I must begin today’s missive with an ebullient congratulations to my good friend Blaine Bell! The wedding in Napa Valley this past weekend was beautiful, the bride radiant and the party atmosphere prodigious.

While my computer did make the trip to Napa, it was used for portfolio management only. Any free time this past week was spent in the lovely company of Rebecca, my girlfriend and the grape vines of Napa. Needless to say I had a tremendous amount of reading to catch up on upon my return to RCM headquarters.

If I could condense this past week’s worth of erudition into a single thought I’d say ‘the more things change the more they stay the same.’ Certainly we have witnessed a significant amount of volatility in 2010.  The ‘change’ component of the above phrase can best be described as nauseating. If you wish to see a graphical interpretation of this 2010 phenomenon feel free to subscribe to our ‘Market Moving Chart of the Day’ located in the top right corner of this page.

As for the ’staying the same’ part of the equation I will simply direct your attention to the following three headlines. In fact, I could have chosen at random any three headlines from the past week and they all sound similar. The basic gist is as follows:

First, a piece of economic news is released that disappoints. However, Wall St. and the powers that be, do their best to put the proverbial lipstick on the ever distending pig… Retail Sales Dip, but It Could Have Been Worse – Briefing. Next, some Fed member chosen to be that week’s puppet (are straws used or is Dictator Ben punishing those who wish to stray?) makes a supposed market soothing comment… Fed’s Hoenig on CNBC says the economy continues to recover modestly, and he still sees 3% economic growth in 2010.  Almost immediately following the sock’s elucidation, a contradicting, real and market troubling story hits the wire…

FOMC minutes from from Jun 22-23 meeting:

The pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted…

The participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period…

We are stuck between intense volatility and an insipid news cycle. At times like this I find the best tonic is a revisit with our trusty steed, technical analysis. Below please scrutinize the daily price chart of our favorite index the NYSE Comp..

As you can see, the major uptrend remains intact. Moreover, three attempts have been made to breach this trend in May, June and July to no avail. You may however, remember that everyone and their proverbial brother on CNBC and the like were calling for an epic Head and Shoulders breakdown at the beginning of this month (labeled 3 & highlighted yellow). Naturally you will not be able to find this obvious prediction on the RCM blog site. Rule number one: When CNBC et all call for imminent market demise expect instantaneous market rally. You may recall that when these jokers were calling for new highs on the market we were ‘Stalking the Bear’.

The above chart also suggests a change in trend may be in the offing. The market price has been locked in a downtrend since the April highs moving from the top of the channel to the bottom. However, as the blue, yellow and red Fibonacci Fan lines illustrate, a change in trend has been signaled.  For your convenience I have highlighted with a green box an initial target area for the current rally.  

Allow me to conclude by writing that fundamentally I can see no reason for the markets to rally. We are firmly of the mind that economic growth will not be able to continue without massive government support. Financial regulation will continue to be a hot button right up to the November elections at the very least. Regulation of the GSEs will continue to cause consternation. I will warn that a fourth breach of the uptrend line will be deadly.

However, our credit guru Michael Johnson continues to write, “ Bank CDS & CDX Index spreads point to continued equity market gains. Being short equities as credit improves is dangerous…”  So, until such time as a fourth breach has commenced, the technical picture of the market remains encouraging.

Tags: CDS, CDX index, Credit, economy, Fed, FOMC, GDP, NYSE Comp., retail sales, Stalking the Bear, stock market strategy

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On Tuesday, May 11, HedgeCo Networks hosted its successful Manager Showcase  gala event in downtown Chicago.  Held at the Hyatt Regency Hotel, the capital introduction event drew a capacity crowd of institutional investors, fund-of-funds, family offices, and high net worth investors.

Robert Stein, accomplished author and Managing Partner of Chicago-based Astor Financial, LLC, provided a well-received keynote dissertation on the current state of the economy.  Stein, who began his career as an analyst for the Federal Reserve under the chairmanship of Paul Volker, has penned such titles as The Bull Inside the Bear: Finding New Investment Opportunities in Today’s Fast-Changing Financial Markets and Inside Greenspan’s Briefcase: Investment Strategies for Profiling from Key Reports & Data.

In addition, five emerging-sized hedge fund managers, including Steve Hall of Lattice Capital Management, Lonny Bernath of Headline Capital Management, Kevin Lennil from Exagroup, Bruce Bernstein from Rockmore Capital Management, and Kurt Hovan from Hovan Capital Management gave brief presentations to the audience before dispersing into separate roundtables for the Q&A portion of the event.

Spending an allotted 15 minutes at each of five investor tables, presenting managers answered individual questions pertaining to each fund strategy, all while sharing their unique insights relating to the current market environment.  Afterward, attendees and presenters, alike, celebrated a spirited networking hour, enjoying an open bar and complementary hors d’oeuvres into the early evening hours.

Tags: Astor Financial, economy, emerging-sized hedge fund manager, Federal Reserve, hedge fund, HedgeCo, HedgeCo Networks, investor, Paul Volker

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Perspective: US$ vs. Gold

Tags: ben bernanke, debt-ceiling, economy, GDP, Geithner, gold, gold prices, obama, Q.E., Quantitative Easing, U. S. economy, US$

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G.O.P. takes Massachusetts Senate seat – NY Times

NY Times reports Scott Brown, a little-known Republican state senator, rode to an extraordinary upset Tuesday night when he was elected to fill the Senate seat that was long held by Edward M. Kennedy in the overwhelmingly Democratic state of Massachusetts. By a decisive margin, Mr. Brown defeated Martha Coakley, the state’s attorney general, who had been considered a prohibitive favorite to win just over a month ago after she easily won the Democratic primary. With all precincts counted, Mr. Brown had 52% of the vote to Ms. Coakley’s 47%. “Tonight the independent voice of Massachusetts has spoken,” Mr. Brown told his cheering supporters in a victory speech, standing in front of a backdrop that said “The People’s Seat.” The election left Democrats in Congress scrambling to salvage a bill overhauling the nation’s health care system, which the late Mr. Kennedy had called “the cause of my life.” Mr. Brown has vowed to oppose the bill, and once he takes office the Democrats will no longer control the 60 votes in the Senate needed to overcome filibusters. There were immediate signs that the bill had become imperiled. House members indicated they would not quickly pass the bill the Senate approved last month.

There is hope! Can the American people bring balance back to our capital as well as some much need accountability? Yes, we can! Yes, we can! Yes, we can!

I’m not suggesting Brown is the embodiment of all that is good, but I am saying this is a wakeup call for the political machine that has been grinding the American dream assunder.  A dream that was never built on handouts and entitlements but instead on entrepreneurial spirit, individual freedom and hard work.

Ok, enough of the patriotism. How will this news affect the investment world? I expect the immediate reaction will be a fiscal responsibility trade. The US$ will rally and Treasury bonds will catch a bid as yields go lower. Meanwhile, commodity prices will suffer as will equity prices. However, this trade will not last long. The economic situation is not improving despite all the financial media cheerleading of the last few months. The reaction to Q4 earnings has been disappointing, as we predicted. Companies have been unable to hide the fact that organic growth is nonexistent. Add to this disappointing earnings picture the Brown victory in Massachusetts and you get a recipe for another stimulus package before the November elections.  Hence, the idea of fiscal responsibility is a pipedream.    

If one would care to argue the economic picture is becoming brighter I offer Exhibit A:

Housing Starts Plummet

Housing starts continued their up one month, down the next trend as starts fell 4.0% from 580,000 in November to 557,000 in December. The consensus expected starts to fall only 8,000 to 572,000…The drop in starts was completely attributed to a lack of single-family construction. Single-family home starts fell 6.9% from 490,000 in November to 456,000. It seems builders are well aware of the pitfalls of starting new construction given that the latest increases in existing and new home sales were propped up by government support. Since new homes constructed today would not come onto the market until after the government stimulus expires, it makes sense that builders would hold off on beginning new single-family homes until they are sure demand has stabilized….

The housing starts number is volatile, you say. Things can still get better, you dream. Not without more government stimulus, I reply. And I offer Exhibit B as another nail in the coffin of a housing recovery:

FHA to Lift Mortgage Insurance Fees – WSJ

The Federal Housing Administration will announce more-stringent lending requirements and higher borrower fees on Wednesday to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency.

The FHA, which has taken on a major role in the housing market during the economic downturn, doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. The premium can be rolled into the loan.

The FHA is set to raise that fee to 2.25%, the second increase in the past two years, according to people familiar with the matter. The value of the FHA’s reserves to cover losses has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio. If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.

Also to boost the reserve, the FHA will ask Congress to increase a separate insurance fee that borrowers pay annually, people said. If the agency were to run short of cash to cover projected losses, it likely would have to ask Congress for money for the first time ever.

This move by the FHA will have the effect of rising rates for FHA borrowers (those most in need of a loan with the worst credit) resulting in a further reduction of demand. With the end of government incentives and the effective increase in mortgage rates is it any wonder housing starts are plummeting?

Rosenthal Capital Management runs the Fortune’s Favorite Family of Funds, including Fortune’s Favor I, Fortune’s Favor Precious Metals and Fortune’s Favor Offshore. For more information visit www.rosenthalcapital.com

Tags: commodities, earnings, economy, FHA, G.O.P., housing, housing starts, Investment, Massachusetts, mortgage, Stimulus, treasury bonds, US$

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Juggling the recent debt crisis in Dubai, reports of a growing asset bubble, the latest unemployment data, and last Thursday’s turkey leftovers can present a formidable task for even the most seasoned of investors.  During times like these, why not sit back, loosen up the belt, and digest an admittedly ‘lite’ version of market commentary?  Jeffrey Saut, Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates, as well as Bill Gross, Managing Director at the Pacific Investment Management Company (PIMCO), recently weighed in, releasing their own market thoughts.

Saut’s November 30th commentary is titled, “Don’t Worry About the Dollar!” Citing a previous occurrence during the 1970′s, he believes that stock market investors’ worries about inflation are largely overblown.  Most notably, he predicts that any continued weakness in the US Dollar will be more-than-offset by rising stock prices.  As he explains,

Nevertheless, the dollar’s weakness has clearly been very positive for our “stuff stocks” (precious/base-metals, agriculture, energy, cement, timber, etc.), as well as stocks in general, and we have been bullish. Most recently, we have suggested, “that with credit spreads below their pre-Lehman bankruptcy levels there should be no reason why the equity markets can’t ‘fill up’ the downside vacuum created in the charts by said bankruptcy… That gives the S&P 500 an upside target of 1200 – 1250”…

Saut goes on to support his bullish theory with a myriad of facts.  In particular, he points to recent decreasing jobless claims, dramatic increases in labor productivity, rising corporate profits, and lowering inventories as potential catalysts for an economic rebound.  More specifically, after initially cutting back on labor, he expects that businesses will soon look to reinvest profits, hire new workers, and replenish those declining inventories.  Such a move could reinvigorate consumer demand and jump-start our ailing economy.

Furthermore, he views last week’s Dubai debt crisis as a symptom of the previous real estate bubble, and not a sign of another pending systemic crisis.  Finally, as he has suggested over the previous few months, he is near-term bullish large cap stocks.

Meanwhile, in Bill Gross’s November commentary, titled, “Anything but .01%,” he points out the depressingly anemic returns generated by most of today’s money market accounts.  Indeed, although maintaining low interest rates may be in the economy’s best interests, they are also forcing investors to flee supposedly “riskless” investments in order to chase more attractive returns.  This has sparked a considerable rise in asset prices.

Nonetheless, Gross does not foresee the Fed raising rates any time soon.  As we have seen, the private sector has shown little traction this year, with government spending largely assuming the role of oiling the gears of this economy.  Until GDP picks up considerably, unemployment shows signs of reversing, and private sector demand replaces the need for government stimulus, rates are likely to remain low.  As Gross notes,

The Fed is trying to reflate the U.S. economy.  The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.  Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation-not until.

Looking forward, Gross has a few ideas for skittish investors to consider.  First, long term investors must ready themselves for a “New Normal” economy to take effect.  In essence, they should expect that as companies continue to deleverage, corporate growth slows, and the government’s role in the economy expands, corporate profits will take a hit.  As a result, dividend and interest payments are also likely to suffer; end result, investors may need to lower their expectations when it comes to returns.

According to Gross, part of the reason why Warren Buffett recently invested in the railroads was to simply put his money to work, rather than let it languish in a low-yielding account (I covered this subject in more depth  in my previous blog).  Like Buffett, Gross believes investors would be wise to follow suit.  In this “New Normal” economy, he suggests targeting low-growth, high-yielding companies like utilities.  Although utilities may not excite investors from a return standpoint, they do offer reliable cash flow (dividends), and normally grow in line with the broader economy.

Tags: Bill Gross, debt crisis, Dubai, economy, equity markets, GDP, Inflation, inventories, Jeffrey Saut, jobless, labor productivity, New Normal, PIMCO, precious metals, Raymond James, real estate bubble, U.S. Dollar, utilities, Warren Buffett

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The October edition of Hedgebay Trading Corporation’s monthly index has shown that the purchase of hedge fund assets is being driven by two prevailing sentiments among investors, creating a two-tier hedge fund market.

The Hedgebay Global Hedge Fund Secondary Market Index reveals a wide discrepancy between the highest and lowest prices at which secondary market users were willing to trade at.

The highest trade took place at Net Asset Value (NAV), the second time in the last three months that this watermark has been reached. This is symptomatic of confidence returning to some sections of the industry. However, the number of trades occurring at the lower end of the scale, the lowest of which took place at only 40% of NAV, shows that the search for liquidity and the cleaning-up of unwanted positions is still taking place.

“The trade at 100% of NAV shows that investors are increasingly willing to pay top dollar for high quality and hard to come by funds.” Elias Tueta, co-founder of Hedgebay, commented, “More and more we will see trades reaching, and maybe even exceeding, NAV as investors increasingly put their faith in these high end assets. However, in the other extreme, the trade at 40% of NAV, and the volume of trades at a similar level, still shows that riskier, less liquid assets –notably side-pockets -are increasingly overvalued. Sellers currently still have to offload these kinds of assets at whatever price they can get”

Though the disparity in the valuation of assets suggests a continuing lack of conviction among hedge fund investors, the index also provides signs of encouragement for the industry. The average price (in terms of percent of NAV) rose to 87% – the first time in five months that the average price of assets being traded has risen. While the rise in the average price is a reason for optimism, Hedgebay has indicated that hedge funds’ portfolios have not yet been fully cleaned-up:

“During a month of heavy trading volume, the average price is up almost 400 basis points from September. This, perhaps even more than the trade at 100% of NAV, is a sign of increasing optimism, but it is not yet conclusive. When we start to see a substantial amount of trades being done at around the 95% level, then we might begin to say that the hedge fund market is almost back to normal.”

The Hedgebay Global Hedge Fund Secondary Market Index, launched in September, provides hedge fund investors with statistics on the key aspects of the secondary market. Most notably it offers the average discount or premium to NAV of hedge fund shares traded during the month.

Tags: economy, hedge fund, Not Categorized

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Mid-week and the economic numbers continue to disappoint. However, equity investors should take heart and view the chart above. This is a monthly chart illustrating the direction of the US$ and the inverse relationship with the S&P500. The chart dates back to 2000, but you can see the correlation has become more intense in the last 12 months.

So, as long as this correlation holds, remember bad economic data equals good equity market performance due to continued Fed accommodation that leads to a weaker US$…

Fed’s Bullard says possible Fed won’t hike rates until 2012

Housing Starts Crater
The talk that housing starts were stabilizing hit a snag in October as new housing starts plummeted 10.6% to 529,000 units from 592,000. The consensus forecasted an increase in starts to 600,000…Single family starts fell 6.8% to 476,000 and is at its lowest level since May. Multi-family starts fell a whopping 34.5% as only 53,000 new units were started. Multi-family starts have never been this low since the index was created in 1959

Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss. Neither the Trustee nor the Custodian independently confirms the fineness of the gold bars allocated to the Trust in connection with the creation of a Basket. The gold bars allocated to the Trust by the Custodian may be different from the reported fineness or weight required by the LBMA’s standards for gold bars delivered in settlement of a gold trade, or the London Good Delivery Standards, the standards required by the Trust. If the Trustee nevertheless issues a Basket against such gold, and if the Custodian fails to satisfy its obligation to credit the Trust the amount of any deficiency, the Trust may suffer a loss. Read More…

I mentioned Monday, “Make sure your precious investment is backed by the actual metal.” Below you will find an excerpt from the Gold ETF (GLD) prospectus. This same language can be found in the Silver ETF (SLV) prospectus. Take heed of these warnings. I fear in a world that has become numb to a long list of possible side effects to the drugs taken, you may view this prospectus in the same light. Don’t make that mistake! These are very real warning that could effect your financial health. Why even take the risk, when there are so many quality alternatives? Please, feel free to log onto our website http://www.rosenthalcapital.com/ for a complete discussion of said alternatives…
…Meanwhile, the best in the business are coming our way. To Touradji and Paulson I will say, from all of us at RCM, welcome to our world!

Paulson & Co. to launch new gold fund January 1; Paulson to personally invest about $250 mln in new gold fund - Reuters

Touradji Capital Management LP, the New York hedge-fund firm that oversees about $2.7 billion, bought 2.23 million shares of Barrick Gold Corp., the world’s biggest gold producer, while selling shares in SPDR Gold Trust, the largest exchange-traded fund backed by bullion. Read More…

Tags: economy, Fed, gold, housing market, precious metals, silver, US$

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Residential Real Estate

 There are dozens of reasons why the residential real estate market bubbled and exploded, causing the ensuing credit crisis and economic strife. The popularity of loans requiring no documentation, the easy access to sub-prime loans and the Federal Reserve’s decision to keep interest rates low all intertwined to fuel the housing crisis. The housing bubble was also inflated by Wall Street’s ability to package and sell mortgages in large pools. Now, after struggling to repair the housing market for more than a year, we are seeing improvements that are unveiling extraordinary investment opportunities in residential real estate. 

It appears we have hit the bottom of the housing market trough. Housing prices found some stabilization; although the prices are still close to the lowest they have been all decade. But, the collapse took years to build and expecting a complete turnaround in 2009 is unrealistic. The real promise in housing is in the future. Getting your money into the market now is optimal because of low prices and reasonable mortgage rates. Plus, there will continue to be tax relief with the recent Obama-endorsed home-buyers’ tax credit extension—which is planned to be available for repeat buyers who have lived in their prior residence for at least five years. 

The United States should see a gradual increase in home sales throughout 2010, but the residential market will most likely not witness a return to “normalcy” until 2011. According to Steve Bergsman, author of “After the Fall, Opportunities and Strategies for Real Estate Investing in the Coming Decade,” “When a bubble market bursts, left behind is a lot of carnage and it takes about three years for the markets just to get a handle on the mess.”[1] 

The three-year anniversary of the housing collapse is fast approaching and a number of high-profile reports have been published this month that suggest the residential housing market is already improving. The Case-Shiller index, which tracks variations in the values of houses in 20 U.S. metropolitan areas, showed an increase of 2.9 percent in the second quarter of 2009. In the first quarter it was down 7.9 percent. Two reports released by the Commerce Department last week suggest that while the overall economy continues on a wobbly path toward recovery, the housing industry is experiencing a number of positive signs. For example, “The supply of new homes was at 7.5 months in September, down from 9.5 months in May.”[2] 

While residential inventory appears to be slimming, foreclosure rates continue to mount in multiple areas across the country. With a significant number of Option ARMs set to reset over the next several months, many cities will continue to experience record-setting foreclosure levels.  However, foreclosures are increasing in different cities than those affected in the last quarters of 2008. Rates appear to be easing in the cities that were hit hardest by the housing collapse and rising in major metro areas in other states. This suggests that the cities previously overrun with foreclosures have found ways to combat the problem and are gradually making progress. 

A continuing stream of foreclosures may keep the residential inventory plump, and prices could remain stable over the next couple quarters. But, as inventory shrinks, so too will the abundance of quality investment opportunities. With the residential real estate market now hovering around the bottom, now is the right time to invest. 

Commercial Real Estate: No Reason to Panic

 While it appears that we have already witnessed the worst of the residential real-estate collapse, we are preparing for the brunt of the crash in commercial real estate. The commercial real-estate industry has taken the place of residential real estate as the breeding ground for widespread fear. Daily reports suggest the commercial real estate storm will be more severe than the one that struck residential housing. Instead of causing another shipwreck, our economy’s commercial woes may prove to be more of an anchor that puts an imposing drag on our recovery. 

The combination of job losses, store closings, rising vacancies and drastic cost-cutting measures puts commercial real estate in a serious bind. However, knowing their mortgages will soon come due or reset, owners and managers of office buildings, shopping centers, hotels and apartment complexes have had ample time to prepare for upcoming obstacles. 

Owners of commercial real estate are not backed into a corner. Banks prefer options that keep mortgage payments flowing. Therefore, banks are willing to work with borrowers to find solutions, even though bundled commercial mortgages will add to the difficulty of negotiations. Securing loan payments is not entirely the responsibility of banks or those who hold investments in pools of bundled loans. The owners of commercial buildings originally took on the responsibility and many of them are actively working to find solutions to keep their properties operating. Many property owners will continue to make their payments either because they have adapted their strategies to fit the difficult times, or because they have explored creative ways to bring in extra income. Of course, some number of defaults will be inevitable. Some of those property owners who are unable to acquire loan restructuring or extensions will view a loan default as their best option. 

As with the residential real estate debacle, the government is sure to intervene in an attempt to keep our economy from falling into another dark hole. For example, the already-in-place Term Asset-Backed Securities Loan Facility (TALF) supports the issuance of asset-backed securities in order to help small businesses meet their credit needs. The TALF is one of a handful of sluggish government efforts that was created to help provide a crutch for the commercial real-estate industry. 

Commercial real estate will continue to tug on recovery efforts, but it is not likely to cause the amount of damage we witnessed during the residential collapse. The time to invest is not when everyone shows interest in an asset. A staple to wise investing has always been buying low and selling high. The commercial real estate market has produced sound investments in the past and will once again flourish. Getting into the market in times of success is more costly, the opportunities are scarcer and the rewards are not as fruitful. The best time to invest is when the masses are fearful, and the masses are easily spooked by commercial real estate right now. 

The Benefits of Hiring Professionals

As is the case when taking on any money-making venture, the waters are difficult to navigate alone. We all want to make investments that are conducive to both our current financial situation and our future goals. Investing with a Registered Investment Advisor (RIA) helps eliminate the series of headaches that come with making sound investment decisions.

Hiring a RIA has a number of benefits. For instance, a RIA can take on the following responsibilities:

• Provide objective investment and financial advice
• Set achievable financial and personal goals
• Take into account all of the factors that influence your current financial situation (your assets, liabilities, income, insurance, taxes, etc.) and provide a comprehensive analysis of where improvements can be made. Also, this helps to guide your investment plans and retirement goals
• Provide consistent investment consultation based on your fluctuating savings, investment selections and asset allocation

Before hiring a RIA, you should also be able to answer the following questions:

• What services do you need? Can your potential RIA deliver these services or are there any limitations on what they can deliver?
• What experience does the RIA have in dealing with investors in your situation?
• Has the RIA ever been disciplined by a government regulator for unethical behavior?
• What services are you paying for and how much do those services cost?
• How does the RIA plan on getting paid and are you comfortable with this payment method?
• RIAs are required to register with either the SEC or their state securities agency, depending on their size. It is imperative to ask for proof of their registration

There are a number of professionals who can provide guidance for your investment strategies. Hiring a RIA can help to take the frustration out of the investment process and help you avoid many of the common roadblocks. The true value of a RIA is their ability to thoroughly understand your overall financial goals and provide professional investment advice that is consistent with those goals.

All My Best,

Thomas J. Powell

[2] See http://online.wsj.com/article/SB125673286433612857.html?mod=WSJ_hps_sections_realestate

Tags: banks, Case-Schiller, commercial real estate, Credit, economics, economy, ELP Capital, Federal Reserve, Finance, financial, Financial Future, foreclosures, homebuyer tax credit, invest, loans, normalcy, obama, Real estate, real estate assets, registered investment advisor, residential real estate, Retirement, ria, Standing In The Rain, The Powell Perspective, Thomas J. Powell

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logi Energy wants as many people as possible to read this article by Nouriel Roubina.

Dr. Nouriel Roubini, professor of economics and international business at the Stern School of Business at NYU and chairman of RGE Monitor, is perhaps best known for his prescient predictions of the financial market collapse in 2005.
Dr. Roubini will be the keynote speaker at IndexUniverse’s upcoming “Inside Commodities” conference on Nov. 4 at the New York Stock Exchange. We sat down with Dr. Roubini ahead of the conference to take his temperature on global markets, the role of oil (NYSEArca:USO – News) and gold (NYSEArca:GLD – News) and the impact of regulation.

Index Universe (IU.com): You’ve said that you’re worried we’re already sowing the seeds of the next crisis. Where do you see that most directly?

Dr. Nouriel Roubini (Roubini):Well in commodities, I look at oil prices. They fell from $145 last summer, came down to $30 earlier this year and now they’re back close to $80. But if I look at the fundamentals of demand and supply, demand is down to 2005 levels, supply and inventories are at all-time highs. In my view, the movement in oil prices is not fully justified by the fundamentals.

There are improving fundamentals. There is a global recovery. But that justifies oil going from $30 to maybe $50. I think the other $30 is all speculative demand feeding on it—speculators and herding behavior. Last year, when oil was at $145, that killed the global economy. I worry that oil is going to go up above $100 for reasons that have nothing to do with the fundamentals of supply and demand. Oil at $100 would have the same negative effects on the global economy as oil did at $145 last year.

Last year, when oil was at $145, the global economy was still growing. Right now it has collapsed, and is recovering. Oil pushing above $100 would have nasty, negative real trade effects and real disposable-income effects on all importing countries:U.S., Europe, Japan, China, India; all the countries that were hit by the oil shock last year. So that’s an element that is in my view totally speculative, and dangerous to the global economy.

Read the rest of this entry »

Tags: BlackGold, economy, logi Energy, OIL PRICES, PEAK OIL

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logi Energy recommends this article by Nouriel Roubina.

Dr. Nouriel Roubini, professor of economics and international business at the Stern School of Business at NYU and chairman of RGE Monitor, is perhaps best known for his prescient predictions of the financial market collapse in 2005.
Dr. Roubini will be the keynote speaker at IndexUniverse’s upcoming “Inside Commodities” conference on Nov. 4 at the New York Stock Exchange. We sat down with Dr. Roubini ahead of the conference to take his temperature on global markets, the role of oil (NYSEArca:USO – News) and gold (NYSEArca:GLD – News) and the impact of regulation.

Index Universe (IU.com): You’ve said that you’re worried we’re already sowing the seeds of the next crisis. Where do you see that most directly?

Dr. Nouriel Roubini (Roubini):Well in commodities, I look at oil prices. They fell from $145 last summer, came down to $30 earlier this year and now they’re back close to $80. But if I look at the fundamentals of demand and supply, demand is down to 2005 levels, supply and inventories are at all-time highs. In my view, the movement in oil prices is not fully justified by the fundamentals.

There are improving fundamentals. There is a global recovery. But that justifies oil going from $30 to maybe $50. I think the other $30 is all speculative demand feeding on it—speculators and herding behavior. Last year, when oil was at $145, that killed the global economy. I worry that oil is going to go up above $100 for reasons that have nothing to do with the fundamentals of supply and demand. Oil at $100 would have the same negative effects on the global economy as oil did at $145 last year.

Last year, when oil was at $145, the global economy was still growing. Right now it has collapsed, and is recovering. Oil pushing above $100 would have nasty, negative real trade effects and real disposable-income effects on all importing countries:U.S., Europe, Japan, China, India; all the countries that were hit by the oil shock last year. So that’s an element that is in my view totally speculative, and dangerous to the global economy.

IU.com:Is that true elsewhere?

Roubini: I could make a similar argument for other commodity prices. In my view, rising commodity prices are not justified by the fundamentals.

There’s a huge bubble, because we have zero rates in the U.S., zero rates around the world and a huge carry trade. Everyone is borrowing at zero interest rates in dollars and getting a capital gain because the dollar is weakening, so they are borrowing at negative rates. And then they invest in risky assets:commodities, equities, credit. We’re creating a bigger bubble than before.

It’s going to go crashing down, in an ugly way. That’s the basics of the argument.

IU.com:Is there a regulatory solution to the speculation issue? Is the CFTC tightening and enforcing position limits a step in the right direction?

Roubini: I think it’s an idea worth considering. I’m not usually in favor of position limits, but I think the swings in the value of oil have been extremely dangerous for the global economy. Oil at $145 was the reason—more than Lehman or anything else—that the global economy tipped into the worst recession in the last 60 years. After the collapse of the global economy, oil collapsed to $30. At $30, there can be investment in new capacity. But now it’s back at $80 and soon enough it’s going to be at $100.

If position limits are going to be effective—and I don’t know that—I would not be against them. Because these swings in value of oil, on the way up and on the way down, are extremely damaging to global economic activity. They are dangerous. They are not justified. And if they can be controlled, so be it.

IU.com:You recently co-authored a report in which you and your colleagues ranked the U.S. third in world financial markets, after London and Australia. Was regulation a big component of that?

Roubini: The U.S. might have been No. 3 overall, but it was ranked No. 38 out of 55 in financial stability, because we’ve had a disastrous banking and financial crisis. That was in part due to poor regulation and supervision of financial institutions. That’s one of many factors and reasons why the U.S. was ranked so low on that particular pillar. Certainly there has been a massive failure of regulation and supervision of the financial system. But the regulatory failure was more in the direction of unwillingness by regulators to apply regulations. The Fed had all the powers to regulate toxic underwriting of mortgages, but they believed in laissez faire markets, and they created a disaster.

IU.com:How does this get fixed?

Roubini: I don’t believe in market discipline. It doesn’t work. That was the ideology of the last 10 years; self-regulation means no regulation. Market discipline doesn’t exist with irrational exuberance and reliance on internal risk management models that don’t work. Nobody listens to risk managers, because it’s risk takers that make the profits. The reliance on ratings agencies that have their own conflicts of interest, the reliance on soft-touch regulation, the focus on principles instead of rules—that particular regulatory philosophy has been a disaster, and we’ve learned it the hard way. We have to go to simpler rules, tougher rules and more binding rules. That’s the right approach.

IU.com:You’ve been clear that you think most assets are currently overvalued. Do you think there are opportunities for investors in certain asset classes or certain geographies?

Roubini: Well, there is a wall of liquidity chasing assets. That liquidity can chase those assets higher for the time being until the huge carry trade—the asset bubble and the wall of liquidity—comes crashing down. You can still have all the risky assets going higher. Of course, the higher they go, the more they diverge from fundamentals, and the riskier the situation becomes. But eventually, if the recovery of the economy is going to be anemic, sub-par, below-trend and U-shaped, there is going to be a correction. And therefore my view is to stay away from risky assets. Stay in liquid assets. I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes.

IU.com:When you say “stay away from risky assets,” many people hear that and think, “Aha, gold!”

Roubini: I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.

Tags: BlackGold, economy, logi Energy, OIL PRICES, PEAK OIL

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