Thursday, January 31, 2013

Where did all the housing inventory go? / By Dr. Housing Bubble / January 30, 2013
This might sound like the start of a riddle but really, where did all the housing inventory go?  In the latest piece of data we find that listed inventory is now at levels last seen in January of 2001.  That is right, today we have the same number of homes listed for sale that we did 12 years ago.  This continues to be the biggest underreported story in the housing market.  A large part of this has to do with the external forces interacting with housing.  One has to do with banks holding on selectively to distressed properties while another is the dragging out of the foreclosure process.  Next, you still have roughly 10 million Americans that are underwater on their mortgages.  Think of that when you realize that only about 1.8 million homes are listed for sale.  Those 5 million homes in distress either because of foreclosure or missing payments sure would relieve some of the pressure current buyers are facing.
Inventory keeps moving lower
The reason we have yet to see a massive boom in building similar to what we saw in the 2000s with the first housing bubble is that builders realize these underlying dynamics.  In fact, about one third of new building projects are going to multi-family units to meet market demands for a less affluent young generation.  Remember those 2 million younger Americans living at home because of the recession?  Their first step is likely to be a rental before buying a home.
The fact that roughly 1.8 million homes are listed today, nearly the same as we had in January of 2001 is stunning.  We’ve added over 33 million people in that time to the country.  The inventory pressures are larger in certain markets like California where some areas have seen inventory decline year-over-year by 50, 60, and even 70 percent:

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3 Ways to Play the Coming European Rebound

Walk around virtually any city in Europe, and you'll get a glimpse of deep economic strains.
Many store fronts are boarding up, people are walking the streets with hopes of finding employment and landlords are evicting tenants who are far behind in rent.

Yet, economists increasingly expect the gloom to lift slowly. And if history is any guide, then you want to invest in troubled Europe before the region's economy is back in full force.

This notion hasn't been lost on some investors who are already profiting from increased exposure to Europe. But these investors were mostly focused on the riskiest stocks that appeared to be the most distressed. Many Italian bank stocks, for example, have risen 50% or even 100% since bottoming out last summer.

But for investors looking to commit fresh funds to European investments, it may be wiser to take a different tack.
Focus on stocks and funds that remain near lows, but have a high degree of economic sensitivity. Once investors have become convinced that Europe will indeed exit a recession in coming quarters, then it's the deeply-cyclical (often industrial) stocks that will likely greatly benefit.

Here are three examples...
ArcelorMittal (NYSE: MT)
This Luxembourg-based steel maker derives more than half of its sales from Europe. The deep recession has dealt a double-barreled blow to the company as European auto sales plunge to new depths and commercial building construction grinds to a halt. These two industries are huge consumers of steel.
From a peak of $117 billion in sales in 2008, sales are expected to come in at just $84 billion in 2012. Analysts expect only modest improvements, perhaps to $86.5 billion in sales in 2013. Yet, the tepid top line masks a vastly streamlined cost structure that should start to bear fruit this year. 
ArcelorMittal generated a $3 billion free cash flow loss in 2011, and likely a small free cash flow loss in 2012 as well. But analysts at Merrill Lynch say that recent cost cuts and constrained capital spending should enable free cash flow to rebound to $2 billion this year, and perhaps $4 billion in 2014. By the time the European economy is back on its feet in subsequent years, free cash flow could really take off. After all, the company averaged $7.8 billion in annual free cash flow in 2007 and 2008, the last time the cycle was at its peak. (more)

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Warren Buffett "Guarantees" These 2 Bank Stocks

Imagine having the opportunity to invest into companies that are "guaranteed" by one of the world's wealthiest men -- Warren Buffett. Most investors would jump at the chance to know they are on the same side as successful investors like him.

Does this seem like pie-in-the-sky thinking? Well, it's not.
Buffett has just issued a personal guarantee on the controversial bank sector.

In mid-January, the Oracle of Omaha appeared on Bloomberg and surprised Wall Street, personally guaranteeing the safety of the U.S. banking segment.
"The banks will not get this country in trouble, I guarantee it," he said.

"The capital ratios are huge, the excesses on the asset side have been largely cleared out... we own bank shares and I personally own stock in banks... I do not see problems in these things."
Clearly, Buffett's commitment to the banking sector goes beyond just his words. More than 37% of his $75 billion-plus portfolio is dedicated to this sector, according to our friends at In fact, out of this 37%, nearly 23% is focused on three U.S. banks -- Wells Fargo (NYSE: WFC), M&T Bank (NYSE: MTB) and U.S. Bancorp (NYSE: USB).

Here's a closer look at two stocks the billionaire investor has large stakes in.

1. M&T Bank
After dumping nearly 1.5 million shares of this bank in early 2010, Buffett is back on the "buy" side, with a purchase of more than 18,000 shares during the third quarter of 2011. There has been no activity since then, yet Buffett is sitting on nearly 5.5 million shares, representing a little more than 4% of shares outstanding, valued at nearly half a billion dollars. (more)

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Are Corn Prices Ready to Soar?

We’re watching these Corn futures very closely right here around 730. There’s a lot going on in this space and I think the daily chart for $ZC_F breaks it down nicely.
The first thing we notice is this giant symmetrical triangle that formed off the July lows and August highs. Prices in December were approaching the apex of these two converging trendlines and broke down pretty hard. The sell-off took prices below a rising 200 day moving average and down to last year’s former resistance. This level turned into new found support and Corn was able to recapture its 200 day Moving Average a couple of weeks ago.
1-28-13 ZC
The reason this chart is exciting is the fact that we’re back up towards this 5 month downtrend line and have been hanging out here for two weeks. This is now the 4th (5th?) attempt to breakout. And the catalyst that may allow for that may just be the false breakdown that took place between December & January.
The number to watch here has to 735. A solid close above that could set the stage for a nice move to the upside. Until we see that, I don’t think there’s anything to talk about. But when something like this sets up, we have to stalk it.
Meanwhile, we’re watching the Powershares DB Agriculture Fund $DBA. Corn represents over 12% of it. Last week this ETF briefly broke below January support, only to reverse much higher on Monday. This level also represents the 61.8% Fibonacci Retracement from the June-August move. This along with the bullish divergence in its Relative Strength Index confirms some of what we’re seeing from Corn.
Obviously a rollover in $DBA and/or lack of breakout in Corn above 735 and there’s no trade to be had here on the long side.

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The Cheapest Energy Stocks on the Market

With every passing month, we read another report about our nation's fast-track path to energy independence. Our domestic production of oil and gas is growing so rapidly, that we may just be a half-decade away from ending our long addiction to imported energy. And this would be great news for our nation's trade deficit, employment picture and national security.

Despite the ever-brightening energy picture, it's still quite easy to find value-priced stocks in this sector. Dozens of stocks trade at reasonable levels in relation to their cash flow, asset base and long-term growth prospects. I ran a series of screens to help bring a sharper focus to these industry value plays.

By triangulating the results of several screens, it's possible to see the deepest values in this steadily-growing sector.

Single-digit multiples abound

While stocks in many other industries are often assessed by their price-to-earnings (P/E) multiples, this metric isn't quite as useful for energy-exploration firms. They have such intense capital requirements and high levels of depreciation and amortization to write down their capital expenses, that net profits can be misleading. Instead, cash flow is the more salient metric.

I looked at all of the oil and gas drillers that are either headquartered in the United States, or trade on U.S. stock exchanges through American depositary receipts, with a market value of at least $500 million. I found 60 that trade for less than six times trailing cash flow.

To narrow down the list, I only focused on companies that trade for less than 1.25 times book value. This means these companies have solid underlying support, trading near or below the value of their base of assets. The list was narrowed down to 16 stocks, as you can see below.
The Cheapest Energy Stocks I've Found 
A pair of energy producers that have exposure to Argentina (YPF S.A. (NYSE: YPF) and Petrobras Argentina (NYSE: PZE)) have been eliminated from this group because these companies now face a risky operating environment thanks to recent government policy changes. Still, it's noteworthy that some of the energy producers (in terms of price) hail from countries such as Russia (Lukoil), Italy (Eni), France (TOTAL) and the U.K. (BP). Sometimes, as Elliott Gue, chief strategist of StreetAuthority's High-Yield International newsletter, can attest, you need to venture abroad to find an industry's top bargains.  (more)

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Bonds Will Be Under Pressure For Awhile

It would seem that bonds are on a lot of traders minds as TLT makes multi-month lows today and if you’re wondering how much lower this could go then I have 3 targets for you on the monthly chart below.
1. I would say there is a 90% chance this is at the very minimum heading to the $105 region as that seems like a shallow enough area to target and if you’re short maybe take some profits there by trimming.
2. I would say there is a 50% that we just go down to $100/share because that’s a nice round number that may act as a magnet.
3. The pullback that has the lesser percentage chance of happening but wouldn’t be outside the realm of impossible would be a pullback to the major trendline that started all the way back to 2007.  That would mean a retest of the $95-97 level which would qualify for the “end of the bond bull market” easily and could provide a good buying opportunity. I don’t think that would happen for many months, maybe not until summer, but it wouldn’t surprise me in the least.
Where do I think we’ll end up? My thinking is we head down to the $101-103 level and then find support, base, and head back to old highs. Expect this market to be under pressure until then and any rallies to be sold. A good level to get short would be anything north of $119.50 with a stop at this year’s highs.


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MUST READ: Peak Silver?

I spent a decade as an Energy analyst; or, more specifically, oilfield equipment, services, and drilling.  Thus, I was exposed to a tremendous amount of research on “peak oil;” which – shale oil notwithstanding – is yet to be proven either way.  Unfortunately, “peak” commodity studies cannot possibly incorporate ALL moving parts; nor foresee unexpected changes in demand, population, and technology trends.
That said, such studies can be extremely valuable – pointing out key hurdles to future production growth, and/or production cost.  That is, not only is “peak oil” a valid research topic, but “peak cheap oil.”
Heck, from the time I commenced my Energy career on the buy side in January 1996, until I left Salomon Smith Barney as a sell-side analyst in February 2005; the marginal cost of oil production stair-stepped higher; from levels to NEVER again be seen.  For nearly the entire duration of my 1996-2005 energy career, WTI Crude traded between $10/bbl and $35/bbl; not exceeding that high until late 2004; as compared to today’s recessionary price of nearly $100/bbl – and the 2008 peak of $150/bbl.  Thus, if anyone tells you “peak cheap oil” is not real, they are delusional.
Oh, by the way; when I left Salomon in February 2005, the Wall Street consensus for the “long-term” (3-5 years) oil price was… drum roll please… $18/bbl.  Why so low, you might ask?  TAR SANDS – which were hailed as a “sure thing” to swamp the market…

The reason I bring up “peak oil” is because “peak silver” is starting to be seriously debated; kicked off by the U.S. Geological Service’s ADMISSION (in the late 2000s) that silver is likely to be the first extinct element on the periodic table…(more)

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McAlvany Weekly Commentary

The Best of MWC: Part III

A Look at this Week’s Show:
-Richard Duncan: The New Depression
-Michael Pettis: Asia Woes
-Richard Taylor & Russell Napier
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