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A Trader's View On US Equities & Why The Inevitable Pan-European CRE Collapse Has A Cousin In the US!
Tuesday trading update from Eurocalypse...
The SP500 daily chart has the same pattern than CAC.a squeeze could lead us to 1240 but I don't see it really pushing any further out and I see the market being more heavy than Europe because we didn't sell off as hard.
Contrary to the CAC points (see Eurocalypse Trading Update 8/16/2011 - French Markets and The Inevitable Pan-European Real Estate Collapse), we didnt visit 2010 lows which are my target, so lets not talk about July 2009 lows just yet. The option set up and trading illustration given to subscribers last week still stands as the preferred method for those who trade optionable ETFs to best position themselves. All paying subscribers should download SPY option strategies in violent down moves for retail investors. We will review larger contract futures strategies for professional and institutional investors in the near future.
Fixed Income
While we believed that it's both rational and worthwhile to play the long US notes, Bunds (or Swap rates) as a positive carry trade to leverage the continuing debacle of western economies, these are profit taking levels for those momentum players and flight to quality traders, and perhaps even levels to cautiously try the short side. No, the strategy is not driven by the explosion of the ponzi that US debt or german debt, but simply an over extension of a trend. UST notes monthly charts shows we are in resistance zone.
On bunds, the German debt, there is still this joker that it is suddenly rerated as bad as PIIGS if Merkel gives in to support Italy and Spain (which she has shown she is thus far refusing to do in by refusing Eurobonds)...The short term mo-mo players are not looking at things this way. There is also this matter of the CRE rollovers that will either smash French and German banks, tank pan-European real estate, or the most likely option - both.
Things to watch
I think the stock market can tank in the short term only if the PIIGS crisis resumes abruptly. Is it possible ? Well of course, it is, but I think we'd see serious signs in the debt markets before the stock market reacts, as usual. I read that 22bn of PIIGS debt were bought last week, the fastest pace ever,
and a very significant amount. All the guys who sold, probably bought Bunds instead (they are bond funds, ALMs so if they sell an investment, they should
buy something else with the proceeds...). If ECB activity subsides, Bunds naturally lose some of their bid. and then the bid on PIIGS will be tested as Bunds' yield rise from here. Then the market could well call the ECB bluff and see how big their virtuo-synthetic inkjet powered pockets really are (from a political point of view, of course - they can literally print forever up until inflation scares them back - reference The Bull Argument For Europe Is Credible, Except For The Circular Argument: You Can't Solve Debt Problems With More Debt!!!). If these balls are not as deep as their virtual pockets, then....
Reggie's note:
Of interest, if we're correct in our fixed income outlook, that Pan-European CRE crash may well have ample company stateside. See my rant on over optimism in this space on CNBC: Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate.
Listen up people, HERE ARE THE NASTY FACTS!!!
Real estate is a highly rate sensitive asset class. Capitalization rates (the popular method of pricing real estate) is explained in Wikipedia as:
Capitalization rate (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.[1] The rate is calculated in a simple fashion as follows:
Without going into a CRE class, when interest rates go up, cap rates generally go up as well and the value (or cost to purchase) of the property goes down in sympathy unless the rise in interest rates is offset by a commensurate or greater rise in net operating income. Now, either everybody believes that unemployment is going to drop towards zero in an era of US austerity (reference Are the Effects of Unemployment About To Shoot Through the Roof? then see Budget Austerity: Goldman Sees Danger in US Budget Cuts - CNBC) at the same time that historically low interest rates that actually went negative are going to get lower (see the Pan-European Sovereign Debt Crisis) ---- or cap rates are about to skyrocket. I'll let you decide!
As you can see above, CRE drops in value whenever yields spike more than the + delta in NOI. Looking below, you can see that US CRE actually runs to the inverse of the 30 year Treasury.
That visual relationship is corroborated by running the statistical correlations...
The relationship is obvious and evident! In addition, we have been in a Goldilocks fantasy land for both interest rates and CRE for about 30 years. CRE culminated in the 2007 bubble pop, but was reblown by .gov policies and machinations. The same with rates. Ever hear of NEGATIVE interest rates where YOU have to PAY someone to LEND THEM MONEY!!!
So, BoomBustBloggers, where do YOU think rates are going to go from here? Up of Down??? Let's ask Portugal or any of the other PIIGS group. I have shown, very meticulously, how Portugal can not only afford the path that they are on (record high interest rates) but the losses that will come when they restructure (default) - for all to see. I have done the same with Spain, Ireland and Greece (for subscribers only). See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by The Anatomy of a Portugal Default: A Graphical Step by Step Guide to the Beginning of the Largest String of Sovereign Defaults in Recent History (December 6th & 7th, 2010). Be sure to carefully and very thoroughly peruse the spreadsheet below to see the many scenarios present that show the NPV of investor losses due to haircuts and restructurings...
I have went through what is inevitable in the US from a fundamental perspective right here in New Amsterdam, just a tad bit before I brought the message across the pond to old Amsterdam.
Remember, unlike many, I have asserted since 2007: It's a Real Estate Depression!!!
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Bad news: If rates rise significantly then commercial real estate is dead, gone, buried, wiped out, along with many small businesses and owners.
Good news: But.... so are the banks!
Until the banks can find a way to off load the commercial mortgages onto the taxpayers again there's going to be zombie properties with no one paying mortgages for years like residential.
As long as M2M accounting is absent, the banks are being allowed and encouraged to perpetuate the fraud, the SEC is complicit with the fraud, this will not end or collapse.
CRE is the line-in-the-sand for the banks. All laws and ethics (sorry, I vomited a bit in my mouth) are abandoned right now.
Good luck. I'd rather bet on the Colts but, hey, that's just me.
Since this is a traders view, I guess it's as good a place as any to post updates on my positions in case anyone is following them. I'm putting a zero loss stop sell on my 38.80 Dec. Silver; currently at 40; I don't need to follow it backwards. I'm holding on to the short Sept. Long Treasury Bond, even tho. it's out of the money by about $9000; it's not a tree, it's not going to grow up to the sky. And I'm long BAC from $7.37 as I posted yesterday, with a goal of eleven dollars. not stop yet.
The over/under on the Cubs @ Astros tonight is 9.5 runs. There's an outward breeze and, rumor has it, the Astros starter has a bum elbow. Could be a good night for the long ball in a scoring fest.
Good Luck!
And here is The Doctor...Dr Housing Bubble on this subject:
The housing figures for July came out on Monday and show an abysmal market in spite of the Federal Reserve artificially slamming mortgage rates to the historical limbo floor. July is typically one of the hottest months for home sales yet the figures are bad in light of every piece of financial spaghetti being thrown at banks and housing. The shadow inventory is still epic in Southern California as banks try to control the market but there is little that can be done because one main ingredient is missing. The recipe is failing because household incomes are in the dumps! Why do you think most of the demand and sales are occurring with lower priced homes? You still have your poser crew in Southern California looking for zip code and area code pride yet their incomes are built for a beer budget yet their tastes are looking for wine. Only a few years ago, the bartender was serving up option ARMs without checking IDs. That is no longer the case. Let us look at the data for the region.
cont:
http://www.doctorhousingbubble.com/southern-california-would-be-the-seco...
Reginald!
I'm no pro or anything (obviously), but it seems to me that this CRE is about the most accurate indicator for 'stagflation' that could exist. Unless i'm misunderstanding everything about the CRE and stagflation and everything else -- a possiblity that i often consider probable.
BTW, don't ever be shy about opening up class.
PS. i was wrong about the market open...good thing i'm not trying to time this stuff. it was about 20 points from me having to abandon my pretend position. now it's starting to turn back down. with volume being what it's been this week, and jackson hole upcomming, i can't help but think there's enormous pressure to clear the chocks breaking the fall, leaving nothing but air beneath this market in big stages till the inevitable QEIII. and to me, it seemed like the bond market started clearing the way for these big drops a couple of weeks ago.
RE will not rise for years. Just the opposite, it will "correct" for years is what I learned from Shiller, GS and DB.
The whole CRE thing was supposed to blow up years ago. One day DRV will make someone a lot of money as it will be a ten bagger for sure. Just not today.
You are correct Boilermaker, as long as there is a coordinated effort of European leaders, US leaders and the FED to constantly back the bankers and hide their loses there will be no crash.
The World is about to hit a global resession and I still dont think the Market will crash because equty traders are stupid and they believe in the Bernanke Put.
Until real civil unrest happens in Europe or America (which so far looks non existent as the sheeple have too much free stuff to get angry) the Ponzi will continue. And when I mean civil unrest I mean a few politicians / bankers losing their life! (Not advocating violence, just saying).
Obummer wants more stimulus already, and there is no way the Republicans are going to help him in his efforts to get re-elected. Which With 2.6 million about to drop off the free cheese America is definitely going to enter a serious slowdown (Better known as a Recession within the Depresion) But will the market crash? Doubt it.
The only way the market crashes is if some Country in Europe blows up and can't be saved. When will this happen? I don't know...probably sometime in late 2012-13.
Love ya, Reg.
By eventually, you must mean after I die of old age. Because the REITs are being jacked back up at break neck speeds daily.
Nothing will crash as long as the Primary Dealers are authorized to bid up every single REIT until the Republic collapses itself. Even today, OF COURSE, they are being ripped higher irrespective of any downward forces.
Play this Russian roulette at your own risk. Because the FED is handing you a gun with 6 bullets in it and not 1. We're in completely unchartered and unprecedented levels of fraud and intervention. If you want to fart with that, go right ahead. Before you do, I suggest you look at a 10 day chart of IYR and see what forces your up against.
You seem to be confused. REITS are not commercial real estate, they are derivatives. Check your local real estate portfolio and see if your commercial real estate (you know, the actual stuff) is being bid up daily. Granted, I can guarantee you its probably overpriced as is, but that will end when rates increase without a commensurate increase in economic activity and employement.
Don't get got by the old okey doke!
When CRE cap rates are back to 2 and 3 percent (basically the same or less then the long bond), then you can come to me and say "Play this Russian roulette at your own risk". By mistaking a derivative that can be manipulated with the actual bricks, mortar and lcoation, you are playing right into the manipulator's hands. That is how they got off the hook in 2009, by selling secondary offerings of stock to those that didn't know the difference between and indebted underwater derivative security and a brick. Of course when those bricks come tumbling down, the buyers of said derivatives may come hunting for legal blood, but by then the bonuses would have been long gone, spent on those fly new Azimuts in the Hamptons.
For an education on this topic, I stongly suggest you read
The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
Reggie, I'm not suggesting your wrong. I'm sure you are right. But, most ZH'ers are trading the derivates, options, ETF's, and equities of the CRE REITs. We aren't buying and selling actual units, of course.
I did read your earlier article and it was informative. However, my warning was meant for anyone who is even thinking of shorting the CRE REITs.
I'm waiting for the CRE mushroom cloud just like you. What happens between now and then with the CRE REITs...I have no idea.
Well as I type, all the bourses rise, as does gold and the barrel of oil. The Euro now surfs above 1.45. So when will it fall to 130 and below, as predicted in the wake of 'no Eurobond' decision? All Euro zone exporters are praying for the Euro to fall, as do the Swiss companies right now for their own money. Crazy market, no trade offs...all assets rise except the USD currency!
Ben's put and USD carry based on ZIRP for two years will feed the speculative beast. The market primes for another massive swing on Euro and Euro banks...roller coaster all the way.