This Week in Barrons – 3-17-2013
History continues to repeat itself … again, and again, and again!
Allow me to explore two elements this week: energy and housing.
The key to our success in the US (for so long) was cheap energy. Through new technology, the US now holds more oil and gas than almost any other nation. If we were allowed to drill and refine it (in the amounts we "could" produce), we could easily get gasoline down to $1 a gallon. We could take 40% right off the top of your electricity bill. This power position could allow us to return to the good old days. China and Vietnam would continue to have lower wages, but our new cost of power could serve to lower production costs enough that once again – we could compete. We have so much natural gas that we could export it to Europe and Japan and reap tremendous profits. Imagine if:
- We were (really) allowed to drill for oil and gas,
- We were allowed to build a new refinery,
- We transformed the existing liquid natural gas (LNG) terminals to export instead of just import natural gas, and
- We transformed the closed military bases (many of which are near coasts) into LNG ports that could ship around the world.
In terms of a recovery, I think our economy has another choice. (1) We can print money forever, but we will eventually implode. (2) We can stop printing money, and we will quickly implode. (3) Or we can harvest our natural resources (correctly), solve our debt problems, put Americans back to work, and enjoy the economic success we had years ago. My only question is – will ‘the powers that be’ allow this to occur? We are sitting on 200 years worth of natural resources that could deliver us complete energy independence within 8 - 10 years. Bottom line: I do not believe The Ben Bernanke and his band of Central bankers can manage a true recovery, any more than he could avoid the 2008 melt down. But cheap energy does offer us a solution to all of our political issues, if we can get out of our own way.
Consider the jobs report last Friday. Everyone screamed and cheered because we created 236K jobs. Unfortunately, (according to the Household Survey) the number of full-time jobs actually declined, but part-time workers rose by 102,000. [Part-time jobs are those where the employee works less than a 40-hour workweek, and for which the employer does not have to pay health care.] But the most surprising development was that the number of multiple jobholders rose by a record 340,000. So if more people got ANOTHER job, how many actual people got new jobs?
Also it was reported that retail sales increased dramatically. Unfortunately the largest component of the retail sales report was the enormous rise in gasoline sales. Gasoline sales are measured in dollars spent, and not on units sold. So all the report really told us was that the cost of gasoline went up in February by a lot. Imagine – we can solve the problems in the economy, put people back to work, pay our debts and finance our Social programs, simply by harvesting the fuel that’s beneath our feet.
Secondly, as some of you know, I enjoy following the real estate market – particularly in the Sarasota, Florida area. It’s become clear that someone is purchasing houses. I know, I'm the guy that says – with 48 million people on food stamps, and unemployment much higher than what we’re being told – there is no housing recovery going on. So, how are these houses being sold? Enter round two of the fleecing of America. On Thursday I saw this news blurb: “Blackstone has invested $3.5 billion to buy 20,000 single-family rental homes since last year, making the New York-based company the largest investor of its type in the U.S. The firm is rushing to acquire properties as housing prices recover and as demand for rentals increases among people who can't qualify for a mortgage or don't want to own.”
That’s a lot of homes, and if Blackstone is involved, dozens of other investment firms are also scooping up mid-sized homes and instantly renting them out. But financial institutions make lousy landlords. Ah-hah, but they are taking the rental payments and packaging them into "rental backed securities" that they are selling as investments. This appeared in Reuters: “Blackstone is preparing a first-of-its-kind securitization of REO-to-rental properties. This comes a week after the private equity giant got an increased bank loan from Deutsche Bank and others to expand its significant holdings of single-family homes. At least 20 banks and investors looked at participating in the loan, and some passed because their charters would not allow them to participate. Blackstone is the largest asset manager in the sector, and demand for a securitization is thought to be so strong that any deal could go forward without needing credit ratings.”
Oh my, did you catch the last line – ‘without needing credit ratings.’ Didn't we see this movie 5 years ago? Didn't we see financial institutions bundle supposedly AAA rated securities and sell them around the globe, knowing full well they were full of folks that had no sustainable means of paying their mortgages? Now they’re going to repeat the entire cycle with rental backed securities? But it gets worse, with packaged mortgages they at least needed ratings. With these rental securities, there is so much demand that they won't need ratings. So we’re going to see ‘round two’ where we sell securities based on someone's ability or willingness to pay their rent? What if we see more job losses, or the economy, stalls, or people just stop paying? Won't the securities become worthless like the mortgaged backed ones did? This can’t be new – can it?
It’s not. One of the first entrants in the REO-To-Rental space, Och Ziff (a $31 billion hedge fund) after a year is now looking to cash out. They purchased 300 foreclosed homes in northern California (at less than $100,000 apiece). After pouring tens of thousands of dollars into each home for renovations before renting, they are seeing returns less than expected and wish to exit the business. I wonder what happens when that entire rental inventory comes back into the market as home sales? What happens when they convert these rental payments into "securities" but the renters turn squatter after being laid off, or take a pay cut? Did we learn our lesson? I suspect we're seeing another learning experience coming here shortly.
The last two weeks of run up has been one of the stranger things that I've seen in a long time. Even the staunchest bears – Richard Russell of DOW Theory fame, has thrown in the towel and decided to take a chance on the market because it was going up despite all the negatives.
We were up 10 days in a row, made an all time DOW high, and are within an inch of the all time S&P high. But in a perverse sort of way, it has done so despite everyone with a working brain cell realizing it's doing it for the wrong reason. I've been leaning long but keeping our finger near the sell button. I've taken profits on things as they've risen, often selling half the position and allowing the other half to ride higher. But make no mistake, I've seen movies like this before and although the plots aren't all the same, the ending is. This will end badly. But until it does, I will make hay while the sun is shining.
Friday they couldn't pull off the 11th up day in a row. But to call a 25-point DOW drop the start of something other than a pause is a bit of a stretch. Time will tell if they'll finally use it as an excuse to do some profit taking. The fun part of trying to guess the market's next move is when you get a situation like we have right now - do the ‘market movers’ continue the move higher, or have they sucked enough late comers to the party that they're willing to shear some of those sheep now?
I tend to think we might be in pause mode for a few days now. On Wednesday the Feds will have their FOMC meeting, and then at 2:30 The Ben Bernanke will do his live presentation with Q&A about the economy. Everyone will worry over whether he mentions the stronger economic numbers, and removing the punch bowl. But The Ben Bernanke knows full well that the employment numbers were massaged. He knows that the Government through all the FHA programs, and the REO-to own programs is subsidizing housing. He knows that if rates really rise, things will get ugly quickly. He might talk about tightening, but that day is a long way off.
So a likely scenario is a pause here for Monday and Tuesday and then Wednesday (right ahead of the close) we soar higher and resume the "all-time" attack on the S&P highs. That's my 2 cents.
Last week I sold Starbucks (SBUX) for $1.
On Friday (via Twitter) I said that I liked National Oilwell Varco (NOV) over 70, and Coach (COH) over 52 on a rebound.
My current short-term holds are recovering nicely:
- DE – in at 89.39 (currently 92.26) – stop at 91.00,
- NOV – in at 70.05 (currently 70.57) – stop at entry,
- WPX – in at 16.45 (currently 16.82) – stop at entry,
- SNDK – in at 52.19 (currently 55.14) – stop at 54.50,
- IRM – in at 35.32 (currently 36.39) – stop at 35.80,
- SIL – in at 24.51 (currently 18.11) – no stop yet
- GLD (ETF for Gold) – in at 158.28, (currently 154.01) – no stop ($1,592.50 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 27.82) – no stop ($28.81 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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Until next week – be safe.