World Housing Bubble - All Aboard!

For months, I was clearly the minority in saying that real estate prices in places like China, Australia, Canada, Hong Kong etc are experiencing a bubble. I was also the minority in saying that US home prices are, in fact, undervalued. In recent weeks though, such ideas have become accepted, even mainstream.

By now, I have to admit that I am actually sick of writing about housing bubbles. However, I know from emails I have received that as a result of these articles, at least some people have been dissuaded from purchasing high-priced condos at the edge of personal affordability, and for this I feel that repeating the same message ad nauseum is worth it.

Paradoxically, money tends to flow to assets and areas that are considered "safest," without regard to whether or not they are "reasonably priced." For investors, immediate safety of capital (or immediate gain) is paramount, and everything else is secondary. It is precisely this desire for immediate reward that results in horrible long-term investment choices.

In some countries, such as China, investment dollars are still incoming. In the US, real estate is stagnant water, despite low prices and excellent investment opportunities. In Canada, the flow is now a trickle, and ready to backflow.

The educated media is coming on board. For the masses, the onset of reality will still take several months.

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Video: Bubble Trouble - MSN Money
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See also the previous Frost Report articles:

The World Housing Bubble – Part II

The World Housing Bubble

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Stocks I Like – Left Behind Games

When I was in grade school, I heard people talking about a new heavy metal band (a genre which was then very popular) called “Stryper.” I learned that Stryper was a Christian heavy metal band. That is, they were Christians playing heavy metal, wearing leather pants and singing about Jesus. I thought the whole idea was ridiculous. However, they proved me wrong by selling millions of albums. I learned not to underestimate the size of the Christian marketplace, or the “cool factor” in Christian marketing.

Left Behind Games Inc (dba Inspired Media Entertainment) is a video game company specializing in faith-based videogames. They boast a selection of titles including action games such as its trademark “Left Behind” series, as well as mild-mannered educational games such as the “Charlie Church Mouse” children’s series.

In the past few years, Left Behind has successfully employed guerrilla-marketing techniques to expand its market, such as sending free copies of their video games to young followers. Word of mouth further moves the video games, and encourages these young Christians to buy future titles.

This holiday season, Left Behind Games will go mainstream, with their titles being carried by Wal-Mart in addition to existing Christian retailers.

Left Behind is a true penny stock, selling at the ridiculous price of just $0.003 dollars per share: yes, that’s correct, less than a penny a share. Why, you may ask, would this company be selling at less than a penny a share?

Left Behind is an evangelical Christian company, which in itself offends many. It has been accused of, among other things, making games that instill religious bigotry. In addition, the company’s strength (niche marketing) may also be its weakness from an investor’s standpoint, since they sometimes seem more intent on spreading Christianity than actually making a profit (though they are currently profitable).

Left Behind Games is a controversial and unproven company, in a volatile market with a battered stock that is traded over-the-counter: it doesn’t get any riskier than that. However, since you can currently buy 5,000 shares for the cost of a movie, I feel that a modest investment is warranted. As with all penny stocks, invest only an amount that you would be completely comfortable losing.

If video game sales go well, Left Behind Games (LFBG: OTC BB) may just be the stock purchase that you tell your grandkids about.

For more information, visit: www.leftbehindgames.com/index.php
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"Never underestimate Jesus, because he will just prove you wrong."

Brian Gurney
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The Mortgage Foreclosure Mess

YET ANOTHER KICK AT THE CAN



US Bank stocks skidded downward this week, based on a moratorium on foreclosures. Major US banks, including Wells Fargo and Bank of America, are accused of (among other things) using “robo-signers”: employees who rubber stamp foreclosure documents without properly reviewing them.

The mass-producing and bulk-signing of documents has a disgusting and immoral aura to it, similar to the revulsion for traffic tickets issued by speed radar cameras.

Having an employee decide the fate of someone’s home without reading the documentation is cold-hearted, and people are understandably upset. Having said that, it isn’t like the banks haven’t been trying. Wells Fargo alone has 17 thousand employees working on foreclosure and mortgage modification paperwork: they are simply overwhelmed by the volume.

For the banks, any moratorium on foreclosures is definitely negative. Moving foreclosed homes into the stabilized marketplace has been an order of priority for months now.

As an investor, there is a series of questions that should be asked in any situation where the immediate outlook seems negative. 1) Is this going to reduce earnings, and therefore stock prices? 2) Will this cause the company to go bankrupt, resulting in a permanent loss of capital? 3) Will the reduction in earnings be permanent?

In this case, the answers are clear: yes, this is going to reduce earnings and stock prices (and already has); no, this is not going to cause the major banks to go bankrupt (since their balance sheets are already positioned to withstand major calamities); and no, the reduction in earnings will not be permanent.

As usual, where there is fear there is opportunity.

The big chance to load up on bank stocks was in Feb-Mar of 2009, but there have been several smaller opportunities since: this may be another one. While today’s drop in bank stocks was just a small bump in the 3-year chart, a few more days of declines will result in some real bargains.

Bank of America (BAC), Citigroup (C), Wells Fargo and Co. (WFC), and JP Morgan (JPM) have all dropped nicely. That is, four of the biggest banks in America - with the greatest profit potential - are on sale again. Depending on next week's hype, bank stocks could drop even further.

If you missed out on the biggest run (when banking index fund XLF went from $6 to $15 in about a year), this is looking like another fine opportunity.

Hope for fear!

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"If I owe you a Pound, I have a problem; but if I owe you a million (Pounds), the problem is yours."

John Maynard Keynes

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Disclosure
Do not buy stocks, sell short, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

Beware of the Bond

In one of the earliest posts on this site, I wrote: “Bond Fund – ‘Bonds’ are essentially loans that you give to a company. In return, these companies pay you interest. A bond fund is a nice mix of short- and long-term bonds of good companies that pay a rate of interest beating inflation. Almost everyone should own at least some bonds in their investment portfolio.”

Times have changed.

While short-term bond funds are still reasonable, those holding medium- and long-term bonds - and especially bond funds that contain government debt - should strongly consider getting rid of them.

During the credit crisis and still today, the retail investor stayed away from stocks entirely, shunning the very word “equity mutual fund.” This of course resulted, and is still resulting, in excellent bargains for some areas in equities. But, where did all the retail investors go?

Retail investors did not buy stocks, as indicated previously. They certainly did not and are not buying real estate, even in the bargain zone that is the USA. Instead, they bought gold (hence ridiculous current prices), money market funds, bond funds, and government debt.

Whenever the retail investor shun a large asset class like stocks, other areas grow bloated and overpriced. As the chart below indicates, whenever the financial news was worst, investors bought bonds the most (bond yields decline when purchases increase).


(click to enlarge)

If you want income-producing investments, consider purchasing those investments that remain deeply unpopular in today’s market: dividend mutual funds or ETFs (consisting of dividend-paying corporations) such as SDY and DWX; Real-Estate Investment Trusts such as IYR; Mortgage Bonds (which are currently being avoided like the plague) such as MBG and VMBS; and, stocks of large oil and gas companies (that are backed by hard assets and typically also pay a dividend) such as CVX and BP.

Like the gooey, sticky mess in the 1950s classic, “The Blob,” the long-term bond market is currently bloated from gluttony, and only a cooling off period can stop it.
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"When a horse learns to buy martinis, I'll learn to like horses."

Steve McQueen, actor
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Disclosure
Do not buy stocks, sell short, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.
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Loose Wallets Sink Ships

How bad is it? Bad.

In many previous articles, I explained the obvious: that the Canadian housing market is grossly overpriced - driven by low interest rates and personal debt - and ripe for a crash.

Many disagreed. Those who disagreed most strongly were, unsurprisingly, those who had bought rental properties or first homes within the last 3 years (for the reason why, see Cognitive Dissonance). Yet, what was obvious to some is slowly becoming obvious to all: the Canadian housing market is sinking.

A recent press release by the Bank of Canada was brutally straightforward: “The slowing since the spring in resale, renovation, and new home construction activity has been driven by a number of factors, including the passing of pent-up and pulled-forward demand; the expiration of the federal Home Renovation Tax Credit in January; the tightening of standards for government-backed insured mortgages that came into effect in April; the introduction of the HST in Ontario and British Columbia in July; declining affordability; and subdued income growth.” This painful laundry list is the reality of the Canadian housing market today.

The demise of the housing market has received surprisingly little coverage in Canadian news. In fact, a recent headline in the Financial Post (Ottawa ponders further tightening of mortgage rules) suggests that the housing market is still hot and may require cooling.

Canadian personal debt levels, which have risen along with the housing market, have been a cause of great concern for the Bank of Canada for some time. Again, the Bank of Canada has been blunt, noting that “Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years.” The Bank of Canada concludes in a single line, “This cannot continue.”

Debt levels have reached the point where any further increase in interest rates – which may be necessary to combat inflation – will strain Canadian families. If inflation rises, the BOC may be forced to raise interest rates and push those citizens who are now “just hanging on” into bankruptcy.

The Canadian housing market’s decline is just beginning. How long this process will take is anyone’s guess, but it will likely be measured in years, not months. A decline in value of an asset class this large ensures no quick recovery.

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To review the progression...

The Canadian Housing Market
Canadian Debt II
Spin City
The Canadian Housing Bubble - CREA to the Rescue
The Canadian Real Estate Market: Trouble in the Pipeline
Canadian Real Estate: Stick a Fork in It

The Bank of Canada - Employment in a Modest Recovery
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"Results - Fall 2010

The Canadian Real Estate Association says first-time home buying activity is slowing. What’s happening in your region?

I’m seeing more first-time homebuyers this year - 24%
I’m seeing fewer first-time homebuyers this year - 66%
I haven’t noticed a change - 10%

Genworth Financial Canada - The Homeownership CompanyPrime Source"

A recent poll by Genworth Financial Corp, given to mortgage brokers and bankers across Canada
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