing is cheaper now than it's been in a generation. The median income is now 78% above what it takes to qualify for a fixed- rate loan on 80% of the median purchase price. Mix that with housing prices that are 30% off their peak nationally and low mortgage rates and you get a cocktail of affordable housing.
The second key part to the argument is to look at the number of forced sellers. As a buyer, it is more favorable to you if you buy from people who have to sell. Makes sense right?
In housing, about 30% of sellers are in foreclosure or approaching it. These are national figures, so in some markets, there are more forced sellers than others. "Buyers benefit when conventional sellers compete with distressed sales," Ackman says. "Las Vegas is an extreme example, where distressed and nondistressed sale prices have nearly converged."
Ultimately, this process is good for the home market. As Ackman points out, "Overpriced and overleveraged homes will be transitioned to new, stable owners at more reasonable prices and on more favorable financing terms." From such stable bases, new bull markets are born.
Third, we look again at financing terms and costs. Blue chip companies don't get the deal you get when you buy a home. You can borrow at about 5% fixed for up to 30 years, putting down only 20% (3% for FHA loans). You have no prepayment penalties - so you can, if rates fall, refinance. But if rates rise, you can sit tight. And you can deduct the interest from your taxes. It is a sweetheart deal.
Rates, by the way, haven't been this low since the Freddie Mac survey began.
This also makes for a great inflation hedge. Housing, as an asset class, performed extremely well during the inflationary 1970s. Today's borrowers have similar upside. Ackman demonstrates how even small price increases multiply the equity in your house, assuming conventional 80% financing and a 10-year holding period:
People who are skeptical of housing think prices won't rise anytime soon. But as this exercise shows, you don't need much of an increase. Even a 1% annual increase over a 10-year period gives you 2.7 times your money. Anything better and your upside soars!
So far, the case for housing is familiar and easy to grasp. Now we get to the fourth and fifth pieces of the argument, which clinch the case, in my view: the long-term supply and demand for housing. Let's start with supply.
What can we say about the supply of houses in the US? There is a lot of it right now, which is what weighs down pricing. This is what creates the opportunity for buyers. But there is more. "Builders have sharply reduced their construction capacity, increasing lead times when the market does recover," Ackman says. "It can take three-seven years to get land permitted in many of the more desirable markets."
This means that we can't turn on a switch and get a lot more houses. As with mining, it is important to consider how long it will take to bring new supply to the market. As investors, we want new supply to come slowly.
The number of housing starts is lower than at any time in at least the past 50 years. New construction is about half the long-term average. Again, good news for investors in housing, since this means that new supply is growing very slowly.
Now let's turn to demand. Demand for new housing is depressed. Home ownership rates are back down to pre-bubble levels. But housing demand - based simply on demographic trends - should rise inexorably for years to come.
You take the growth in households - driven by population growth - and apply a home ownership rate. Demographically, the US is still a growing country. By 2030, there will be 370 million Americans. Even using the long-term average home ownership rate means we'll need 1.1-1.2 million new single-family homes per year.
Here is another chart that puts supply and demand together and captures how depressed things are. The chart shows housing starts. The dotted line shows you projected annual demand of about 1.2 million homes per year. So you can see the big gap as the market digs into existing supply. At some point, housing starts will rebound. This could happen as early as this year...
The prime beneficiary of any rebound would be the homebuilders. There are several interesting possibilities in homebuilder stocks, such as Lennar (NYSE:LEN) or MDC Holdings (NYSE:MDC). I don't think we need to rush to buy any of these just yet, but they are on the radar.
There will be other beneficiaries of a housing rebound, too. There are all those depressed building supply stocks. There are the many little local banks that finance housing. Each has been an area we've sought to avoid, but they have become promising fishing holes.
The risks seem low. We've already seen the bubble collapse. A second collapse is unlikely. The market is adjusting to a more normal level. All is to say that as contrarian as it seems, housing is now a good bet for the long term.
Paulson and Ackman - two great investors - made fortunes betting against housing, but now they've changed their views as the market changed. Maybe we should too.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: Fellow Reckoners may be interested to learn that Chris Mayer's latest investment presentation is now online. You can access it at the link below...but first, a little background. Addison and Chris provided details in yesterday's edition of The 5 Min. Forecast:
"While everyone thinks of Iran for oil," says Chris, alerting us to a "special situation" at the heart of the matter, "not as many are aware of a neighbor's oil riches.
"A recently discovered Turkish oil basin is believed to draw from the same oil source as the huge Iranian Zagros basin, like a huge sea of oil swimming under thousands of miles of desert. This unexplored region holds what could prove one of the biggest untapped oil deposits in the world.
"Even the leading oilmen in the US and Europe have not fully explored it, as they've been distracted by the oil 'boom' in Iraq. Much more lucrative are the prospects of Iran's neighbors...in a much more stable country."
"Pursuing this opportunity is tantamount to 'stealing' oil from underneath the Iranians, which may be as gratifying an oil investment as you could find. Chris is eyeing a Canadian firm priced under $3.50 that's sitting on reserves potentially worth more than 50 times its present market cap." Fellow Reckoners can find the full details from Chris in this presentation.
| | | | Inflation...Oil Shocks...Economic Turmoil...It's Back To The 1970s...! |
The New OIL WAR and Why Iran Threatens Your Money...
According to Byron King's new presentation Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year. Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue.
Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead...
Click here to watch Byron's value-packed presentation now.
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| | | | Bill Bonner | | When Bonds Go Down: Speculating on the Economic Recovery | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
US bonds fell yesterday. The feds borrowed more. The deficit for January was nearly $50 billion. The record for January was hit two years ago - $63 billion.
This puts the US on track for a record deficit of $1.5 trillion.
Wait a minute. This is the 5th year after the crisis began. You'd think federal finances would be getting back to normal. And normal means deficits of 2% or 3%, not 10%.
What gives? They cut taxes!
Associated Press has more of the details:
The Congressional Budget Office is projecting a record deficit of $1.5 trillion this budget year, which ends in September. The estimate was revised upward last month based on a tax-cut package brokered between the White House and Republicans that will add $400 billion to this year's red ink.
That will mark the third consecutive year that the government's deficit has been over $1 trillion, unprecedented imbalances that have been caused by the worst recession since the 1930s. That meant a sharp drop in government tax collections as millions of people lost their jobs while at the same time the government was boosting spending to stimulate the economy and stabilize the banking system.
Obama is facing GOP demands to slash billions from government programs as he prepares to unveil his budget for 2012 on Monday. That spending blueprint will contain a five-year freeze on many domestic government programs but GOP House members contend it is far too timid in slashing deficits. They are putting together a proposal for the current 2011 budget year that will trim spending by $32 billion, a downpayment on their pledge to roll total spending back to 2008 levels. The feds are spending $1.50 for every dollar they collect in taxes. We have no comment on this kind of public finance program. Anything we could say, no matter how provocative or grotesque, is dwarfed by the facts.
But what is really puzzling is how they get away with it. Where are the bond vigilantes?
The funny thing is that if you believe the "recovery" story, you naturally think inflation will pick up and bonds will go down. You should be a vigilante. You should sell bonds. Bonds should go down.
If you don't believe the recovery story, you can buy bonds without worrying. If the economy weakens, bonds should go up. Heck, the Fed will probably keep buying them, helping to keep prices high.
At least for a while. There's the rub. There's the itch. There's the festering sore.
If the economy "recovers," bonds go down.
If the economy doesn't recover, the Feds buy bonds with dollars they created out of nowhere. Dollar holders everywhere - including those who own US Treasury bonds - should be alarmed. They should be vigilantes too.
Either way, sooner or later, bonds should go down.
The one thing that bothers us about this logic is the fact that so many people think it is true. Everyone now seems to expect stocks to rise and bonds to fall. What if it is the other way around?
Wouldn't surprise us.
But what if you don't like stocks or bonds? What if you think the whole damned capital structure is going to fall down? What if you think stocks will sink with the economy...and bonds will sink with the dollar?
Not necessarily in that order.
What do you do then?
You buy gold. You wait.
How long?
A year? Two years? Five years?
What's the hurry?
And more thoughts...
"Most people want to be rentiers," said Elizabeth. "I know I do."
Rentiers are people who collect "rentes" - that is, they are people who live on their investments. If you have an investment in an apartment building, for example, you collect rents. That's why you own the building. You want the income.
That makes you an investor. If you buy the building because you think it is going up in price you are not an investor; you're a speculator. You're speculating that you'll get an increase in your capital.
"Most people who call themselves 'investors' are not really investors," we explained, to know one in particular.
"If you are a real investor, you have to study your investments carefully and make sure they produce a stream of income that justifies the investment. But very few stocks provide enough in dividends to give you any real return on your money. The dividend yield is only about 2%, on average...or about the same as the official inflation rate. The real inflation rate is much higher...meaning, you lose money unless your stocks go up in price."
How likely is it that stocks will go up in price? Everyone seems to think they'll go up. Ben Bernanke - the most powerful economist in the world - says he'll make sure they go up. And they've been going up for almost 2 years.
So... Why not buy stocks?
And guess what...they're cheaper today than they were yesterday.
The Dow went down 10 points yesterday. If the Dow goes down another 5,000 points, we'll be a buyer too.
*** "Why don't you bring your new friend down for the weekend," we suggested to one of the children.
"Elizabeth will ask him questions about St. Augustine. I'll see how he handles a chain saw. We'll all see how he holds up."
We used to be reluctant to involve ourselves in our children's personal lives. That was their business, we said to ourselves. Now, we're not so sure...
"Americans have very funny ideas," said a French friend. "They don't believe in giving money to their children. They're afraid it will ruin them. I guess the idea comes from Americans' history as frontiersmen and settlers. Each pioneer had to make it with his own wits.
"But in most of the world, people want to help their children as much as possible. It seems only natural to me. The world is a competitive place. You give your children every kind of help you can. If you have a skill, you pass it on. If you have a nice house, you give them that. If you have money, you want to make sure they get it, rather than it going to someone else's children. Money gives them something to work with. And it makes their lives nicer and easier.
"And if you don't have any money, at least you should help your children find suitable marriage partners. When they do it on their own, the result is hit or miss. Often, they just make the wrong choices. And then they have to get a divorce - which undermines their financial plans. Or they live with their mistake, unhappily, all their lives.
"It seems crazy to me. Parents are older and wiser. They should help guide their children into happy marriages. If they don't, they are failing in their parental duty."
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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