Tag: news

Wolf Richter   http://ift.tt/NCxwUy   http://ift.tt/Wz5XCn

Private equity firms are the ultimate smart money on Wall Street; they know how to wring out the last dime from their own clients, such as pension funds and rich individuals, through hidden fees, obscure expenses, elaborate expense shifting, lackadaisical disclosure, and “zombie advisers,” to the point where SEC Inspection Chief Andrew Bowden singled them out in a speech in May. Now the lawyers are circling.

And these PE firms invented a whole new business: buying vacant homes out of foreclosure and from banks and renting them out. Flush with the Fed’s nearly free money, Blackstone Group ended up spending $8.6 billion in two years on 45,000 homes, spread helter-skelter across 14 cities. Another PE product, American Homes 4 Rent, which went public last summer as a highly leveraged REIT, bought 25,000 homes. Firms sprouted like mushrooms, spending $50 billion to acquire 386,000 homes.

And home prices soared. Year-over-year increases of over 20% suddenly appeared in the data. Housing Bubble 2 was born. That’s how the Fed “healed” the housing market. Yet numerous economists claimed that buying 386,000 homes over two years in a market where about 5 million existing homes change owners every year could not possibly have had much impact on price. Turns out, that meme is awfully close to propaganda.

The smart money on Wall Street had a goal.

And a system – aided and abetted by the banks. Homebuyers today are, literally, paying the price. The goal was to progressively drive up home prices to book near-instant paper profits on the units they had already bought. According to a source at one of the GSEs (Government Sponsored Enterprise), whose work is focused on residential real estate, they did it by constantly laddering their purchases. And in some markets, like Las Vegas, they achieved price increases of 100%. The multiplier effect. He explains:

A multiplier of roughly 60 times is placed on one sale in a market. In other words, one sale affects the value of 60 homes. So the 386,000 homes adjusted the price on roughly 23 million homes. There are 78 million homes in America with 35 million first-lien mortgages. This happened in about 8-12 markets nationwide. The West Coast was leading the charge back up.

Last fall, two investment houses announced they were going to sell out of their inventory and today three others announced the same. Reason: prices have more than met their goal. Since real estate is a commodity, the rule of price elasticity applies. A very small number of sales can have extreme consequences in price for the rest.

The problem with that strategy? It drove up prices so far and so fast that the business model of buying these homes, fixing them up, and renting them out at a profit has hit a wall. So the dynamics of the market are changing. From gobbling up and finding renters to…

Selling, securitizing, and consolidating.

But selling them to first-time buyers at these prices – well, forget it. So Waypoint Real Estate Group is trying to “quietly” unload half its inventory of 4,000 homes in California to another company. It also manages another 7,000 homes that an affiliated REIT owns. Och-Ziff Capital Management Group and Oaktree Capital Management have already started selling their homes. Other firms, including Blackstone Group and American Homes 4 Rent have pulled back from buying homes as prices have soared.

Instead of trying to sell their tens of thousands of homes, Blackstone and American Homes are selling synthetic structured securities that are backed, not by mortgages like the toxic waste that contributed to the financial crisis, but by something even worse: rental payments, based on the flimsy hope that these homes will stay rented out. The already sold $3 billion of this stuff. Wall Street is jubilating. The fees are going to be huge: the market for this type of synthetic concoction is estimated to be $1.5 trillion.

Now that they have to focus on making the business model work with what they’ve got, they have to do the grunt work of fixing up tens of thousands of far-flung homes and renting them out one at a time, and keep them rented out, and they have to come to grips with American mobility where strung-out renters wander in and out and are late paying their rent if they can pay at all, and it’s hard, tedious work.

With buying more homes in overheated markets no longer a priority, or even an option, American Homes is embarking on the next step: buying competitors. It just announced that it would acquire Beazer Pre-Owned Rental Homes, a REIT backed by Beazer Homes, PE firm KKR, and others. It now owns 1,300 homes. Everyone had jumped into this Fed-sponsored game, even home builders like Beazer. American Homes CEO David Singelyn put it this way during the earnings call in May: “We will be one of the players in the consolidation of this sector.”

The goal: manipulate the market to their liking. Through consolidation, the biggest players will try to raise valuations – or at least keep them from collapsing – and control the smaller players that are desperate to take their profits by dumping homes on the market and thereby opening the floodgates. All heck would re-break loose in the housing market. It would reverse the flow, and all the paper profits PE firms have already bragged about to their clients would suddenly evaporate. And that must not be allowed to happen.

Housing Bubble 2 has been accompanied by other bubbles. “Asset prices have reached stunning levels, obviously out of line with ‘fundamentals.’ But the “most dangerous” are housing bubbles; when they burst, they “wreck whole economies.” Read…. UBS: The Secret Reason The Fed Is ‘Tolerating’ Bubbles

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The Ukraine ceasefire is off, which means all those pro-Russian “separatist, terrorist” troops and/or civilians living in the breakaway East Ukraine, aka Novorossiya, region are again fair game. The video below, published Wednesday, and first reported by RT, shows a moment from the shelling that happened a day before. The shell hits right next to a one-story residential building, sending a blast-wave and a cloud of smoke and dust in all directions. 

Severodonetsk is a city of 110,000 residents in the Lugansk Region. Troops loyal to Kiev started bombarding it with heavy weapons as part of a major offensive launched by President Petro Poroshenko at midnight on Monday.

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With GoPro up over 100% since its IPO (which the mainstream media decides indicates massive demand for the ‘future’ infrastructure monetization of camera-on-a-stick clips), it appears there is another much clearer reason for the surge. As WSJ reports, the utilization level – the percentage of shares available to loan that are actually being borrowed – is near 100%. As Astec Anaytics notes, it’s rare for a stock to have such a high utilization level as the cost of borrowing GoPro shares, a proxy for short-selling activity, has “immediately become one of the highest in our system.”

“Although sharp and strong moves are common in the first days of securities lending activity of a newly listed company, and often unrelated to short selling activity, these numbers are dramatic even by those standards,” Mr. Loomes said.

It appears the squeeze has come and gone and today’s 9% tumble may just be the start…

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Alongside that other canard of global monetary machinations, Christine Lagarde (who oddly declared earlier that “the global economy will not return to ‘pre-crisis’ world” and asked if central banks need a ‘financial stability goal’ -mandating a market “put” of sorts); Fed head Janet Yellen will be addressing her peers at The IMF this morning. We expect a lot of “noise” comments, “lower for longer”, “weather” excuses, and escape velocity is coming any minute as she desperately tries to keep the “don’t worry, you will be ok without all our money printing” meme alive.

• *YELLEN: `WE HAVE MUCH TO LEARN’ IN MACROPRUDENTIAL OVERSIGHT
• *YELLEN: POLICY MAKERS SHOULD COMMUNICATE CLEARLY ON STABILITY
• *YELLEN: POLICY AT TIMES MAY BE APPROPRIATE TO ADDRESS RISKS
• *YELLEN SAYS FINANCIAL STABILITY COMPLEMENTS FED’S DUAL MANDATE
• *YELLEN: MACROPRUDENTIAL RULES SHOULD BE MAIN STABILITY DEFENSE
• *YELLEN: STABILITY BEST PROMOTED BY MACROPRUDENTIAL OVERSIGHT

• *YELLEN ‘MINDFUL’ OF HOW LOW RATES CAN PROMPT ‘REACH FOR YIELD’
• *YELLEN SAYS RATE POLICY SHOULDN’T CHANGE OVER STABILITY CONCERN
• *YELLEN SAYS RATES SHOULDN’T BE MAIN TOOL ENSURING STABILITY

IMF Live Feed…Yellen due to start at 11ET (if embed is not working use Bloomberg below)

Bloomberg Feed (click image for feed – no embed)

Lagarde:

The world is continuing to change. Monetary policy, and central banking, will not go back to what they used to be once the crisis is finally behind us. This tumultuous period from which we are beginning to emerge has raised fundamental questions. It has pushed us outside of our comfort zone and forced us to learn.

Full Yellen Speech:

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To the Fed’s Janet Yellen, runaway inflation – at least that which can not be “hedonised” away by the BLS like iPad and LCD TV prices – may be simply “noise”, which probably explains why she doesn’t rent. But for the record number of Americans who are forced to rent as house prices are too high for the vast majority of the population while mortgage origination has tumbled to record lows (as banks can generate far higher returns on reserve by buying stocks than lending out said money), inflation is going from bad to worse. Case in point: as the WSJ shows, since 1990 asking rents – in real terms i.e., adjusted for inflation – have increased a whopping 15%. The change in median income over the same period? 0%.

This means that all else equal, the average American has 15% less disposable income after factoring rent compared to 24 years earlier.

And since the demand for rental properties will only go up as even parent basements are getting full, it means the already record high rent prices will duly follow, taking even bigger chunks out of US disposable income, and thus, that part of the US economy, some 70% of it, which depends on consumer spending. The beneficiary? The personal bank accounts of owners of rental properties… such as BlackStone – America’s largest landlord.

Sure enough, as WSJ confirms, “apartment landlords continued to push through hefty rent hikes in the second quarter, squeezing U.S. households that already are struggling financially after four years of steady increases.”

The average monthly rent for an apartment rose to $1,099 in the second quarter, up 0.8% from the first quarter, according to data to be released Wednesday by real-estate research firm Reis Inc. That was the 18th consecutive quarter of rent increases. For the 12-month period ended in June, rents rose 3.4%.

No, it’s not just a New York phenomenon. It’s everywhere:

Effective rents—which tend to be lower than asking rents—were up in all 79 U.S. metro areas tracked in the Reis report. West Coast cities that have been the model of recovery continued to top the list of highest rent growth for the quarter and over the past 12 months.

 

Rent growth exceeded 6% over the past year in San Francisco, San Jose and Seattle.

 

Even cities that aren’t normally associated with fast rent growth, such as Charleston, S.C., and Nashville, Tenn., posted strong growth over the year, up about 5% or more for the year.

To some, renting as the new owning is equivalent of a recovery: “You have definitely seen that recovery now spread to all of the major markets around the country, even if some of them were laggards,” said Ryan Severino, an economist at Reis. “It’s a very pervasive recovery.”

Actually, what it is, is a pervasive confirmation that the Old Normal American Dream is over. As for the new one, renting, even that will soon be out of the reach of most.

Economists said the growing demand for rental housing partly reflects changing preferences among younger renters, who tend to prefer urban areas. But the demand for rentals also reflects tight mortgage-lending standards that have shut out potential homeowners from the market.

 

“If you can’t get into a single-family house and you can’t get a mortgage, well, you don’t need a mortgage to get an apartment,” said Stephanie Karol, an economist at IHS.

 

But household incomes have stagnated, resulting in a financial squeeze for a growing number of renters. Median household income was $50,017 in 2012, below 2007’s peak level of $55,627, after adjusting for inflation, according to U.S. Census Bureau data.

So what is the alternative? Well, just “charge it”… as increasingly more Americans are doing, and as the subprime lending bubble of the 2007 period is meticulously recreated, one can say with 100% certainty that the consequences will be identical.

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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Is the New Normal of ever-higher stock valuations sustainable, or will low volatility lead to higher volatility, and intervention to instability?

Though we're constantly reassured by financial pundits and the Federal Reserve that the stock market is not a bubble and that valuations are fair, there is substantial evidence that suggests the contrary.

The market is dangerously stretched in terms of valuation and sentiment, and it does not accurately reflect fundamentals such as earnings and sales growth.

Why do we care? If we own no stocks in a retirement or other account, we don’t care; it’s mere background noise.  But if we’re exposed to the gyrations of the stock market in any way, we should care, because those who sell near the top before the market drops preserve not just their initial capital, but their winnings from the 5+-year bull market. Those who fail to sell risk losing not just their gains, but quite possibly a material chunk of their initial capital.

Another reason to care is that those who bet the market will decline in a trend-reversal profit handsomely, just as those who buy at the bottom of a decline profit handsomely from the trend reversal from down to up.

Let’s start with the most fundamental truth: nobody knows the future.  If any technique of prognostication worked every time, anyone with three 100% accurate forecasts in a row could turn $5,000 into $100,000 in three trades using options (or futures contracts). A decent rise or drop will triple an option bought before the move:

$5K -> $15K

$15K -> $45K

$45K -> $135,000

That few manage the apparently simple task of making three accurate predictions in a row (and being confident enough in the technique to leave all the chips on the table) is powerful evidence that no such technique works consistently enough to last even three trades.

That said, the benefits from being correct even once are powerful enough to make it worthwhile to pursue increasing the odds in our favor—even if the odds will never be 100% in our favor.

New Normal: Cycles and TA Banished, or Hubris?

There are three basic tools of prognostication: cycles, technical analysis and fundamental analysis. While each subject is broad, we can boil each down:

In the past six years of unprecedented central bank intervention—quantitative easing (buying of assets such as Treasury bonds and mortgages), zero interest rate policy (ZIRP) and “free money” liquidity (unlimited credit extended to financial institutions and financiers)—the belief that this New Normal is immune to downturns/trend reversal has taken hold, mostly for the reason that every downturn has been reversed by some additional central bank monetary intervention.

If the New Normal is truly permanent, then cycles and technical/fundamental analysis have been mooted: they no longer work because the central banks can push stocks higher essentially forever.

There is another school of thought which holds that central bank intervention so distorts markets that their efforts to eliminate downtrends introduce the seeds of instability which eventually disrupt the market.

Believers in the New Normal hold that the Fed and other central banks have an unlimited ability to print money and buy assets, such that they can buy up the majority of markets to keep valuations elevated.

I see such linear thinking as dangerously simplistic in a non-linear world, and I make the case that the Fed is far more constrained by the bond and currency markets (recall that all these markets are interconnected) than the New Normal faithful believe: The Fed's Hobson's Choice: End QE and Zero-Interest Rates or Destabilize the Dollar and the Treasury Market.

We might also question the basic premise of the New Normal crowd which is that the recent past is an accurate guide to the future. To quote songwriter Jackson Browne: Don't think it won't happen just because it hasn't happened yet.

Though the New Normal faithful see cycles as banished by the godlike powers of central banks, I see a pattern in the New Normal:

Central bank intervention seems to have generated a new cycle: five years of a roaring bull market that reaches bubble heights and then crashes over the following two years.

Is there some reason to believe stocks can loft ever higher, other than central bank intervention?

The one fundamental metric that matters is profits.  Let’s look at corporate profits and the S&P 500 (SPX):

It appears the stock market is responding to central bank intervention to the degree the interventions have enabled corporate profits to soar.  How has intervention boosted profits? One easy way is that by lowering the cost of credit to near-zero, corporations have booked the savings in interest payments as profits.

The question of the New Normal boils down to: Can corporate profits continue soaring? Or perhaps more to the point: Can central bank intervention keep pushing profits higher? Since interest rates are already near 0%, the answer seems to be the fruit of QE and ZIRP have already been picked, and there is little more profit to be gained from these policies.

There are a number of reasons to doubt this steep ascent is sustainable, for example, a rise in the U.S. dollar crimping profits earned in other currencies (About Those Forecasts of Eternally Rising Corporate Profits…  ), a weakening global economy and the stagnation of real household earnings.

Here is a chart which shows corporate profits have indeed rolled over in the first quarter of 2014:

There are a number of other reasons to suspect the New Normal market is stretched; for example, bearish sentiment is low and bullish sentiment is at multi-year highs:

Other conventional metrics of market activity such as corporate buybacks, mergers and acquisitions, issuance of junk bonds, margin debt, etc. are also at extremes.

A continuance of the New Normal requires these extremes to become even more extreme, with no blowback (unintended consequences) or snapback. 

The emergence of inflation is seen by some analysts as a precursor to a market correction:

Countdown to Another Market Peak Has Begun: If we consider two basic drivers of inflation, higher wages and expanding bank credit, there is evidence (via mdbriefing.com) that inflation is systemic:

Here’s a measure of inflation by good old price:

The last extreme to consider is volatility, which has slipped to multi-year lows on the complacency born of a belief that central banks can enforce the New Normal of ever-rising markets at will.

The Big Question: When?

Is the New Normal enforceable even as markets reach extremes, or is the faith in the central banks’ power to bend markets to their will just the latest manifestation of hubris?

No one knows at the moment, but as this article has shown, there are numerous persuasive reasons to be skeptical of the New Normal faith that markets can only loft higher in a permanent state of low volatility and rising profits.

In Part 2: The Signal That Will Tell Us A Stock Market Reversal Is Imminent, we present a number of markers that will indicate when the top is in and the uptrend has reversed. The cautious investor will do well to be attentive to these. Remember: locking in gains — even if that means still leaving some upside on the table — is vastly preferable than holding too long, and watching those gains evaporate.

Click here to access Part 2 of this report (free executive summary, enrollment required for full access)

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