This Week in Barrons - 10-6-2013

This Week in Barrons – 10-6-2013
 

Housing Recovery – meet ‘The Matrix’…  

When I think of the movie ‘The Matrix’, I think of a virtual world, where reality has been ‘checked at the door.’  I’m seeing more and more characteristics of ‘The Matrix’ in my everyday life – for example:

-       ‘Matrix’ Responses often tell you what you want to hear – such as the publicized unemployment rate of 7.5%.  When ‘in truth’ an ‘under-employed’ nuclear scientist (age 77) works part-time at a burger joint to ‘make ends meet’.

-       ‘Matrix’ Behaviors favor the belligerent, the combative, and their lies often become ‘louder’.  Such as a Pittsburgh, PA based University that paid an Adjunct Professor $3,500 for a course where they took in over $130,000 in tuition, and ‘in fact’ the University stood idly by, while the Adjunct Professor died in poverty and without proper medical care.

-       ‘Matrix’ Beliefs begin to adapt and invent reasons for a particular situation to exist the way that it is.  For example: real estate agents continue to tell J. Q. Public how great the housing recovery is and how pent up demand is pushing prices and values back up and over pre-2007 levels.  When ‘in fact’ rising prices are attributable to investors (not buyers) converting homes into rental properties, and to banks allowing foreclosed owners to continue living in their homes ‘mortgage free’.

Over a month ago I wrote on the ‘Illusion of a Housing Recovery’, because of the many companies (including Blackrock) that were buying 10 to 20,000 houses in an area, fixing them up a little, and putting them up for rent.  Obviously, when an investment company takes 20,000 houses out of any particular availability pool, it leaves fewer houses on the true market to buy, and the homes that are there increase in price. 

However, there is something more insidious than that going on.  Banks are no longer foreclosing on homes.  Four or five years ago, a bank would rush in and foreclose if you hadn't paid your mortgage in 8 months.  Banks then found that they would have to account for that foreclosed property, and place yet another home in the foreclosure pipeline.  When a particular area shows up on foreclosure websites – and is overloaded with these properties – property values in the area plunge, effecting the payments on other mortgages within that area.  Well, banks certainly don’t like that – so (currently) they are choosing NOT to actually foreclose on a lot of deadbeats, but rather simply ignore them.  For example: in Miami, FL, you will see houses that are owned (and being paid for), along-side houses that are ‘in the foreclosure process’ – a) without any signage, b) with people living in them, and c) that haven’t made payments in years!  Thus continuing the housing illusion that demand is strong, supply is short, and therefore prices are rising.

RealtyTrac recently proclaimed that over 47% of U.S. homes ‘in the foreclosure process’ have people living in them.  In Miami – over 65% of the foreclosed homes have families ‘living large’ inside of them, without paying any mortgage or rental payment(s).  Therefore, of the 31,000 Miami homes in foreclosure, only 11,000 are truly in foreclosure – awaiting new occupants. 

These facts seem to sever the ‘virtual reality’ of a housing recovery:

-       First, it’s bad for existing homebuyers to be buying into a market that has an artificially reduced supply of homes, because the existing homes will have an inflated price associated with them.  Imagine when all of these houses DO come to market – then all homes will drop like a rock in value – again!

-       Secondly, with all of the families living ‘rent free’ – it pushes excess dollars into the economy in a dislocated way.  Without a mortgage payment, people are spending money on items that they should NOT be able to afford.  So, when you see amazing automobile sales figures, just know a significant portion of them are going to sub-prime loans by folks squatting in homes they don't own.  Again, a picture that is fraught with disaster.

-       Lastly, Wall Street and Main Street are in this one together.  Wall Street needs to drive up earnings while Main Street needs statistics to support our current economic path.

Just know that a) housing didn't recover, b) squatter spending won't carry an economy, and this ‘virtual reality’ always ends badly. 


The Market:

From the day The Ben Bernanke told us that he wasn't going to taper, the market has pulled back.  Part of that was simply because we had ‘run up’ into the announcement, and they sold us down a bit afterwards – in the classic: "Buy the rumor, Sell the news" response.  But (for several reasons) the pullback has gone much further than just that event would generate:

-       First, a lot of ‘bets’ had been placed on the ‘Taper of QE’ side, and those positions had to be unwound. 

-       Second, we are experiencing a legitimate Government shutdown – with no end in sight.

-       Third, we still have a debt ceiling problem. 

These three elements have combined to promote a profit-taking pause in the market’s climb.  For all of 2013 we have NOT had a true 10% ‘correction’ – with the largest pullbacks being in the 4 to 6% range.  Heading into Friday, the market was down 4.5% from its recent highs.  With Friday's 78-point bounce, we are currently in the middle of the area that the previous pullbacks have established. 

I think that it is possible that we see the market fade to the 6% drop area, but I don't think they're going to let this turn into a full-blown 10% correction.  I say this, fully knowing that Octobers can be odd creatures, and knowing that we still have the Government shutdown and debt ceiling to contend with.  Remember that The Ben Bernanke still has his foot on the pedal – printing money, and that Wall Street loves it’s holiday bonuses.

If (however) the market does drop for an additional 5%, I think that ‘drop’ will be bought-up savagely and we ‘V’ right back up into the yearend.  Anyone who didn't jump on the market’s train this year (and is lagging the market) will want to squeeze it for all they can get, and honestly, there's very little (other than stocks) that can make any money right now. 

So, I’m expecting a year end run, and I just don't know if it will be preceded by more downside.  I tend to think we'll trade sideways and choppy until we get past the debt ceiling issue, and then start to turn it back up.

Thanks to DS – a fact that I hadn’t considered is that the government shutdown could push the ‘agriculture’ markets into turmoil this week.  It seems that the Government shutdown has prompted a lack of official statistics surrounding commodities.  With a vacuum of data – often comes fear, and with fear – often comes selling (aka - a flight to cash).  Likely to fall victim to the shutdown is the USDA's monthly crop production report, due out on October 11 – which affects prices of grains and other agricultural commodities around the world.  And once the USDA resumes operations, a torrent of backlogged data could trigger a highly volatile reaction.  Exchange Traded Funds (ETF’s) that could be affected by this lack of data are: MOO, CROP. PAGG, VEGI, JJG, GRU, CORN, WEAT, SOYB, COW, UBC, JJA, RJA, AGF, DBA, FUD, UAG, DAG, AGA, ADZ, JJS, TAGS, USAG, and RGRA.

Tips:

Congrats to those of you who adopted the strategy of selling slightly out of the money covered call options last week.  For example: on Apple (AAPL) you netted over a 54% annual return last week, and I would suggest that you do it again this week.  For example:  Apple is selling for $483+ (per share) right now.  If you own some, you could sell the $485 weekly call option (expiring on Friday, Oct 11) – and collect the $5.20 per share.  If the option expires worthless – that’s about a 53% annual return, and if you’re ‘called out’ the return is even greater.  “Rinse ‘n Repeat” with many of the weekly options stocks – some with better returns than Apple. 

Now to further take advantage of any upside – and balancing out any ‘downside’ risk – you could take a position slightly further out on the call premium.  Some stocks that are better positioned for this than AAPL are:  AMD, TSLA, PRLB, SSYS, DUST and NUGT.

When the market does turn – look at:  AMZN over 321.75, CIEN over 26, TEX over 35, KBR over 34, SBUX over 78, POT over 33, IPI over 17, MOS over 46, WNR over 31.50, NBR over 17.50, and COH over 56.

My current short-term holds are:

-       FB – in at 25.61 (currently 51.01) - stop at 49.00,

-       SIL – in at 24.51 (currently 12.64) – no stop

-       GLD (ETF for Gold) – in at 158.28, (currently 126.50) – no stop ($1,309.70 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 20.95) – no stop ($21.70 per physical ounce).

To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm. 

Please be safe out there! a

Disclaimer:

Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews.  You can learn more and get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com> .

Please write to Mr. Culbertson at: <rfc@culbertsons.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <rfcfinancialnews.blogspot.com>.

If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower -  "taylorpamm" is the handle.

If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing: http://www.youtube.com/watch?v=K2Z9I_6ciH0

To unsubscribe please refer to the bottom of the email.

Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations.  Mr. Culbertson and related parties are not registered and licensed brokers.  This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document.  Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.

Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.

Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.

Remember the Blog: <http://rfcfinancialnews.blogspot.com/> 
Until next week – be safe.

R.F. Culbertson

<mailto:rfc@culbertsons.com>

<http://rfcfinancialnews.blogspot.com>