Strategic Real Estate Still Recommended

There can be no disputing the fact that Real Estate was in a huge bubble that burst in the 2006 to 2007 time frame. This was most evident in the Sand States of California, Nevada, Arizona, and Florida. The carnage from the bursting bubble drove home prices to below replacement costs enabling rental returns to soar from a minimum of 8% to 15 or 20%+ for a very profitable Return On Investment ( ROI ). Just as discounted distressed properties became readily available, 70-80% of Mainstream America became ineligible to purchase due to foreclosure or short sale lender issues, thus missing an enormous buying opportunity. A huge vacuum temporarily existed in the marketplace until organized investment groups entered and purchased the discounted distressed inventory; clearing the bottleneck and eventually allowing housing to normalize. Home prices rose to reflect a stabilizing environment and distressed properties slowed to a much more manageable pace. A stabilized marketplace allowed prices to rise from the discounted extremes as prices returned to the mean.

The pent-up selling pressure from homeowners that chose to honor their contractual agreement and not allow their property to be foreclosed or short sold has been unleashed as their homes are no longer underwater. However, a new vacuum is present in the market as all of the low hanging fruit has been picked, leaving investors absent. Penalized buyers are just becoming eligible for new loans creating a supply-demand imbalance. This is or will shortly cause a correction in home prices that has the potential to accelerate should economic or geopolitical events cause disruption.

Walter Zimmerman of United-ICAP, a renowned technical analyst, believes there is a transition underway from paper assets into real assets. Further, Walter Zimmerman's work is forecasting trouble ahead for the stock market and junk bond market; both, he believes, are in a very large unsustainable bubble. The bursting of these bubbles will eventually be bullish for housing as money flows out of stocks and high yield bonds into hard physical assets. Additionally, he sees a bottoming and a strengthening of the US Dollar further depressing the commodity market which has been sliding. Should these markets implode as Walter Zimmerman fears, deflation will affect all asset classes. Real estate will be affected, but not to the extent it had in the previous downturn. Rentals should remain in demand, although the rate may be slightly affected. The catalyst for a global meltdown may be China.

China has financed its' prosperity, and problems abound: Issues range from local banks unable to meet small investors’ bond payments to missing hypothecated copper and aluminum ingots supposedly stored in harbor warehouses, but missing and feared to have been used as collateral with multiple lenders. With over 52 million vacant residential housing units, the Chinese housing bubble is of epic proportions. As the world economy slows the risk of red flags and black swans increases dramatically. A global slowdown will have widespread effects: Japan's debt laden economy may collapse the currency; Russia could finally descend into recession; and the US stock and bond bubble are at risk. Real estate will eventually benefit as the economy again begins to recover, but that event's time frame will probably not bottom until 2016-2017 when the inflation cycle may begin. What is a possible strategy?

Over the last year, I have been recommending selling marginal properties, trimming stock and bond holdings, preparing an exit strategy, and raising cash. Spring of 2013 seems to have marked the high point in many formerly distressed markets (including Phoenix) that had the greatest investor activity. Prices have slightly declined as inventories have risen; curiously, rentals are very strong. As previously mentioned, a correction in housing is possible, but with much of the thousands of homes purchased by investors with cash and very little encumbered leverage, the asset itself should be secure. The junk bonds used to raise the cash may be at risk with consequential problems. Both Charles Nenner and Walter Zimmerman see inflation beginning in 2017 and a normalization to an actual boom market by 2020.

Strategic real estate delivers dependable cash flow, is located in markets that will retain value, and will experience growth in a normal environment. Cash flow in a difficult marketplace will be of paramount importance and mitigate the effects of any economic turmoil. Although there must be careful selection, opportunities to add good quality properties to a cash flow/income oriented portfolio should be considered. They may boom in the outlying years while providing scarce income in the near term. Further, an opportunity to place long term financing at these current near historically low rates, may not be available in the near future. As Walter Zimmerman has stated, expectations that property values may slide during a downturn should be tempered by the belief that the crash that followed the Real Estate Bubble will not be repeated; rather any downturn is a correction in a long term real estate bull market. Investors negatively impacted during the bursting of the bubble experienced problems due to over-leveraging the debt, not the property itself.

This article should interest investors in residential REITs like American Campus Communities (NYSE: ACC), American Capital Agency (Nasdaq: AGNC), Annaly Capital (NYSE: NLY), Apartment Investment and Management (NYSE: AIV), Apollo Residential Mortgage (Nasdaq: AMTG), ARMOUR Residential REIT (NYSE: ARR), Associated Estates Realty (NYSE: AEC), AvalonBay Communities (NYSE: AVB), BRE Properties (NYSE: BRE), Camden Property Trust (NYSE: CPT), Campus Crest Communities (NYSE: CCG), Colonial Properties Trust (NYSE: CLP), CYS Investments (NYSE: CYS), Education Realty Trust (NYSE: EDR), Equity LifeStyle Properties (NYSE: ELS), Equity Residential (NYSE: EQR), Essex Property Trust (NYSE: ESS), Hatteras Financial (NYSE: HTS), Home Properties (NYSE: HME), Maxus Realty Trust (OTC: MRTI.PK), Mid-America Apartment Communities (NYSE: MAA), New York Mortgage Trust (Nasdaq: NYMT), PennyMac Mortgage Investment Trust (NYSE: PMT), Post Properties (NYSE: PPS), Senior Housing Properties Trust (NYSE: SNH), Sun Communities (NYSE: SUI), Two Harbors Investment (NYSE: TWO) and UDR (NYSE: UDR).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Put Stock Profits to Use in Real Estate

This sounds sooo self serving! However, profits from virtually all stock indices have been absolutely outstanding. It may very well be time to take some of those gains and diversify into a separate asset class. As a very active Real Estate Broker, my clients’ greatest mistake in the huge run-up in 2005 was not heeding advice to “take some off the table” believing the mercuric rise would continue indefinitely. It was a display of pure GREED! Although stocks climb a wall of worry, the red flags gathering seem to show we are beginning to approach much more than a wall. Rather, it may be more like the small rise before the edge of a canyon cliff!

Decisions are difficult to make without the clarity of solid information and the confusion from differing sources. For instance, the January employment numbers showed 129,000 (revised) new jobs, which was above the revised 84,000 jobs added in December, though neither was robust! It conflicted with the Household Survey implication that 616,000 new jobs were created in the economy, which would be euphoric.

It’s a statistical anomaly, though, as John Hussman explains. January is a Bureau of Labor Statistics adjustment month. The increase of 523,000 people in the US labor pool skews the January numbers. John Hussman further explains that it is not unusual as two prior ominous times easily illustrate:

1. In January 2000, household employment figures jumped by 2,036,000 jobs.
2. In 2003, they jumped by 871,000.

The Main Stream Media failed to discuss this very relevant statistical adjustment implying a huge explosion in employment. Employment is soft at best. Hours worked continues to decline. GDP has declined to under 2%. The Federal Reserve is still committed to its asset purchase tapering. Capex spending is stagnant, and the credit markets continue to shrink. Civil unrest globally is rising and several nations are on default watch. The markets may continue to rise, but cash flowing assets will be valuable in whatever environment prevails.

This is the self serving part
I am not advocating new money, but a transfer of funds from one risk asset to another. It is time to buy conservative cash flowing real estate to preserve an income stream against volatile or declining stocks.

Real estate is long-term, generally 5 years or greater. Although subject to declines in value, as any financial asset is, any decline should be less severe than the bubble years of 2004-2006, and would probably be contained to well less than 20%. Further, high quality rental properties such as Class B apartment units or well located single family homes will probably fair even better. The huge population of former homeowners who have lost properties through the foreclosure process or short sales will become eligible to purchase again in the next few years as their financing penalty period expires. This will cause pent-up demand to be unleashed. This should drive the next cycle starting in 2016 as I see it. These former owners, plus the annual increase in household formations, will fill the available rentals. Should one of the red flags around the world cause a disruption to securities markets, these rentals will continue to flow cash.

Not all real estate will be suitable, and consultations with Tax Advisors, Financial Planners, and a good RE Broker is advisable. Retail may be very negatively impacted, as it is subject to both changes in the economy and changes in marketing and sales via the Internet. Medical, entertainment venues, properties with Class “A” tenants and some government entities such as the IRS will probably qualify as strategic real estate, and should also provide dependable cash flow. Conservative long-term financing may be appropriate, as there are many models forecasting much higher rates in just a few years. Current rates may look extremely attractive in the next cycle.

It may be time to become a little more conservative. Good to excellent properties that are real tangible assets with cash flow components should be very dependable. They will have the flexibility to adjust to conditions, and should perform well in good markets and maintain an income stream during bad markets. That will help mitigate downturns in equities and a downturn in general business conditions. This strategy will keep cash flowing into accounts when perhaps all others have stopped. As always, my best to you all.

This article should interest investors in iShares US Real Estate (NYSE: IYR), SPDR S&P Homebuilders (NYSE: XHB), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), Citigroup (NYSE: C), J.P. Morgan Chase (NYSE: JPM), US Bancorp (NYSE: USB), Pultegroup (NYSE: PHM), K.B. Home (NYSE: KBH), Toll Brothers (NYSE: TOL), Annaly Capital (NYSE: NLY), American Capital Agency (Nasdaq: AGNC).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Strategic Real Estate in 2014

There is no clarity only confusion in the economy. The unemploy- ment rate is heralded at 6.7%, yet the percentage employed of the entire working age population is at a historic low. Fewer people are working, yet the rate of unemployment declines! The stock market has exploded to new highs, yet 75% of the gains are from P/E multiple expansion and not profit growth. Further, household income, hours worked, and the all important GDP have all declined significantly while securities march to record highs. The number of food stamp recipients has nearly doubled in the last decade with almost 50 million people on SNAP. Almost 50% of the American population receives some sort of government assistance, and student loans have risen to over one trillion dollars. These obligations, along with the new Obamacare debacle, attempting to force some families into higher premium insurance policies, do not forecast a robust economy. It is time to reexamine portfolio holdings. The possibility of a recession, possibly a severe recession is climbing; since World War II the average expansion is thought to last about 44.8 months and it has been 57 months since March of 2009!

2014 Real Estate Forecast

In past posts, the recommendation has been to raise cash by liquidating marginal properties. Should a recession begin, the length can be from 11 to 43 months with the extreme during The Great Depression. A new downturn could be the 2nd leg of the Financial Crisis, as predicted by Reinhart and Rogoff in their work This Time Is Different: Eight Centuries of Financial Folly, where the colossal excesses of the debt cycle are finally corrected. Many economists believe the recession was only interrupted by the Federal Reserve’s flooding of the marketplaces with, as former Congressman Alan Grayson reports, up to $26 trillion. This may be a very volatile time and if The Great Recession can be used as a guide, most asset classes will be dramatically affected. The central banks of the world have already used most of their ammunition to force the global economy to escape velocity, but the economies of the world are heading to stall speed. The Federal Reserve is using untested methods, with its quantitative easing of $85 billion a month in Treasury and Mortgage-Backed Securities purchases, in its attempts to raise the inflation rate to beyond 2%. The Personal Consumption Expenditures Index (PCE) is at 1.2% and declining, stubbornly resisting the Fed’s efforts. All this enormous liquidity and capital added to the financial system, and yet inflation refuses to ignite; the forces of deflation must be gargantuan! Cash flow will be a very valued item!

Should the world enter another recession, real estate investors need to focus on 2017 and beyond where an enormous buying opportunity will be presented; an opportunity of generational proportions. Surviving intact will be paramount to investors, and strategic real estate may be one of the lifeboats. Strategic real estate will provide the cash flow that is absolutely necessary to survive a difficult economic environment, as yield will become increasingly scarce. Strategic real estate needs to have low or no debt, and if encumbered, any balloon or re-finance clause needs to extend beyond the 2018 period, preferably completely fixed and amortized. Rates could trend considerably higher in the coming years and properties financed now will be perceived as having favorable terms going forward. Not only may rates be higher, but appraisals may be much lower and underwriting criteria vastly more restrictive than today. Rates are currently trending lower; another re-finance opportunity may be at hand. In a downturn, prepare for lower valuations but fairly stable cash flow. A decline of perhaps 15-20% is possible. This should eventually be mitigated by lower vacancy, lower taxes through a lower tax assessment, lower insurance costs, lower labor and material costs.

The tenant quality needs to be excellent. The tenant credit rating should be above average and care should be used in accepting tenants in economically sensitive segments. An economic slowdown will affect everyone, delinquencies will rise, revenues will shrink, and job losses will ensue. However, losses can be mitigated by observant and proactive management addressing expenses and tenant quality. Not all segments will be as badly impacted and some will even prosper. Long-term government leases with such entities as the IRS, FAA, FEMA, etc., or commercial tenants in the medical sector, the defense industry, entertainment, or food and beverage businesses etc. should be less impacted, and their employees as well. Rental homes and apartments serve a basic need and will retain much of their appeal. New construction will probably suffer a severe downturn limiting additional supply, which will lower vacancy rates. Tenant migration would probably reverse as “A” tenants migrate to “B” complexes as price points should become very important. Rental rates would probably suffer as they will follow the economy lower, but rents may not suffer the full impact if the property is well located in a strong multi-industry market, another requirement for strategic real estate. Rentals in demand areas will fare the best.

In conclusion, strategic real estate properties are well located in growth and demand areas; they are leased by strong creditworthy tenants in industries that are less likely to be affected by economics, have no or very low long term debt, and have dependable cash flow. These properties will do well in an expansionary market and perform better against their peers in a challenging market. Review holdings and adjust accordingly. There is no clarity; the economy does not have to turn down, but the odds are rising and the time to prepare is running out. The current year should be the defining year if a downturn is imminent.

This article should interest investors in the iShares U.S. Real Estate ETF (NYSE: IYR), SPDR S&P Homebuilders (NYSE: XHB), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), J.P. Morgan Chase (NYSE: JPM), MGIC Investment (NYSE: MTG), Annaly Capital (NYSE: NLY), American Capital Agency (Nasdaq: AGNC), PulteGroup (NYSE: PHM), K.B. Homes (NYSE: KBH), Equity Residential (NYSE: EQR), Apartment Investment & Management (NYSE: AIV), AvalonBay Communities (NYSE: AVB) and others.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Australian Housing: At The Edge

The Gold Coast of Australia is blessed with so many wonderful attributes: miles of sandy beaches; clean air and skies; with clear, fresh water; lush vegetation in rich soil that will produce fine fruits and vegetables in abundance; and with year round sunshine and ample rain. The climate is warm in winter, a bit hot in summer driving the population to the sea breezes of the coastal beaches. The area is Lucky, much as Australia has been lucky.

The global financial crisis affected all parts of the world. In order to avoid a perceived systemic collapse, the major economies coordinated their efforts to stabilize and re-kindle commerce. Europe and America chose to pour vast sums of capital into the financial system to stabilize the banking system. The Federal Reserve expanded its reserve balance by over $2 trillion, plus trillions more were sent to foreign banks and financial institutions as well as sovereign nations in the form of currency swaps to help liquify and backstop a failing system. In Europe and Great Britain, huge sums of euros and sterling were used as enormous sovereign debt was created to flood the markets with liquidity in a desperate attempt at solvency. In the case of Germany, the nation expanded it's debt to prevent entire nations partners from collapsing; bonds were purchased and loans extended to basically bankrupt nations. Financial assets were saved for the institutions.

The US Treasury and Federal Reserve not only shored up the balance sheets at major US banks, but also underwrote the havoc created by the meltdown in US housing: guaranteeing loan losses at Fannie Mae and Freddie Mac along with guaranteeing failed lenders. Foreclosures and short sales of US housing created a black hole where capital disappeared in the destruction and deflation of asset prices created by the clearance sale of US homes, which demanded increasing amounts of capital. The central banks of Europe and America poured liquidity into the financial system to offset the losses faced by the lenders. A financial recovery of sorts ensued, but the massive debt had been used to replace lost capital and had not been used to enhance productivity or support job creation, resulting in the “jobless recovery”. Asset prices of equities rebounded, joined in the US by a bounce in the price of US real estate. This coordinated action was used to prevent a systemic collapse. China, the second greatest economy in the world approached the crisis differently.

China did not pour its trillions into banks, but into infrastructure and construction projects building massive commercial districts and enormous non-viable high rise residential units priced far above the purchasing ability of the average citizen. China went on a construction spree building more skyscrapers than any other nation on earth. Further, China built world class shopping malls sized for the record books, serviced by new roads and bridges; it all lacked in nothing but shoppers to fill the retail outlets. Millions of cubic yards of concrete; millions of tons of steel, coal, copper, aluminum, and iron ore to supply the vast construction projects that enriched a few, but gave work to millions. Factories and more factories were built to produce goods for export, but they are now starting to idle as their trading partners in Europe and Asia have slowed their purchases of Chinese imports, resulting in excess capacity. High rise residential units have been overbuilt, leading to high vacancy and the famous "ghost cities" of empty high-rise residential communities. Official lending through sanctioned lenders in China as well as the famous shadow banking system exploded the economy with liquidity driving the GDP to double-digit expansion. Some of those massive funds were exported to Australia.

Australia boomed! Mining operations expanded and workers were needed in the desolate mining districts of the Outback to supply the Chinese miracle. Truck drivers were reportedly earning $150K -$200K annually working 21 days on and 7 days off. Business activity for direct equipment sales, staffing and support, as well as marketing firms exploded. Indirect participants of the general economy benefited as well when miners returned home to enjoy their wages on new homes, furnishings, cars, and the relaxation toys of jet skis, vacations, and entertainment. The velocity of money moved through the Australian economy. Prices of homes soared. By late 2011, the boom slowed, imperceptible at first, but steadily slowing nonetheless.

Capital expenditures for Australia are projected to decrease in 2013 by 12-13%; 2014 CAPEX is projected to decrease by as much as 20%. Further, Credit Suisse (NYSE: CS) is forecasting a possible currency exchange rate of AUD/US of 0.75, which is portending lower demand for the Australian Dollar. One of the mainstays of Australian mining, premium grade coking coal has dropped from a high of $330/ton in 2011 to a current price of $135/ton. Iron ore has experienced the same phenomena, dropping from $192/ton to $130/ton. Mining projects are forecast to drop from a high of $350 billion for future projects to a possible low of $25 billion in 2018.

As the global economy slows, commodity rich Australia will be affected. In July, Woolworth's (Nasdaq: WOLWF) a national grocery chain was rumored to have begun a hiring freeze and a reduction in worker hours by 10%. Such management decisions are the result of slower revenue growth and will compound the affordability challenge. Prestigious custom home builders have been slowing and some are idle as projects have stopped. High rise development on the Gold Coast has slowed to almost non-existent. These are all evidence of less than optimal current conditions.

Since the global financial crisis, Australia has enjoyed strong economic activity that resulted in continually higher housing prices rising until 2011. Just recently, of the 34 nations comprising the Organization for Economic Co-operation and Development (OECD), Australia ranked 6th in over-valued housing when comparing both the price-to-rent and price-to-income ratio. Further, the 9th annual Demographia International Housing Affordability Survey of 2013 ranks Australia as the 3rd least affordable housing market behind Hong Kong, China and Vancouver, Canada. Australia had no affordable housing or moderately affordable regions in any of its 5 major markets, which compared to 20 Affordable and 20 Moderately Affordable regions in the U.S. out of 51; the US having already experienced the housing correction.

These ratios will drastically change for the worse if the global economy softens further; a slowdown will impact affordability which will impact price. The Australian government has pursued a policy of urban containment, releasing limited amounts of land in its 5 major markets, which has contributed to a limited supply of new housing. However, if other of the world’s economies may be used for comparison, as economies soften, the demand for housing drops precipitously. To proactively address these issues, The Reserve Bank Of Australia reduced the published rate to 2.5%; it was the eighth reduction since November 2011. This will give a boost to the general economy, and in particular, will help address the affordability issue for Australia’s housing. However, the projected forecast for unemployment has been raised from 5.75% to 6.25%, which will perhaps counter the rate cut.

Much of the published research indicates that Australia nationwide is extremely over-valued. That condition can remain the case for a very long time, particularly in world class markets like Sydney, London, New York, the Gold Coast, etc. But eventually the average person needs to be able to support the entry level and 1st and 2nd tier properties with a reasonable amount of their household income, or the market plateaus, or worse implodes, should there be an event or an external shock. I am afraid that is where Australia is! As an aside, a policy change of releasing additional land would help address the supply issue that is pervasive throughout Australia's metropolitan areas. Allowing for sector development along the freeways and demographic pressure routes would reduce the entry level prices and relieve some of the demand, further opening the market to competition from many landowners.

For better or worse, the globe is interconnected. Australia dodged the worst of the global financial crisis with the help of the Chinese economy; now if China slows or enters a recession itself, Australia will be deeply impacted. An over-priced, unaffordable housing market has the potential to implode; a steep housing correction is possible, as much as those that have corrected in Spain and the U.S. Once the tipping point is reached, a cascade usually follows that can have far reaching effects throughout the entire market. All eyes are on CHINA, let us all hope Australia's Luck holds!

This article should interest investors in the iShares MSCI Australia Index (NYSE: EWA), CurrencyShares Australian Dollar Trust (NYSE: FXA), Aberdeen Australia Equity Fund (NYSE: IAF), PIMCO Australia Bond Index ETF (NYSE: AUD), ProShares Ultra Australian Dollar (NYSE: GDAY) and the ProShares UltraShort Australian Dollar (NYSE: CROC).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Phoenix Real Estate Investors: Time to Take Profits

Let’s step back 4 years to a time when the “Great Recession” was in full force and Phoenix, Arizona had fallen from the #1 builder market in the United States to one of the worst MSA’s (Metropolitan Statistical Area) in the nation. The Metro Phoenix Builder Community had completed over 60,000 new homes in 2006, a record year. Builders in October 2008 had thousands of finished homes completed and ready for delivery when “The Lehman Moment” changed everything.

Phoenix Real Estate

Builders, including major companies like PulteGroup (NYSE: PHM), D.R. Horton (NYSE: DHI) and K.B. Home (NYSE: KBH), had a cascade of buyers refusing to close and their finished homes became “Specs Available,” or expensive inventory on short-term construction notes that would eventually no longer belong to the builder, but become Real Estate Owned (REO) of many local and national lenders like Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) and J.P. Morgan Chase (NYSE: JPM). The Arizona Regional Multiple Listing Service (ARMLS) listed a low of less than 6000 available properties in 2005 to a ballooning inventory of over 59,700 properties for sale and 9800 properties for lease in late 2008. The housing industry in Phoenix was in a depression with a glut of new and existing homes.

To exasperate the problem, over 300,000 individuals working in or connected to housing and new construction left the Valley of the Sun in search of other employment. In Phoenix almost everyone was connected to housing, which included the obvious roofers and framers, but also title and escrow officers, loan officers and loan underwriters, thousands of real estate agents and brokerage houses, surveyors, and the not so obvious furniture , electronic, decorating centers, and even movers. Tens of thousands lost their jobs and most had their income severally curtailed. The loss of business was felt everywhere in Metro Phoenix. Incomes and available capital were declining while underwriting standards for new loans was rising and excluding buyer after buyer. Phoenix had crashed and was burning.

As with any commodity, the law of supply and demand dictated terms in the market place, and the over-inflated prices tumbled past fair value to in some instances 50-60% below replacement costs. As costs declined, the over-valued status of Phoenix changed to an under-valued market, and then to an extremely undervalued market. Many local business people and employees alike were experiencing the loss of income, and many local homeowners were burning through their savings and capital to pay monthly expenses. Eventually, many depleted entire nest eggs while their real estate wealth evaporated as prices declined well below mortgage values, condemning them to future foreclosure or short sale. Incomes, down payments, and then credit issues excluded many potential buyers and shrunk the buying population, further reducing demand. The cleansing process is brutal, but necessary in the business cycle, and the excesses needed to be removed in order for the eventual recovery. Prices plummeted to ridiculous levels because there were very few buyers. Enter the original courageous and foresighted investors.

Everyone knew buying real estate was a very bad idea; however, the properties were priced below cost, and if unemotionally approached, were very compelling. Further, rental rates had declined about 15%, but properties had dropped 60-70%. Although rental rates were lower, the acquisition cost was much lower. So were operating expenses including: repairs, insurance costs, taxes, and long-term mortgage rates. Rents for the now distressed and depressed properties purchased at much lower prices were cash yielding investments. The gut wrenching declines, the turmoil of speculators buying high to sell higher, and the builders and developers caught in the final capitulation doomed the average homeowner. The simple indicators of value: Own vs. Rent; the Gross Rent Multiplier; and the Affordability Indexes all shifted wildly from indicating an overbought market to a hugely undervalued one. Cash flows began to yield 9-15%.

Much of the buying public had already purchased in the frantic years of 2004 to 2007 and was trapped in underwater homes. There was a void in the buying pool. Prices and returns were exceptionally compelling as a result. My recommendation for several years has been unabashedly bullish. Investors in Phoenix have helped clear the inventory and pave the way for a fresh set of homebuyers to replace the rental homes with owner occupied. Former homeowners that liquidated their properties via the short sale process are becoming eligible once again to purchase.

As demand began to enter the Phoenix market, prices rose steadily and have recovered a portion of the decline. Many early investors have seen cash purchases double and those that assumed more risk with leverage have realized huge capital gains as well as monthly cash flows in the range of 5% on cash to over 8%+ levered. The investment in Phoenix real estate has been exceptionally profitable. It may be time to take some profits now, and those properties not sold should be evaluated for long-term mortgages.

Real estate is local; however, real estate is economically sensitive. The economy may be heading for difficult times and if the economy enters a recession as Charles Nenner and the Economic Cycle Research Institute (ECRI) predict, and as our site's founder warns is highly possible, a better buying opportunity awaits just a few years away.

A specifically aggressive, but overall cautious approach may be the appropriate theme for the foreseeable future. A good price on a good property is usually profitable, but the low hanging fruit has been picked and much of the recovery is priced in current values. Low long-term rates indicate more potential for future capital gains, but rental rates are stabilizing indicating a normalization of rental growth rates. Some properties are gems and should be kept for the long-term; marginal properties may be considered for liquidation.

In 2006, I reviewed the market dynamics with my clients and advocated selling as I believed the direction of the market was down. Enormous profits had been gained. Most did not heed my advice and in fairness, I was 9 months early to the peak. Now once again enormous profits have been gained; my advice is to take some profits.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

This Time is Different

The Most Expensive Words in the English Language

Wishful thinking! Unfortunately this time is definitely not different. The business cycle will not be denied; it can be altered, it can be delayed, but it cannot be stopped. As in all cycles from recession to boom and back to recession, the excesses that become built up need to be resolved so the system can cleanse itself and recover. Inefficient industries and/or companies and mismanaged entities (public or private), and the accompanying debt will need to be re-structured or bankrupted. As mentioned in other articles, much of the global debt has been shifted from private debt to sovereign, federal, state, or municipal ledgers. Currently ultra-low, repressed, and manipulated interest rates allow for budgets to re-pay the interest carry, but certainly not the principal of global debt. New loans are created by central banks in a round robin of “borrowing to pay”. Eventually, the ultimate arbiter, the global currency and global bond market will demand either repayment in full or a much higher interest rate to justify increasing credit risk. This applies to even the most credit worthy stalwarts like Japan, the United Kingdom, Germany and the United States. Conservative investors may not appreciate the degree of real risk in the bond markets; I suggest even a small rate rise of just 1.0% could result in catastrophic losses as investors exit positions.

The current fiscal leadership including from the Federal Reserve, IMF, ECB, Bank of Japan and the rest of the G20 nations is attempting to liquidate the global banking system to inflate and hopefully grow the global economy. Fresh debt is added to the old debt and needy governments (Greece, Spain, Portugal, and perhaps Italy, France, Hungary, Cyprus etc.) accept the loans with the dimming hope of growing their economies. Programs of higher taxes and reduced spending through austerity programs are proving to be highly ineffective and have worsened already desperate situations. The policy of adding new debt to the old debt is adding to the burden. Resolution to the debt problem and the natural progression of the cycle are only delayed and the ultimate outcome made worse. I propose that a cyclical tidal wave is overdue as a result.

The bond markets have provided consistent income with growth of principal over the last 10 years or so. However, the winter season is rapidly approaching for bonds, and it is time to harvest assets and profits to prepare for the cold, dark nights and much shorter days, and to prepare for the spring that should just as surely come. There are many potential seismic triggers cocked: a Middle-East War, euro-zone breakup, rising rates in Japan, or my personal favorite, global recession; each is capable of causing enormous turmoil. There has been a shift in the financial world, a change of trends that may require a shift in investments. Two definite scenarios are possible: defaulting on the debt or inflating against the debt.

Government and corporate budgets are much the same as in a personal household. A boiling point of manageable debt and repayment costs is reached which extends beyond the household’s capability. There is only so much revenue, and when the outflows exceed the inflows, a breaking point is reached. This is an excess that needs to be resolved, perhaps by very radical means, because the problem spreads like a vicious cancer.

Nations such as Greece have had very difficult decisions to make. They can honor the debt and suffer for a decade or more with rising social unrest and higher unemployment. Somehow, perhaps miraculously, with reduced spending and austerity, the economy might improve. A more radical, but more immediate decision would be to default on the debt. The repayment burden would be removed with a return to the national currency. Local revenues would be curtailed somewhat, but even reduced revenues could be used to stimulate services and restart the economy. There would be turmoil, but measured in months to a couple of years instead of by decades.

Should such a solution spread to other burdened nations, it could become acceptable to default and a global rebalancing could occur. The result would be a severe mistrust of all fiat currencies and all sovereign debt, including U.S. debt. This mistrust would result in higher rates, significantly higher rates. This mistrust would also result in a shift of capital allocation to hard assets such as oil, gold, silver, farm land and agricultural commodities. It also would offer opportunity to all investors through investment in REITS and Real Estate. My personal favorite is the single family home in stable neighborhoods.

The inflation scenario is problematic for the bond market. Trillions of dollars have flooded into it throughout the world. The large multinational banks including the likes of Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), J.P. Morgan Chase (NYSE: JPM), Morgan Stanley (NYSE: MS), Barclay’s (NYSE: BCS), Credit Agricole (OTC: CRARY.PK), Deutsche Bank (NYSE: DB), UBS (NYSE: UBS), Credit Suisse (NYSE: CS) and many of the world’s largest corporations are hoarding reserves, reluctant to deploy capital.

In addition to the reserves, the losses to the housing bubble collapse are diminishing as the U.S. real estate market recovers. The black hole of foreclosures and short sales, which have destroyed immense capital, is closing and may be completely closed within 24 months should the economy skirt a recession. There exists a tremendous potential for pent-up demand to propel the real estate markets higher as former homeowners become eligible to purchase. This demand could provide one of the catalysts to spark the velocity of money and unleash a torrent of capital seeking a return. This flood of capital would drive prices higher and perhaps ignite inflation and overwhelm deflationary trends. Hard assets would be the destination of capital looking for a return, and my favorite, real estate prices, would trend higher. However, rising interest rates accompany inflation.

Rising rates have the potential to decimate a bond portfolio, particularly a long-term bond portfolio where many investors have parked conservative money. It has the potential to be catastrophic. Real estate can provide an income stream that grows and often mimics the rate of inflation. Yet, there are many alternatives to help balance a portfolio. Please check with your advisor and review investments, as a rebalancing may be in order.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Get Out of Bonds!

Shakespeare wrote in Hamlet, “Neither a borrower nor a lender be.” With long-term rates repressed artificially by the Federal Reserve to historically low levels, I want to modify this phrase to “Neither a lender but a borrower be.” Clearly a bubble has formed as conservative and risk adverse capital has fled to the “safety” of US Treasury Bonds. The decision for bonds is not whether to exit the market, but when.

Relative tickers include Federated Investors (NYSE: FII), Barclay's (NYSE: BCS), T. Rowe Price (Nasdaq: TROW), State Street (NYSE: STT), BlackRock (NYSE: BLK) and J.P. Morgan Chase (NYSE: JPM).

Sell Bonds

I have had the privilege of interviewing Charles Nenner when in mid- 2011 he forecast the bottoming of the CPI in April 2012 and the bottoming of the PPI in October 2012, heralding the end of the deflationary cycle of 30 years which began in the Volcker years of 1981-1982. The 1975-1979 timeframe exhibited the final stages of inflation with a “blow-off” era of double-digit inflation. Perhaps 2012 will exhibit the final deflationary dip this summer. According to Charles Nenner, in late 2012 the inflationary cycle starts again, and will be active for the next 30 years, when bond rates are so low there is very little room left to drop lower; the path of least resistance is up. Charles Nenner, in recent interviews, has again reiterated his call that long-term bonds will bottom this summer. This does not bode well for the stock and bond market. Furthermore, Lakshman Achuthan of The Economic Cycle Research Institute has again re-affirmed ECRI's call for an imminent recession, coinciding with the regularly published concerns of our Editor-in-Chief, Markos Kaminis; this also does not bode well for stocks. Typically, a recession kills inflation, which by combining both forecasts would indicate more immediate deflation and a slow building into an extended inflationary period. Interestingly, the array of ECRI indicators shows an uptick in the Housing Index.

If bond rates are bottoming and inflation is beginning, asset allocation will become paramount to protecting and growing wealth. The onset of a recession should drive rates down; an attempt by the Federal Reserve to stimulate the economy once again with QE3 may drive rates lower yet, for a very short-term. This window presents an enormous opportunity, perhaps a generational buying opportunity to purchase Real Estate at still discounted pricing to capture historically repressed and artificially low long-term rates; it’s an irresistible package. Mortgages in the US are typically obtained with an interest rate fixed for the entire length of the loan and amortized fully over a 15 or 30 year term. This will be an enormous advantage to a family or an investor in the coming years should rates return to 5% to 7% or higher.

Initially, should the US enter a recession, the cash flow generated by the rental income would mitigate reduced earnings from stock dividends and any bonds still held. A recession would reduce new construction and further exacerbate a tightening housing market, balancing the rental market between declining personal income from a weakening job market and the need for basic shelter. The income stream generated by rental property should remain viable, with possibly a little downward pressure; more so if the economic downturn turns vicious, but still producing a dependable monthly revenue source several basis points above US Treasury Rates.

There is a strong possibility we could endure a very vicious economic slowdown. As our chief here at Wall Street Greek has warned regularly will happen, and as Lakshman Achuthan has indicated in several of his interviews, an “event or black swan” can turn a mild recession into something worse. In order to protect one's wealth and future, personal debt costs need to be reduced, reserves need to be expanded to withstand a two-year slowdown, and any underwater or non-cash flowing properties need to be reviewed for liquidation via the short sale process to reduce the income and fiscal drag from these negative properties.

Qualified investors should start to position for the recovery that will certainly follow the slowdown, and accumulate quality properties that have the potential to grow in both value and increase revenue. A slowdown will bring properties held by weaker investors to the market, perhaps at very attractive pricing. Going forward, pricing may soften as higher mortgage rates depress affordability and dampen demand. The offset will be rising rents, as supply is further curtailed spiraling into shortages; higher rates brings higher mortgage and housing payments which evolves into higher rent. Currently, a package of both discounted pricing and historically low and repressed fixed mortgage rates present an appealing mixture. Further, the US Leading Home Index of ECRI has been trending positively against a back drop of declining indicators, forecasting a possible bottom in the devastated U.S. housing market. ECRI has a stellar record of forecasting inflection points and trends. As devastated as housing has been, it may be the safer asset to protect and grow wealth in the coming years.

With Treasury Bonds in a possible bubble, a prudent investor should consider capturing gains on a large portion of his fixed income portfolio. Furthermore, he should move capital into rental properties capable of maintaining current income and growing forward earnings, which is extremely important in a deflationary environment, but also important for hedging in an inflationary environment. Accumulating investment properties with dependable monthly income as well as offering potential for asset growth should be considered and reviewed with your adviser. The risk to a bond portfolio may soon be much, much, greater than ever anticipated. Thus, it’s time to get out of bonds.

Article should interest investors in SPDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY), PowerShares QQQ Trust (Nasdaq: QQQ), ProShares Short Dow 30 (NYSE: DOG), ProShares Ultra Short S&P 500 (NYSE: SDS), ProShares Ultra QQQ (NYSE: QLD), NYSE Euronext (NYSE: NYX), The NASDAQ OMX Group (Nasdaq: NDAQ), Intercontinental Exchange (NYSE: ICE), E*Trade Financial (Nasdaq: ETFC), Charles Schwab (Nasdaq: SCHW), Asset Acceptance Capital (Nasdaq: AACC), Affiliated Managers (NYSE: AMG), Ameriprise Financial (NYSE: AMP), TD Ameritrade (Nasdaq: AMTD), BGC Partners (Nasdaq: BGCP), Bank of New York Mellon (NYSE: BK), BlackRock (NYSE: BLK), CIT Group (NYSE: CIT), Calamos Asset Management (Nasdaq: CLMS), CME Group (NYSE: CME), Cohn & Steers (NYSE: CNS), Cowen Group (Nasdaq: COWN), Diamond Hill Investment (Nasdaq: DHIL), Dollar Financial (Nasdaq: DLLR), Duff & Phelps (Nasdaq: DUF), Encore Capital (Nasdaq: ECPG), Edelman Financial (Nasdaq: EF), Equifax (NYSE: EFX), Epoch (Nasdaq: EPHC), Evercore Partners (NYSE: EVR), EXCorp. (Nasdaq: EZPW), FBR Capital Markets (Nasdaq: FBCM), First Cash Financial (Nasdaq: FCFS), Federated Investors (NYSE: FII), First Marblehead (NYSE: FMD), Fidelity National Financial (NYSE: FNF), Financial Engines (Nasdaq: FNGN), FXCM (Nasdaq: FXCM), Gamco Investors (NYSE: GBL), GAIN Capital (Nasdaq: GCAP), Green Dot (Nasdaq: GDOT), GFI Group (Nasdaq: GFIG), Greenhill (NYSE: GHL), Gleacher (Nasdaq: GLCH), Goldman Sachs (NYSE: GS), Interactive Brokers (Nasdaq: IBKR), INTL FCStone (Nasdaq: INTL), Intersections (Nasdaq: INTX), Investment Technology (NYSE: ITG), Invesco (NYSE: IVZ), Jefferies (NYSE: JEF), JMP Group (NYSE: JMP), Janus Capital (NYSE: JNS), KBW (NYSE: KBW), Knight Capital (NYSE: KCG), Lazard (NYSE: LAZ), Legg Mason (NYSE: LM), LPL Investment (Nasdaq: LPLA), Ladenburg Thalmann (AMEX: LTS), Mastercard (NYSE: MA), Moody’s (NYSE: MCO), MF Global (NYSE: MF), Moneygram (NYSE: MGI), MarketAxess (Nasdaq: MKTX), Marlin Business Services (Nasdaq: MRLN), Morgan Stanley (NYSE: MS), MSCI (Nasdaq: MSCI), MGIC Investment (NYSE: MTG), NewStar Financial (Nasdaq: NEWS), National Financial Partners (NYSE: NFP), Nelnet (NYSE: NNI), Northern Trust (Nasdaq: NTRS), NetSpend (Nasdaq: NTSP), Ocwen Financial (NYSE: OCN), Oppenheimer (NYSE: OPY), optionsXpress (Nasdaq: OXPS), PICO (Nasdaq: PICO), Piper Jaffray (NYSE: PJC), PMI Group (NYSE: PMI), Penson Worldwide (Nasdaq: PNSN), Portfolio Recovery (Nasdaq: PRAA), Raymond James (NYSE: RJF), SEI Investments (Nasdaq: SEIC), Stifel Financial (NYSE: SF), Safeguard Scientifics (NYSE: SFE), State Street (NYSE: STT), SWS (NYSE: SWS), T. Rowe Price (Nasdaq: TROW), Visa (NYSE: V) and Virtus Investment Partners (Nasdaq: VRTS).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Real Estate or Stocks in 2012?

How does an investor assess risk? How does an investor identify potential problems with the stocks of the firms in one's portfolio? For instance, is there exposure to Greece, Spain, Ireland or Turkey? Will the company experience parts shortages from Japan or Myanmar? What are the currency implications of an appreciating or depreciating US Dollar on corporate profits? Can the record profits be repeated year after year, after year, to justify the P/E that reflects that same growth? Labor problems in China, union problems in Europe, and fluctuating transportation and commodity costs exasperate attempts at research. Most of these issues are outside of the average investor’s ability to foresee or control. Furthermore, the stock market's movements seem to be faster going down than going up; months of steady improvement can be destroyed in the matter of a few days, causing extreme angst.

Relative tickers: SPDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY), PowerShares QQQ Trust (Nasdaq: QQQ), ProShares Short Dow 30 (NYSE: DOG), ProShares Ultra Short S&P 500 (NYSE: SDS), ProShares Ultra QQQ (NYSE: QLD), NYSE Euronext (NYSE: NYX), The NASDAQ OMX Group (Nasdaq: NDAQ), Intercontinental Exchange (NYSE: ICE), E*Trade Financial (Nasdaq: ETFC), Charles Schwab (Nasdaq: SCHW), Asset Acceptance Capital (Nasdaq: AACC), Affiliated Managers (NYSE: AMG), Ameriprise Financial (NYSE: AMP), TD Ameritrade (Nasdaq: AMTD) and Calamos Asset Management (Nasdaq: CLMS).

Real Estate or Stocks?

With the possibility of a global recession and a European depression, the prospects for stocks seem to be limited. Opinions range from a mild downturn to an economic collapse; however, there are very few forecasting an immediate return to global growth. The financial and social burden caused by debt is escalating as additional debt is used to service existing debt, compounding the problem. Tax revenue is being diverted from essential social services and fiscal incentives used to promote employment to totally non-productive interest payments. As more debt is added, the portion of the revenue collected and allocated to debt service is expanding exponentially.

The world’s governments are essentially borrowing at 0%, but when the repression of rates comes to an end, rates will rise to their true market level and the debt service will overwhelm the economies of the globe. Rates have been artificially lowered to force conservative cash into the economy in search of a riskier return, but eventually true market forces will prevail and the ensuing result will be explosive. Holders of Treasury Bonds have enjoyed extraordinary returns, receiving both interest payments and capital gains as rates have been driven down by the Federal Reserve's “Operation Twist”. Holders of Greek, Spanish, Portuguese, and Italian bonds felt very comfortable just a mere 24 months ago, but now things are radically different for them. Understandably, Treasury Bonds offer protection from a deflating environment, and while backed by the world's reserve currency their safety should be assured. The key word here is “should”. There exist two possibilities of which neither is pretty!

Currently, the 30-year Treasury Bond rate is 3%. The Federal Reserve has been pushing the rate down; a slight rise to 4% would significantly reduce the value of the bond. Should the rates rise to 5% or 6%, which is a more normal rate historically speaking, the ensuing capital loss could be as high as 50%. If inflation or even inflationary expectations started to brew, the losses could be staggering. Events across Europe could force weaker nations to seek “bankruptcy protection,” and default on their debt. Chaos would ensue, but eventually order would be restored and a pathway to recovery established.

The calamity of a default might be considered the lesser of two evils. Default and nine months of chaos may be preferable over 10 to 20 years of austerity. Should default become an acceptable option, then a cascade of nations, provinces, states, municipalities, localities, councils, and corporations could default. It is then not totally unthinkable that our great reserve currency might also default to preserve its integrity. As unthinkable as a global default might be, it is a possibility that needs to be considered, as it would allow for recovery.

Accompanying recovery would be inflation, as everything would be adjusting to new currency values and things would be in demand. Perhaps the rise of gold and silver over the last decade in an obviously deflating economy is forecasting turmoil in fiat currency and government obligations. Commodities would eventually recover: gas, oil, minerals, lumber, farms, food, water, shelter, etc., causing inflation and further pressuring debt instruments. The silver lining of a default would be the balancing of budgets worldwide with a path to recovery unveiled. This recession that has started in Europe is different from past downturns; it is not controlled by the Federal Reserve regulating rates and money supply. This is a potential cyclic event to correct global excesses.

Long-term treasuries still offer protection of capital in a very uncertain world. They still provide a small income stream to supplement other revenue sources. A portfolio of bonds needs to be risk managed and an “exit strategy” needs to be in place. Should the U.S. slide into recession, interest rates on 30-year bonds could slide even further producing capital gains. However, there will be a time to take profits and not look back. Another advantage of the repression of rates caused by the Federal Reserve is the opportunity to lock in long-term money and leverage cash flowing rentals.

Ironically, the Real Estate Market may be the asset class that preserves and grows wealth. Real estate as an asset class has been devastated and much of the risk of decline has been mitigated by the severe market correction of the past few years. Population pressure will eventually absorb all of the excess and pockets of shortages that are starting to appear most notably in my home market of Phoenix, AZ, one of the most affected markets in the nation. The strategy to employ would be to accumulate rentals in second and third move-up properties in discounted markets with good forward growth prospects, and use current low interest 30-year fixed rate mortgages finance them. The possibility of rising rates and/or market turmoil will curtail new construction and positively enhance the existing housing market. Furthermore, Cap Rates of 5-7% are available increasing to 8-10% cash on cash with use of a simple Fixed Rate Mortgage. This cash flow will be exceptionally important in any economic slowdown as rates will continue to compress and yield will become elusive.

A key component of a 5-year holding horizon is the inflation protection afforded by the “real” in real estate, as well as the growth in revenue potential as scarcities develop. The revenue stream may become of utmost importance as other traditional sources of revenue and paid benefits are curtailed or jeopardized: CD's, money markets, insurance guaranteed annuities funded by sovereign debt, state and municipal pensions may also be at risk if defaults occur. Cuts in Social Security and Medicare may be needed to reduce entitlement costs. Distressed properties discounted below replacement cost are still available, but financial institutes are working hard to clear the properties and take the losses this year. Any “underwater” residence or non-cash flowing investment property needs to be reviewed for liquidation via the “short sale” process while the market is still viable. Looking forward, costs are to be cut, debt is to be reduced, and reserves accumulated.

Article should interest investors in SPDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY), PowerShares QQQ Trust (Nasdaq: QQQ), ProShares Short Dow 30 (NYSE: DOG), ProShares Ultra Short S&P 500 (NYSE: SDS), ProShares Ultra QQQ (NYSE: QLD), NYSE Euronext (NYSE: NYX), The NASDAQ OMX Group (Nasdaq: NDAQ), Intercontinental Exchange (NYSE: ICE), E*Trade Financial (Nasdaq: ETFC), Charles Schwab (Nasdaq: SCHW), Asset Acceptance Capital (Nasdaq: AACC), Affiliated Managers (NYSE: AMG), Ameriprise Financial (NYSE: AMP), TD Ameritrade (Nasdaq: AMTD), BGC Partners (Nasdaq: BGCP), Bank of New York Mellon (NYSE: BK), BlackRock (NYSE: BLK), CIT Group (NYSE: CIT), Calamos Asset Management (Nasdaq: CLMS), CME Group (NYSE: CME), Cohn & Steers (NYSE: CNS), Cowen Group (Nasdaq: COWN), Diamond Hill Investment (Nasdaq: DHIL), Dollar Financial (Nasdaq: DLLR), Duff & Phelps (Nasdaq: DUF), Encore Capital (Nasdaq: ECPG), Edelman Financial (Nasdaq: EF), Equifax (NYSE: EFX), Epoch (Nasdaq: EPHC), Evercore Partners (NYSE: EVR), EXCorp. (Nasdaq: EZPW), FBR Capital Markets (Nasdaq: FBCM), First Cash Financial (Nasdaq: FCFS), Federated Investors (NYSE: FII), First Marblehead (NYSE: FMD), Fidelity National Financial (NYSE: FNF), Financial Engines (Nasdaq: FNGN), FXCM (Nasdaq: FXCM), Gamco Investors (NYSE: GBL), GAIN Capital (Nasdaq: GCAP), Green Dot (Nasdaq: GDOT), GFI Group (Nasdaq: GFIG), Greenhill (NYSE: GHL), Gleacher (Nasdaq: GLCH), Goldman Sachs (NYSE: GS), Interactive Brokers (Nasdaq: IBKR), INTL FCStone (Nasdaq: INTL), Intersections (Nasdaq: INTX), Investment Technology (NYSE: ITG), Invesco (NYSE: IVZ), Jefferies (NYSE: JEF), JMP Group (NYSE: JMP), Janus Capital (NYSE: JNS), KBW (NYSE: KBW), Knight Capital (NYSE: KCG), Lazard (NYSE: LAZ), Legg Mason (NYSE: LM), LPL Investment (Nasdaq: LPLA), Ladenburg Thalmann (AMEX: LTS), Mastercard (NYSE: MA), Moody’s (NYSE: MCO), MF Global (NYSE: MF), Moneygram (NYSE: MGI), MarketAxess (Nasdaq: MKTX), Marlin Business Services (Nasdaq: MRLN), Morgan Stanley (NYSE: MS), MSCI (Nasdaq: MSCI), MGIC Investment (NYSE: MTG), NewStar Financial (Nasdaq: NEWS), National Financial Partners (NYSE: NFP), Nelnet (NYSE: NNI), Northern Trust (Nasdaq: NTRS), NetSpend (Nasdaq: NTSP), Ocwen Financial (NYSE: OCN), Oppenheimer (NYSE: OPY), optionsXpress (Nasdaq: OXPS), PICO (Nasdaq: PICO), Piper Jaffray (NYSE: PJC), PMI Group (NYSE: PMI), Penson Worldwide (Nasdaq: PNSN), Portfolio Recovery (Nasdaq: PRAA), Raymond James (NYSE: RJF), SEI Investments (Nasdaq: SEIC), Stifel Financial (NYSE: SF), Safeguard Scientifics (NYSE: SFE), State Street (NYSE: STT), SWS (NYSE: SWS), T. Rowe Price (Nasdaq: TROW), Visa (NYSE: V) and Virtus Investment Partners (Nasdaq: VRTS).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Euro Land is Doomed - Achilles Heel of Globalization

One of the classic landmarks of the Great Depression was the tendency to protect local and national markets from competition. This protectionist behavior resulted in retaliatory actions escalating the issues and resulting in poorer economics for all. The sovereign leaders of Europe are publicly attempting to keep the markets open to free trade, which will facilitate the economies of all and support the struggling peripheral countries. The heads of the 17 Euro nations are working to keep the debt from imploding and destroying the European Union; with each positive announcement, stock markets around the world rise in anticipation of a lasting solution; privately, things may be different.

Relevant tickers: NYSE: DB, NYSE: STD, Nasdaq: ITUB, NYSE: UBS, NYSE: WBK, NYSE: LYG, NYSE: BCS, NYSE: CS, NYSE: AIB, NYSE: BLX, NYSE: NBG, NYSE: RY, NYSE: BFR, NYSE: IRE, NYSE: BMO, NYSE: CM, NYSE: ING, NYSE: C, NYSE: GREK, NYSE: VGK.

The Achilles Heel of Globalization

All entities work first on their own behalf, and then for the benefit of others. As much as a private citizen may want a strong European Union and the benefits of association, the fact remains that all will be pro-active in assuring the survivability of their own market, their own business, and their own personal welfare. The possibility of peripheral nations exiting the European Union and the complications that action would entail will eventually be the end of globalization.

Major manufacturers depend on their suppliers to provide the ingredients for production; an unreliable supplier or a supplier that is perceived to be possibly unreliable will be replaced. The natural tendency is to bring the supporting plants to the home country or use businesses within their own country, thus mitigating any disruptions. The industrial giants of Germany and France and general economics will cause the downfall of their weaker neighbors, unraveling the work of the central governments. Greece, Spain, Portugal, and Italy are at tremendous risk; the global banks, insurance companies, and pension funds that have bought their sovereign debt are at risk, and that jeopardizes the entire Globe. The five top banks in the US have Credit Default Swap (CDS) exposure on an even higher magnitude insuring the debt threatening the financial structure of our economy. Investors cannot assess the risk/reward ratio for existing investments; new investments in plants and equipment that stimulate jobs will be postponed until clarity returns. This hesitancy is natural and will cause a downward spiral in economic activity, ensuring a deep and long European recession; it will have a ripple effect across all borders.

Reduced trade with Europe cannot be beneficial to any of the economic zones of the world. The developing economies around the world owe their prosperity to selling goods to the developed countries. Resource rich countries such as Australia and Canada owe their prosperity to selling raw materials to the developing nations, and the US has plants and suppliers outside of the US - notably in China and the Pacific Rim countries. Everything and everyone is interconnected; if a disruption occurs, look for increased protectionism and tariffs along with rising nationalism. An economic slowdown will bring social unrest in the distressed markets, further compounding the tendency to repatriate factories and suppliers back into the home market and exasperating the situation. Globally, bankers, investors, and manufacturers that have made plans on expansion and continued growth with debt obligations will feel the slowdown first. Revenues will be reduced and will result in cost cutting; then employment reductions, further causing social unrest; then non-payment of loans; and finally in the failure of the project and/or total default. A contraction appears to be unavoidable, but there are prudent preparations to consider.

Income and debt level will be paramount to surviving this coming downturn. The savers of the world have been devastated by the historically low interest rates. Savings accounts, CD’s, Municipal Bonds, and US Treasuries, the haven for the retired and conservative investors, have been eviscerated. Pension funds and insurance companies requiring a yield component have been forced to search for much riskier investments to achieve just marginal returns to service distribution requirements. These conservative vehicles may have assumed much more risk than previously thought. Annuities, pensions, insurance policies may be at risk if there is a sovereign default in Europe, unknown to and far away from Main Street America. These are the vehicles in which the retired and elderly often depend along with Social Security; they may be at grave risk. Income enhancing securities such as MLP’s and high yield investment need to be reviewed and if prudent, positions hedged, reduced, or stop losses instituted. Long-term US Treasuries yield less than 3% currently, but provide a reliable income stream, and as the reserve currency of the world, the dollar should benefit from global disruptions.

The central banks of the world typically react to crisis by injecting liquidity, which will eventually, perhaps in 24-36 months, precipitate inflation, possibly double-digit inflation, which will threaten long-term bonds. The task will be to conserve one’s capital and exit the downturn intact and be able to re-position capital when the bottom has been reached. In a reduced revenue and yield environment, payments must be eliminated or reduced to coincide with reduced income in order to conserve capital. Typically a downturn will last 13-26 months, but this one may be longer.

“Underwater” or non-cash flowing Real Estate investments need to be liquidated, preferably via the “short sale” process. Foreclosure typically should be avoided, as the penalty period for obtaining mortgages is reduced using the short sale. If the timing is perfect, the waiting period could coincide with the downturn, and capital could be re-allocated to properties, as long-term inflation may follow the downturn as the liquidity injected into the economy searches for a home. Strategic real estate opportunities are still available, and more may become available as the downturn unfolds. Strategic properties are typically yielding a passive 5-6% return unleveraged to 8-9% cash on cash, with conservative lending. Currently, strategic real estate is a very favorable investment offering monthly income with the strong potential for revenue growth as well as a huge hedge against any future inflation.

There is a strong possibility of a global recession. A prudent investor needs to be aware and cautious as the traditional sources of income have been eliminated. Long-term treasuries are great in deflation and real estate is great in inflation; both generate the current income needed through a downturn. A combination of both may be advisable, check with your advisor and review the suitability for your portfolio.

Article is relevant to Deutsche Bank (NYSE: DB), Banco Santander (NYSE: STD), ITA (Nasdaq: ITUB), UBS (NYSE: UBS), Westpac Banking (NYSE: WBK), Lloyds Banking Group (NYSE: LYG), Barclays (NYSE: BCS), Credit Suisse (NYSE: CS), Allied Irish Bank (NYSE: AIB), Banco Latinamericano (NYSE: BLX), National Bank of Greece (NYSE: NBG), Royal Bank of Canada (NYSE: RY), BBVA Banco Frances (NYSE: BFR), The Bank of Ireland (NYSE: IRE), Bank of Montreal (NYSE: BMO), Canadian Imperial Bank of Commerce (NYSE: CM), ING Groep (NYSE: ING), Citigroup (NYSE: C), Global X FTSE Greece 20 ETF (NYSE: GREK) and Vanguard European ETF (NYSE: VGK).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Inflation or Deflation? Doomsday Either Way!

For the past two years I have mentioned a bubble will form in an asset class. I was not sure which asset class, but I suspected basic materials and agricultural commodities. I believe I have identified the next bubble to be imploded: the United States Debt. A $1.5 trillion deficit for the next annual budget is unsustainable. A storm is coming! An enormous financial storm that has the potential to change our way of life forever; a tsunami to clean the slate and re-balance the economy! Some things have already brutally corrected such as the Real Estate Market in the Sand States. Some are going to like the soft commodities such as cotton. Nothing will ever be the same again. There are decisions to be made, choices to make, plans to formulate. It is not time to be scared; it is time to be prepared! It is time to implement inflation protection.

Relative tickers: NYSE: DIA, NYSE: SPY, Nasdaq: QQQ, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: NYX, Nasdaq: NDAQ, NYSE: ICE, Nasdaq: ETFC, Nasdaq: SCHW, Nasdaq: AACC, NYSE: AMG, NYSE: AMP, Nasdaq: AMTD, Nasdaq: BGCP, NYSE: BK, NYSE: BLK, NYSE: CIT, Nasdaq: CLMS, NYSE: CME, NYSE: CNS, Nasdaq: COWN, Nasdaq: DHIL, Nasdaq: DLLR, Nasdaq: DUF, Nasdaq: ECPG, Nasdaq: EF, NYSE: EFX, Nasdaq: EPHC, NYSE: EVR, Nasdaq: EZPW, Nasdaq: FBCM, Nasdaq: FCFS, NYSE: FII, NYSE: FMD, NYSE: FNF, Nasdaq: FNGN, Nasdaq: FXCM, NYSE: GBL, Nasdaq: GCAP, Nasdaq: GDOT, Nasdaq: GFIG, NYSE: GHL, Nasdaq: GLCH, NYSE: GS, Nasdaq: IBKR, Nasdaq: INTL, Nasdaq: INTX, NYSE: ITG, NYSE: IVZ, NYSE: JEF, NYSE: JMP, NYSE: JNS, NYSE: KBW, NYSE: KCG, NYSE: LAZ, NYSE: LM, Nasdaq: LPLA, AMEX: LTS, NYSE: MA, NYSE: MCO, NYSE: MF, NYSE: MGI, Nasdaq: MKTX, Nasdaq: MRLN, NYSE: MS, Nasdaq: MSCI, NYSE: MTG, Nasdaq: NEWS, NYSE: NFP, NYSE: NNI, Nasdaq: NTRS, Nasdaq: NTSP, NYSE: OCN, NYSE: OPY, Nasdaq: OXPS, Nasdaq: PICO, NYSE: PJC, NYSE: PMI, Nasdaq: PNSN, Nasdaq: PRAA, NYSE: RJF, Nasdaq: SEIC, NYSE: SF, NYSE: SFE, NYSE: STT, NYSE: SWS, Nasdaq: TROW, NYSE: V and Nasdaq: VRTS.

The economy is slowing quickly and signs are mounting that deflation of assets, both financial and some commodity assets may be underway. As I have mentioned previously, bad to toxic commercial paper held by many financial institution was transferred to the balance sheet of the Federal Reserve, the FDIC, the Treasury, or absorbed by other government sponsored entities such as Fannie Mae (OTC: FNMA.OB) or Freddie Mac (OTC: FMCC.OB). These bad assets coupled with ballooning entitlement programs, especially those targeted to an aging population, have produced an untenable situation which probably will resolve itself soon and unpleasantly. There are only two paths: Default or Re-Organization of the debt, which may be accomplished under different scenarios, none of them pleasant. Or a globally orchestrated attempt to devalue further the U.S. Dollar and inflate the value of all hard assets and re-pay old debt with much cheaper, probably extremely cheaper, dollars.

The raising of the debt ceiling has bought the US some time, about 12 months and counting. The projections for repayment include a growing economy of close to 3% GDP, robust employment adding jobs and higher tax revenue; these rosy projections likely will not be met. There are many possible catalysts capable of initiating a decline, ranging from a sovereign default in the Euro Zone to an attempt to replace the US Dollar as the reserve currency of the world, or simply by the slowing of the business cycle, which is currently underway. With the economy vulnerable to an economic or political shock, growth is slowing perceptively and government growth projections are certainly suspect. As the economy slows or worse, sustains a shock, prices on the world market will tumble dramatically. The worldwide recovery has been very beneficial to commodities; prices of iron ore, copper, coal, oil, natural gas, cotton, and sugar have all soared over the last three years as well as many industries related to them including pipelines, railroads, and heavy equipment makers to name a few.

These industries will experience hardship as supplies increase due to lessening demand, and as prices that had so reliably risen begin to fall. Income vehicles that derive their dividends from the sale of commodities such as Natural Gas, Oil, Coal, the Master Limited Partnerships, will suffer both price and income corrections. This decline will spread and perhaps feed on itself causing risk assets to decline precipitously. As the commodity markets decline, the Dow, S&P, and Nasdaq will also drop, affecting the spending habits of most of the population spreading from a financial correction to an economic correction; a recession or worse will be underway. As risk avoidance accelerates, the asset class that will benefit most, contrary to many current pundits, will be the US Dollar and long-term US Treasuries. Long bonds will not only deliver dependable income, but rise in value; Agency, Mortgage-Backed, Municipal (both insured and uninsured) will suffer as state and local government revenues drop jeopardizing payment of their obligations and as the ability of the insurance companies to cover losses is questioned. The federal government will have limited ability to rescue cash strapped states, counties, and cities, and jobs will be at risk again.

The coming slowdown will be evident soon. As the economy slows, the US Dollar will rise, exacerbating the decline in commodities as prices are expressed in dollars; and risk assets and asset-backed currencies such as the Australian and Canadian Dollar lose value due to slackening demand for their mineral and forest products. U.S. bonds especially long term securities will initially benefit tremendously as the markets perceive Treasuries as a “Safe Harbor”. Negatively correlated ETF's will soar in value as the stock markets suffer on reduced earnings estimates; a recession is probable with global implications.

Past economic slowdowns have been blunted and a few times averted by Federal Reserve and US Treasury action: reducing interest rates and expanding the balance sheet. This will be vastly different as rates are already as low as they can possibly go; while the dollar is the reserve currency of the world, the Fed can print money and buy US Treasuries; the current deficit will curtail the ability of the US Government to add stimulus and lower taxes as revenues from taxes will be dramatically reduced. Government spending will be limited and possibly reduced further curtailing economic activity. The debt will become extremely burdensome as government revenues are earmarked for interest repayment and entitlement programs. The usual remedy of deficit spending to spark the economy will not be available as the worldwide slowdown diminishes the Emerging Markets’ surplus cash flow that has been used to fuel the US debt binge. The Federal Reserve will become the last defense of the economy and will print more money and add more debt. Deflation should result with the ensuing decline in most asset classes. As wealth evaporates and debt becomes extremely burdensome, governments across the world will hold coordinated meetings in an attempt to address the financial crisis.

Bondholders BEWARE; this will be a SIGNPOST to sell and take the enormous profits that have probably been made and re-position a portion in gold. There will probably be an attempt to restructure all of the debt, first addressing sovereign debt held by nations across the globe; the trillions of dollars held by China and Japan may be repaid or restructured at 20-30% of value. The Federal Reserve balance sheet of printed money may be completely eliminated, and the toxic debt held by Fannie Mae and Freddie Mac will be at risk of severe discount as their status as a government entity is attacked and their debt repudiated. Likewise municipalities will attempt to restructure to sustainable levels. Havoc will ensue!

Should the US attempt to re-structure debt, the status as the World's Reserve Currency will be jeopardized and perhaps lost. There will be talk of a world currency and a World Central Bank. If commodity prices were to be expressed in Yuan or the Euro, then virtually all goods in the US will skyrocket as our currency devalues. Without the status as the reserve currency, almost everything manufactured will become much more expensive; the once mighty manufacturing base of the US is now offshore. Wheat and corn, livestock, vegetables, and all prepared foods will jump in price; a one dollar menu is not the same as a one euro menu.

This possible scenario comes with the possibility to profit handsomely. The initial stages will require the identification of the tipping point in the economy. The decision to become defensive is easy by reducing or eliminating security positions to a basically cash position. To become pro-active is much more difficult; recovery rallies might be viewed as an opportunity to add to short positions and accumulate long term US Bonds. If a recession becomes obvious, commodity securities will become cheap for a short period of time. MLPs will yield double-digit dividends. This would become an opportunity as much higher food and energy prices would be just around the corner. Rates would bottom and long-term bonds will have reaped enormous profits, and could be sold to redeploy the capital in the commodity sector.

Precious metals have risen over 700% and are still rising. Perhaps the markets are telegraphing worsening currency conditions or future inflationary expectations. This market may correct some, however, the depressed Real Estate Market will offer tremendous opportunity. Strategic Real Estate offers an income stream to combat deflation, an income stream which is much higher than money market or bond funds, while also offering a tremendous hedge against the equally possible scenario of runaway inflation caused by crisis driven governments pouring liquidity into the markets to stave off an economic collapse. The downside risk to Strategic Real Estate has already been mitigated as this asset class has been deflated and hugely discounted. Further, a steady source of long term tenants is assured as the economy declines and underwater and foreclosed properties are liquidated. In a risk adverse financing environment, new construction projects will be curtailed, further restricting the supply and driving rental demand. With looming economic problems, the burden of over-encumbered “underwater properties” or non-cash flowing real estate need to be liquidated.....NOW!

Article should interest investors in SPDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY), PowerShares QQQ Trust (Nasdaq: QQQ), ProShares Short Dow 30 (NYSE: DOG), ProShares Ultra Short S&P 500 (NYSE: SDS), ProShares Ultra QQQ (NYSE: QLD), NYSE Euronext (NYSE: NYX), The NASDAQ OMX Group (Nasdaq: NDAQ), Intercontinental Exchange (NYSE: ICE), E*Trade Financial (Nasdaq: ETFC), Charles Schwab (Nasdaq: SCHW), Asset Acceptance Capital (Nasdaq: AACC), Affiliated Managers (NYSE: AMG), Ameriprise Financial (NYSE: AMP), TD Ameritrade (Nasdaq: AMTD), BGC Partners (Nasdaq: BGCP), Bank of New York Mellon (NYSE: BK), BlackRock (NYSE: BLK), CIT Group (NYSE: CIT), Calamos Asset Management (Nasdaq: CLMS), CME Group (NYSE: CME), Cohn & Steers (NYSE: CNS), Cowen Group (Nasdaq: COWN), Diamond Hill Investment (Nasdaq: DHIL), Dollar Financial (Nasdaq: DLLR), Duff & Phelps (Nasdaq: DUF), Encore Capital (Nasdaq: ECPG), Edelman Financial (Nasdaq: EF), Equifax (NYSE: EFX), Epoch (Nasdaq: EPHC), Evercore Partners (NYSE: EVR), EXCorp. (Nasdaq: EZPW), FBR Capital Markets (Nasdaq: FBCM), First Cash Financial (Nasdaq: FCFS), Federated Investors (NYSE: FII), First Marblehead (NYSE: FMD), Fidelity National Financial (NYSE: FNF), Financial Engines (Nasdaq: FNGN), FXCM (Nasdaq: FXCM), Gamco Investors (NYSE: GBL), GAIN Capital (Nasdaq: GCAP), Green Dot (Nasdaq: GDOT), GFI Group (Nasdaq: GFIG), Greenhill (NYSE: GHL), Gleacher (Nasdaq: GLCH), Goldman Sachs (NYSE: GS), Interactive Brokers (Nasdaq: IBKR), INTL FCStone (Nasdaq: INTL), Intersections (Nasdaq: INTX), Investment Technology (NYSE: ITG), Invesco (NYSE: IVZ), Jefferies (NYSE: JEF), JMP Group (NYSE: JMP), Janus Capital (NYSE: JNS), KBW (NYSE: KBW), Knight Capital (NYSE: KCG), Lazard (NYSE: LAZ), Legg Mason (NYSE: LM), LPL Investment (Nasdaq: LPLA), Ladenburg Thalmann (AMEX: LTS), Mastercard (NYSE: MA), Moody’s (NYSE: MCO), MF Global (NYSE: MF), Moneygram (NYSE: MGI), MarketAxess (Nasdaq: MKTX), Marlin Business Services (Nasdaq: MRLN), Morgan Stanley (NYSE: MS), MSCI (Nasdaq: MSCI), MGIC Investment (NYSE: MTG), NewStar Financial (Nasdaq: NEWS), National Financial Partners (NYSE: NFP), Nelnet (NYSE: NNI), Northern Trust (Nasdaq: NTRS), NetSpend (Nasdaq: NTSP), Ocwen Financial (NYSE: OCN), Oppenheimer (NYSE: OPY), optionsXpress (Nasdaq: OXPS), PICO (Nasdaq: PICO), Piper Jaffray (NYSE: PJC), PMI Group (NYSE: PMI), Penson Worldwide (Nasdaq: PNSN), Portfolio Recovery (Nasdaq: PRAA), Raymond James (NYSE: RJF), SEI Investments (Nasdaq: SEIC), Stifel Financial (NYSE: SF), Safeguard Scientifics (NYSE: SFE), State Street (NYSE: STT), SWS (NYSE: SWS), T. Rowe Price (Nasdaq: TROW), Visa (NYSE: V) and Virtus Investment Partners (Nasdaq: VRTS).

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