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DOW Jones Reshuffling. Does It Make A Difference?

BusinessWeek Writes: How New Entrants Will Swing the Dow

 wall-street-bull-investwithalex

The venerable Dow Jones Industrial Average just announced its biggest rejiggering in some time: booting components Alcoa (AA), Bank of America (BAC), andHewlett-Packard (HPQ) to induct Goldman Sachs (GS), Visa (V), and Nike (NKE)into its elite group of 30. Prepare yourselves for a very different blue-chip index.

Read The Rest Of The Article Here.

Does this matter? From a trading perspective the answer is most definitely NO. The Dow Jones average will experience no deviation from its original trading pattern due to these changes. It will continue to perform as if there was no change. However, I do want to bring your attention so something interesting.

Please note that we have two huge Finance conglomerates coming into the index (Visa/Goldman Sachs).  What does that mean? It is simply another confirmation that the Financial sector is now the largest sector of the US economy as the % of GDP.

Is that good or bad? Historically speaking that is really bad. If we study history we soon learn that when any given society shifted from production to money shuffling (as the US has done in a big way over the last 2 decades), it always ends badly for the Nation in question. Will this be the case for the US as well? I am afraid so. 

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US Congress and Senate Is Full Of Vomit

Yahoo News Write: U.S. lawmakers unite in fury over Putin’s op-ed in New York Times

crazy mccane

 

It’s not every day that an opinion piece in The New York Times simultaneously insults the Republican speaker of the House and nearly causes the top Democrat on the Senate Foreign Relations Committee to  “vomit.”

But that’s exactly what happened when Russian President Vladimir Putin penned an article calling for the U.S. government, which is considering launching a military strike on Syria for alleged war crimes, to use restraint in the Middle East. In his piece, Putin also took issue with part of President Barack Obama’s national address on Syria on Tuesday night, which made the case for military action and praised “American exceptionalism.”

“It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation,” Putin wrote.

“I was at dinner,” New Jersey Democratic Sen. Bob Menendez said on CNN after he read the piece. “And I almost wanted to vomit.”

Other lawmakers were equally blunt.

“I was insulted,” House Speaker John Boehner told reporters on Thursday morning. “I’ve probably already said more than I should have said, but you’ve got the truth.”

Arizona Republican Sen. John McCain called Putin’s piece an “insult to the intelligence of every American.”

Read The Rest Of The Article Here

 

Yesterday, President of Russia, Vladimir Putin sent an open letter to the American people published by The New York Times.  You Can Read The Letter Here. As a matter of fact, I challenge you to read the letter before you continue. 

Let’s put away any sticking points or special interest between Russia and the US for a second. Yes, you can argue it is a divergence and Russia is playing their own game, but stick with me for a second.

Shockingly enough, Putins message is fairly simple. It is the message of peace and desire for reflection on what is really going on in Syria.  He is essentially asking American people to pause and really think about the situation and its ramifications on the whole region and the international community before getting into another mindless war.

What’s American response? “I was insulted”, “I wanted to vomit”, it is an “Insult to the intelligence of every American”. We want WAR and we want it NOW. We don’t even care if by doing so we are partner up with Al Qaeda.

What the hell is going on here? I am an American and I am not insulted. I think Mr. Putin brought up some very good points. I think the American Government has lost touch with reality and went completely off the rails.

I think it is our Senators and our Congressman that make most Americans want to vomit. The proposed strike on Syria has a 7% approval rating, yet these idiots are still pushing for war. While this is quite entertaining, I am watching this unfold in disbelief.   

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Why The USA Housing Market Is About To Collapse

(Quick Note:  Dear reader….. I can drop a substantial amount of economic and statistical data on you to support the points below. However, if past is any indicator any such economic data would put most readers to sleep within 10 second.  Plus, a volume of data/analysis can be published in regards to every single point below. As such, I offer only a quick summary and my conclusion for your reference.   Should you require any additional information about the thesis below, please contact me directly. )

housing bubble

 

Yes, I called it perfectly in 2006-2007 and now I am saying that it is not over. 

Before we can understand where we are now and where we are going in the future we must understand where we came from. The Real Estate run up that we have experienced between 1997-2007 has no historical  precedent.  Real estate data going all the way back to 1790 clearly shows that the US housing market basically appreciated at the rate of inflation.  Yes, there were some bubbles and substantial declines, but overall, appreciation at the rate of inflation is an appropriate way to look at the US real estate sector.

real estate 1 investwithalex

 

A QUICK HISTORY LESSON:

All of that changed in 1997 when Bill Clinton signed The Taxpayer Relief Act into law, basically allowing $250,000 in tax free capital gains in real estate.  While real estate was already appreciating at a good clip at that time, that law added fire to the trend. 

Later,  fearing significant economic slowdown in 2002-2003 the Bush administration added a huge amount of jet fuel to the Real Estate Bubble by cutting interest rates and making mortgage finance available to everyone (even to the dead people).  As people used to say, if you can fog a mirror you can get a mortgage. Of course, all of that led to the largest finance bubble in the history of mankind that “kind of” melted down in 2007-2009. I say “kind of” because most of those excesses are still in the financial system and will have to be worked through in the future.  

 

WHERE ARE WE NOW?

Issue #1: US Home Ownership Rate Is Plunging

On historical basis, home ownership rate in the US is in free fall. Take a look at the chart. I think it speaks for itself.  

homeowership-rate-investwithalex 

Issue #2: Real Estate Affordability Is Plunging

Take a look at the chart as it speaks for itself. The affordability index is in free fall as well. Most likely due to higher interest rates and rising prices. 

Housing Affordability Index

 

Issue #3: Interest Rates Are Going Up             

The trend has shifted up and the 10-year rate is up 100% over the last 12 months. I gave detailed interest rate analysis here. Please take a look here.

 

Issue #4: US Economy & The Stock Market Is About To Turn Down (Big Time)

Please read “The Long Awaited US Stock Market Decline Is Likely Here” as to why.

 

Issue #5: Who Is Buying All Of These Properties For Cash Today?

Chinese buyers, hedge funds, banks themselves, investors, speculators, etc…..  Who cares!!! Remember all those Japanese investors buying everything they could in California and Hawaii in the late 1980’s. I wonder how that turned out for them.

On a more serious note, notice that I didn’t say Average American Family. That is the only category that we should track if we want to accurately predict the future trend in the US Real Estate market. Every other category is irrelevant over the long run.  And guess what? They are not buying.  See the charts above. 

 

Issue #6: Bear Market In Real Estate (sucks people back in)

As I have said here before (US Real Estate At A Turning Point), this is how the bear market works. This is the stage #2 bounce, before the big decline (stage #3).  The bear market tends to suck people back in, offer them perceived safety and a high return before slamming the door, ripping their head off, drinking their blood and taking all of their money.  The US Real Estate market is topping in Stage #2 run up here. That is why you are seeing so many divergences. The market should turn down soon. Beware.  

 

FUTURE OF REAL ESTATE:

Real estate is not made of Gold.  There is a tremendous amount of land available in California, Florida and all over the US.  There is no housing shortage. As such, expect real estate to decline significantly in order to revert back to its natural inflation adjusted mean. It might take a few years, it might be different for various cities, but one way or another the market will get there.

BubbleBurst investwithalex

 

HOW FAR DOWN?

Let’s do very simple math for the San Diego market.  It doesn’t have to be exact for our purposes.

Setup:

  • San Diego Median Family Income: $61,500
  • As Per Various Financial Guidelines Families Shouldn’t Spend More Than 30% Of Their Income On Housing.  That means a $1,500/monthly payment.
  • Median Home Price in San Diego: $500,000 (pushing that level again as per Trulia.com)
  • Interest Rates: 30 Year Mortgage 4.72% (Rates as of 9/4/2013) 

With such fundamental input variables median house value should be $290,000 -OR – A 42% DECLINE     ($1,500x360month@4.72%)

What if interest rates go to 7% over the next 5 years, which can easily happen? 

The fundamental value of the median house drops further to $225,000 -OR- A 55% DECLINE

Also, don’t forget that markets oftentimes overshoot to the bottom, just as they set blow off tops. In such a case I wouldn’t be surprised to see a median price of $150,000- 200K -OR- A 70%-60% DECLINE

You say impossible….. I say study financial markets. Nothing is impossible. 

Now, I understand and agree that there are various market forces at play that make the picture a lot more complicated. Interest rates, timing, mortgage finance, cash buyers, the FED, foreign buyers, speculation, location, supply/demand, etc….    However, fundamentals will always prevail over time. Everything else is just temporary bullshit.

 

ADVICE: 

Your house is not an investment. Don’t be confused. It is the place you live and raise your family. If you are happy with your house, have a fixed interest rate, can afford your monthly payments and don’t care if your house depreciates in value, I would stay put.

If you find yourself in a contrary situation……..I would consider various options. 

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Germany Should Leave The European Union. Like Now!!!

BusinessWeek Writes:  German Euro Skeptics Could Give Merkel An Election Shock  

 investwithalex germany

German parliamentary elections are coming up on Sept. 22, and Chancellor Angela Merkel has a problem on her hands. A euro-skeptical political party known as AfD is rising in the polls and could deny her Christian Democratic Union and its coalition partners the majority they need to continue governing.

AfD, or Alternative for Germany, currently holds no seats in the Bundestag, and until recently it barely registered in public-opinion polls. But a survey released on Sept. 4 by the Forsa polling group showed it with 4 per cent support—just shy of the 5 per cent needed to win Bundestag representation. Peter Matuschek, Forsa’s chief political analyst, says the poll may have underestimated the party’s strength. Many supporters, he told Spiegel, “are too embarrassed to admit that they are planning to vote for the AfD,” which wants Greece, Spain, and other crisis-hit countries to leave the euro zone, and possibly break up the existing monetary union itself.

Read The Rest Of The Article Here

An important election in Germany is coming up on September 22nd.

So important in fact, that the future of European Union is at stake. While most believe that Chancellor Merkel will maintain control, there is an increasing number of observers (including myself) that believe CDU will lose control.

Why is this so important? It could spell the end of the European Union as we know it. German people are fed up with supporting Greece, Spain, Italy and the rest of the freeloaders.  European Union is a  mess on multiple levels. While it is a great idea on paper, culturally speaking there is just too many differences on both the economic and cultural level.

Germany is an economic powerhouse and it should act like it.  I believe German people feel the same way and will act accordingly in 12 days.  If Merkel losses control, I have a hunch that it will set Germany on the course to eventually leave the European Union and go back to the Deutsche Mark.  This would lead to a huge surge in German Economy and that is all that German people should care about.

As soon as that happens, European Union will collapse under its own weight. While most people believe that it would be a bad, I respectfully disagree. I think it would be a boon to all European countries for various reasons. All we can do now is wait and see.  

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GOLD

investwithalex gold

 

People keep asking me about Gold and other precious metals.

Short Answer:  I have no idea. I am too stupid to understand the metals in order to predict them.

Longer Answer: I have studied Gold for a while now and have heard every bullish and bearing argument for or against it. I understand inflation, deflation, safety and currency issues associated with precious metals. However,  I cannot put a complete analysis together in order to give you a legitimate answer.

Basically, precious metals are too complicated.  Some people see it as money, others as inflation/deflation hedge, then you have fundamental/industrial demands for the metals, then there are national reserves, etc….

All of those points are easy enough individually, but when you put them all together you get a lot of interference and noise without any clear direction. Perhaps it is easier for other people to understand, but it simply does not make sense for me.

I cannot see any fundamental reasons for owning gold.  Is it a hedge against inflation/deflation?  Not really. I would rather hold US Dollars in a deflationary environment and a portfolio of inflation protected stocks in an inflationary environment. Plus, the long term gold chart doesn’t look good from a technical stand point. It is either showing a sideways movement or a breakdown.

investwithalex gold chart

Can Gold and other precious metals appreciate significantly here? Sure, but they can also break down. Once again, I have no idea, nor do I find myself qualified to issue an appropriate opinion. 

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Cash Is King

Bloomberg Writes: Why Cash Costs the U.S. Economy Real Money

 Investwithalex_cash

The use of dollars and coins costs the U.S. economy at least $200 billion each year—roughly $1,739 per household—according to a new study from Tufts University. One reason: Americans waste an average of 28 minutes each month just getting to their cash, with part-timers, retirees, and African Americans likely to spend even more time accessing their money. The worst hit, not surprisingly, are low-income consumers, who are dinged with higher fees, along with the lost time.

For businesses, the biggest cost of cash comes from theft. Even if they can afford armored cars and guards to prevent outsiders from taking their cash, there’s still the risk that insiders will drain the coffers. Government, meanwhile, pays a price in lost tax revenue and the cost of actually making currency.

As technology continues to surge forward there is a considerable push from various interest groups to become a cashless society.  Articles such as the one above are clearly sponsored by the Banking Industry with their own agenda, but there is an important red flag here that you should be aware of.

Call me old fashioned, but I love cash. It’s a great feeling to hold a stack of crispy new $100 bills in your hand and smell them once in a while.  Just one second, I need to go do that…..

All joking aside, this is an important matter that can have real implications on your life.  As I have said before,  cash is king. It is the only thing that you will have control over if something does goes wrong. In the worst case scenario none of your stock holdings or bank database entries will mean anything. They will be worth ZERO.  Cash could be your insurance policy and as such I would suggest keeping a considerable amount of cash that is readily available to you.

Do not buy this nonsense that using cash has real economic cost. The real cost here is losing your freedom and being at the mercy of large financial institutions and/or governments. Remember Cyprus? It reminds me of a time when I tried to withdraw $125,000 in cash from my Bank of America account.  They looked at me and said “Sir, I am sorry, but we do not have that much cash available. It will take us a few days to get it”.

Fair enough, but I do not want to find myself in such a situation ever again. Therefore, I would highly recommend having a considerable amount of cash stashed away somewhere safe for your own good (preferably not in your mattress). It’s a great feeling. Trust me. Mine is buried somewhere in the Nevada desert. 

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12 Years Ago

world_trade_center invest with alex

We all know what happened on that fateful day and atrocities committed against innocent people. However, I choose to remember it for something good.

I remember being in Pacific Beach, San Diego on September 11th, around 9 pm. There were American flags everywhere and a ton of people outside. Everyone was either sitting quietly on the street curb in deep thought or talking. There were candles everywhere. Cars driving by with American flags sticking from the windows, honking like crazy.

I have never seen anything like that. The entire nation came together. There were no longer political parties, rich or poor, black or white. At that instant everyone was simply an American.  A beautiful site to behold indeed.

sept11

Today I will a grab a beer in memory of all of those innocent people who lost their lives. Irregardless of your views on the subject matter, I suggest you do the same.    

 

 

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China Is An Economic Disaster Waiting For Implosion

CNBC Writes: Why China property is immune to tapering

china_real_estate_bubble_debt_collapse

China’s property market is unlikely to take a hit from tighter liquidity when the Federal Reserve finally pursues the much-anticipated tapering of its bond buying program, said Wang Jianlin, chairman of Dalian Wanda, a commercial property-to-karaoke-outlet conglomerate, as well as China’s richest man according to Forbes (Bombay Stock Exchange: 502865-BY) magazine.

“The tight liquidity will push up interest rates. But I don’t think interest rates will go up by too much,” Wang told CNBC in an exclusive interview, adding China’s economy also doesn’t move in lock-step with global markets.

“Because the profit margin for China’s real estate industry is above the global average, a 1 percent to 2 percent rise in interest [rates] will have very limited impact on the profit margins of bigger property players,” added Wang.

China property developers’ gross margins were around 34 percent in the first half of the year, UOB (Singapore Exchange: UOBH-SG) Kay Hian said in a recent report on the developers it covers. It noted the second half is usually stronger.

Wang also expects Beijing to re-focus its sector cooling measures, with property firms to soon be allowed to refinance after a nine-year hiatus on the segment’s IPOs, in a move set to spur further development.

The Shanghai Securities Journal reported last week that detailed regulations on refinancing approval would be released in a couple of weeks at the soonest.

“China’s economy now needs the property industry,” Wang said. “Given the decline in export and investment, China’s economy has turned from high growth to moderate growth with further downside risks.”

Deutsche Bank (XETRA:DBK-DE) also expects Beijing’s drive toward urbanization to offer a long-term fillip to the property sector. The “new form” of urbanization will include developing big city-clusters, rather than just a few big cities, with more urban retail properties in Tier two, three and four cities, it said in a recent report.

“We expect domestic consumption to pick up given higher urbanization and higher productivity,” the investment bank said.

Wang is also bullish on China’s consumption outlook in the longer term. “This will be key for the country’s future economic development,” he said. Wang’s Wanda Dalian conglomerate operates 57 department stores. “By 2015, China is set to become the largest consumer market in the world at over CNY30 trillion ($4.9 trillion).” 

Immune? Sure, just as I am immune from dying.

If you have been to China over the last couple of years you have seen it firsthand.  There is so much real estate development that it is a site to behold. There are literally entire cities coming up all at once in the middle of nowhere.  I was impressed and I am not that easily impressed.

The problem is, most of these developments are driven by speculation and capital misallocation. The majority of these developments are empty, bought by Chinese speculators using multi generational savings and loans.

What surprised me the most is that not a single Chinese person I talked to (and I was mostly talking to very intelligent business/government folk) even remotely worried about this issue. Every single one of them said something to the tune of….”Real estate will always go up in China, if market begins to decline our Government will backstop it to prevent losses. There is no risk, it’s an easy way for us to make money.”

I didn’t want to argue with them to prove my point, but such a statement by itself is a clear indication of a speculative bubble.  Any reliance on the Chinese Government to prevent or stop a collapse from happening is just an illusion at best. Those who study financial markets know that there is no way to prevent or to stop a collapse when it happens. I don’t care what kind of a government it is. Not even GOD can do.

China is a fiscal time bomb that will eventually go off.  I believe that time is coming up very soon. When that happens Chinese property bubble will implode, millions of Chinese families will lose their multi generational savings and that in itself will lead to political instability and a possible revolution.  Simple as that.     

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Stock Market Update, Sept 10th 2013

Sept 10 2013 chart

The Dow is recovering nicely here, just as anticipated. As I have mentioned before the market was oversold and due for a bounce. I believe this bounce will take the rest of September to complete. 

What is interesting is that the market left a bunch of open holes (gap downs) on the way down around 15,500-15,400 range. After studying the market for many years, I have noticed something. The market doesn’t like these gaps. One way or another the market comes back to close the gap. Even if it takes years.

Other technical and timing works indicate that the market is likely to get into this 15,500 range by the end of September before reversing and heading down. As of right now I would still be in a waiting pattern, looking for various confirmation. There is no need to rush here. Stay patient. 

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Americas Hidden Depression

Bloomberg Writes: Recession? Depression? One in Three Thinks So

great-depression-investwithalex

A third of Americans think the U.S. economy is in a recession or a depression and only one in six think it’s growing, says a new survey that also finds “deep-seated pessimism about the medium term.”

Americans are highly critical of policymakers, unwilling to take risks with their savings, planning to reduce their indebtedness over the next year, suspicious of the stock market, and more worried about inflation than unemployment, according to the survey released today.

The National Bureau of Economic Research has declared that the U.S. pulled out of recession more than four years ago—in June 2009—but a lot of people apparently didn’t get the memo.

The survey found that 85 percent of the 1,000-plus adults worry to some degree about their financial situation, compared with 90 percent three years ago. People who say they’re worse off than they were a year ago outnumber those who say they’re better off, 28 percent to 22 percent.

Read The Rest Of The Article Here

This is fairly easy to explain.  The survey above shows the true state of the US Economy. Even though the numbers shows that the US Economy has recovered significantly from the March of 2009 bottom, nothing could be further from the truth.

The recovery was fueled and financed by Credit Bubble Finance. Meaning that the US Government basically wasted about a Trillion Dollars (some claim a lot more) to prevent a complete collapse in the US Economic System.  However, the original “SIN” of massive credit expansion, cheap finance and speculation hasn’t been fixed yet. On the contrary, it has been made a lot worse.

Now the US Economy has massive imbalances that cannot be dismissed or fixed in any favorable fashion. It could only be done either through massive inflation or massive defaults. Even war is no longer a tool. 

I am sorry to say, but my timing work clearly shows that both of those things are about to happen. First, deflationary credit defaults from now till 2016 final bear market bottom (and 2018 secondary bottom), followed by accelerated inflation thereafter.

Unfortunately, in such a scenario no one wins, but it does pay to be prepared.  

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