A Subtle Sign that the Mania is Topping?

A friend of mine sent me a link to an interview of Gemma Godfrey on CNBC. 

 

So I asked him - Who is Gemma, is that your new girlfriend? and he's reply shed a lot of light: She must be 30 but talks as if she had 30 years of market experience. She seems to be full of self confidence, and according to Tweeter and LinkedIn, she is considered to be highly competent in financial markets, economics and be an expert on the Euro Crisis!!!!

And, if you look at the interview, she will try to shine by stating she is a Quantum Mechanics PhD, and will give a completely silly analogy between the Euro crisis and quantum mechanics. 

This reminded me on the 2006-2007 period when I was working in the hedge fund industry and that I noticed that within a few months, all of the sudden, most conferences would be full of bimbos dressed in mini-skirts and extra high heels... Signs of mania and smell of the top!

Extreme Sentiment Readings Spotted Across All Assets - Next Decline Imminent

Extreme sentiment has been spotted on all the "risk-on" trades with sentiment readings close to all times highs for most, and even making new all times high for some.

ElliottWave reports that:

• Maket Vanes Bullish Consensus is at 70%, higher than October 2007 when the Dow made its all time high (69%).
• According to the CFTC’s Commitment of Traders report, Large Speculators, which are mainly hedge funds, recently moved to a record net-long position in futures and options contracts on the NASDAQ 100.
• The 10-day average of the CBOE index put/ call ratio just declined to a record low .90, based on data since 1995.
• As recently as mid-September, the number of sales- to-purchases of insider shares for S&P 500 companies was 40:1, according to data provided by Bloomberg.
• A 10-day average of the Daily Sentiment Index (trade-futures.com) for gold rose to 82.2% bulls on September 17
• Silver: the Daily Sentiment Index recently surged to 92% bulls.
• And the USD: With the Daily Sentiment Index falling to just 7% bulls on September 14, the day of the recent low at 78.60, the odds are high that these current extremes will coincide with the early phases of another significant U.S. dollar advance.

So we are getting to a point where the risk-off trade should be quite violent. Oil is already down significantly. It's about time to short AUD, CAD, EUR, Silver, Gold, and even oil and equities across the board... And go long the USD.

Excessive Overbullishness Getting More Excessive

Generally speaking, on contrary to popular beliefs, markets are uncorrelated with the economy. But this is normal given that they raise and fall with sentiment, and not with fundamentals, and that politicians and central planners have been spreading oil on the fire, massaging economic and employment figures for decades, but now reaching epic proportions since 2009, believing that higher markets improve economics.

In this odd reality of our world where the 'experts' would more likely be qualified as madmen in a rational world; it's not surprising to see all the expert to call for even higher levels:

GS forecasts massive rally in 2013 and ending the year at 1,575 on the S&P, BofA aims at 1,600, and Citi 1,615 although surprisingly, MS forecasts a big drop to 1,167

UBS and CS aim at 1,500-1,525 for the year end.

Another analyst forecasts Apple Shares to Hit $1,650 by Late 2015

More from Bloomberg:

Goldman Sachs Group Inc. forecasts an 18.2 percent return from commodities in the next 12 months, with energy and industrial metals leading the way.  

Another Bloomberg report states

Bullish commodity wagers rose to a 16-month high just before the Federal Reserve’s pledge for more stimulus drove prices to a seventh weekly advance and banks from HSBC Holdings Plc to Citigroup Inc. forecast more gains. 

Yet another Bloomberg report is titled: Stocks Show Americans Better Off With S&P 500 Cheap to World. Here are a few selected quote from this report:

“We are in a healthier state right now,” Chris Hyzy, who helps oversee about $325 billion as chief investment officer of U.S. Trust in New York, said in a Sept. 12 phone interview. “Next year, we think the growth clip in the United States and the globe is going to be better than expected. Over the next three years, we are bullish.

“Our economy and our banking system are in better shape than others,” Chanos said last week in an interview at Bloomberg’s headquarters in New York. “I suspect that the surprises will probably be on the positive side in the U.S. market.”  [Even Chanos is Bullish?!]

I think we’re dramatically better off than we were,” Cohen, the senior U.S. investment strategist at Goldman Sachs, said in an interview at Bloomberg’s headquarters in New York last week. “The market is telling me that investors are generally confident that we’re on the right path.”

Markets Frothing — Topping in Progress?

Here are a few headlines about market forecasts and markets action showing how exuberance, irrationality, and "over-condidence" in what is called a "textbook market behaviour" is. Markets are made to fool 95% of the people 95% of the time. Whoever believes in a textbook market behaviour is a fool or an academic — or, very often, an academic fool!

1. BofA Sees Fed Assets Surpassing $5 Trillion By End Of 2014... Leading To $3350 Gold And $190 Crude 
2. Platinum Has Longest Rally in 25 Years; Gold Gains on QE3
3. Canadian Dollar Rises to 13-Month High as Fed Spurs Risk Demand
4. Forth consecutive month of gains for the S&P500, which closes at 6 percent of its all time high.

Here are some quotes:

(Bloomberg) 2012-09-14 — Platinum rose, capping the longest rally in 25 years, after the Federal Reserve took steps to bolster the U.S. economy and as strikes halted output at mines in South Africa, the world’s largest producer. Gold advanced.

The Fed yesterday said it will expand its holdings of long- term securities with open-ended purchases of $40 billion of mortgage debt a month in a third round of quantitative easing. Workers at a Lonmin Plc mine and nearby operations of Anglo American Platinum Ltd., the biggest producer, are holding protests over pay.

“Today’s rally can be attributed partly to the easing announced yesterday,” Marc Ground, a commodity strategist at Standard Bank Plc in Johannesburg, said in a telephone interview. “The fundamentals remain supportive.”

(Bloomberg) 2012- 09-14 — Canada’s dollar strengthened to a more than 13-month high against its U.S. counterpart as stimulus measures by the Federal Reserve spurred global demand for higher returning assets such as stocks and commodities.

The dollar gained for a third week versus the greenback and rallied against 11 of its 16 most-traded peers as investors bought the currencies of commodity producing nations including Canada on a bet global economic growth will accelerate. Crude oil, the nation’s biggest export, climbed above $100 yesterday for the first time since May. Statistics Canada will release data on Sept. 17 showing whether international investors added Canadian securities in July.

“The Canadian dollar is up quite a lot after the Fed decision and its complete textbook currency behavior,” Eric Lascelles, chief economist at Toronto-based Royal Bank of Canada Global Asset Management said in a phone interview. “With quantitative easing, the U.S. dollar weakens, commodity prices strengthen and both those things are like catnip for the Canadian dollar.”

NEW YORK, Sept 14 (Reuters) - U.S. stocks pared gains but were up for the fourth straight day on Friday on the Federal Reserve's aggressive new plan to stimulate the economy.

Apple Inc and Exxon Mobil, the two largest U.S. companies by market value, reached new highs, and the small-cap Russell 2000 index neared a record peak.

Equities are in the midst of a run-up in which the S&P 500 has posted gains for four consecutive months, fueled by the actions of Europe's and the United States' central banks to keep interest rates low and stimulate their struggling economies.

Peak Confidence in, Peak interventionism by Central Banks

The interventions of the past 4-5 years are really incomparable with anything in the past 70-80 years and the era of modern, fiat based, Central Banking. These John Laws of modern time have had no result to show for their massive amounts of printing except for enormous debt loads on the sovereign balance sheet of their countries.

Yet, it seems that money printing is the cure for many seemingly totally unrelated issues. Indeed, printing money:

• Creates jobs
• Creates economic growth
• Saves currencies
• Saves political unions
• Improves exports
• Put here whatever you like, money printing will do it for you.

To be honest, one must really have a critical mind to be able to see through most of these urban legends perpetrated by mainstream media and parrot journalists for decades. The still, one of these stands out as the most inept statement ever; yet people seem to believe in it, it's the one about printing an unlimited amount of Euros to save the Euro. The fact that the whole world is still buying into the ever increasing amount of lies and non-sense coming out of the mouth of lunatic central bankers is very telling about the overall sentiment of the market.

Moreover, the amount of intervention done in the past few months alone is so gigantic and its scale so much beyond imagination that it is completely unsustainable going forward, even for a short period of time. Yet, in spite of all this, "inflation", defined as the growth of overall money and credit, is not happening in those economies (namely, in the UK, the EU, the US and Japan).

We have reached what I would like to call the peak confidence in, and peak interventionism by, Central Banks from where there's only one way ahead: disappointment and reduction of interventions:

• Bernanke Options to Stimulate Growth Include Open-Ended QE Plan
• Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%
• Draghi Lured by Fractious EU Leaders to Build Euro 2.0
• Draghi Says Officials Agree on ECB Unlimited Bond-Buying 
• Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival
• Mario Draghi’s Big Moment, Continued - ECB to "do whatever it takes"
• SNB’s Franc Defense Swells Reserves to 71% of GDP
• SNB’s $380 Billion Pile Makes Jordan Wonder

All these plans will come crashing down to the earth, and most of those expecting the Fed doing QE and the ECB buying bonds will be sourly disappointed. I have already been through the reasons before; and the fact that the Central Bankers are talking the markets up without intervening will end up badly for those who believed the lies.

In addition to my previous posts here are quotes from Graham Summers who writes a great newsletter at GainsPainsCapital.com:

Super Mario's Big Bluff

The financial world has entered a new state of mania with the announcement by the ECB that it will engage in "unlimited" bond buying to maintain lower interest rates for trouble EU sovereigns.

As you no doubt know, our firm's forecast was that the ECB would not engage in any large-scale bond purchasing programs.

We maintain this view today regardless of the ECB's announcement. The reason? The ECB stated very clearly that new bond purchases would only be made under strict conditions. Those conditions involve:

1. Applying for a bailout from the EFSF
2. Meeting fiscal budget requirements
3. Implementing major spending cuts and various other austerity measures
4.  

[...] Let's cut through the BS here. The use of the word "conditions" completely negates the word "unlimited." Saying that you'll buying "unlimited" bonds as long as EU sovereigns meet certain "conditions" actually means nothing.
[...] The ECB says it will buy EU sovereign bonds if EU nations apply for bailouts from the EFSF. Spain and Italy (the very countries that need bailouts) are meant to supply 30% of the EFSF's funding.
So this new program involves Spain and Italy bailing themselves out, while simultaneously implementing austerity measures so the ECB will buy their sovereign bonds?!?!

Oh, and by the way, the EFSF only has €65 billion in funding left. That will definitely be enough to bailout Spain and Italy, seeing as Greece has received over €200 billion in bailouts is still imploding.

What's the Fed Going to Do?

Today we turn our attention to the US's Federal Reserve where the whole world expects the Fed to announce QE 3 at its FOMC meeting this Wednesday and Thursday.
There is a small problem of math with this. The Fed currently owns all but just $650 billion of the outstanding 10-30 year Treasuries. At this point, even a $200-300 billion QE program would create serious liquidity problems for the financial system. So scratch that idea off the list.

Of course, the Fed could potentially implement another agency/MBS QE program. But that would be a very political move with the Presidential election so close. This, combined with current food and energy prices, makes it unlikely the Fed would want to do this: too many consequences with too little to gain (stocks are at four year highs).
Indeed, if anything, the Fed is likely to pull a "ECB" move, namely promising something vague that it actually cannot deliver on. Why would the Fed do this? Because, like the ECB, the Fed is running out of bullets. Indeed,  St Louis Fed President James Bullard all but admitted this to the Financial Times:

"I am a little - maybe more than a little bit - worried about the future of central banking," said James Bullard, president of the Federal Reserve Bank of St Louis, in a Financial Times interview at Jackson Hole. "We've constantly felt that there would be light at the end of the tunnel and there'd be an opportunity to normalise but it's not really happening so far."

The biggest worry on display at Jackson Hole was whether these bureaucrats, sitting at the heart of every mature economy, still have the power to influence demand now that interest rates cannot fall much further. Lurking behind many debates was this question: if central bank policies are so effective, why is the global economy not growing faster?

Here's a Fed official, not only openly admitting that Fed policies aren't working, but even calling the future of Central Banking into question. Take note: underlying realities are beginning to be asserted by officials at Central Banks around the globe. They're running out of bullets.

So where does this leave us? Well, it's highly unlikely the Fed will actually implement anything major this week. What we could see is a large, but hollow promise for action, much like the ECB's promise of "unlimited" bond purchases based on certain "conditions" being met (an empty promise if ever there was one).

Finally, see for yourself some quotes from various reports listed above which I have collected over past few weeks.

Bernanke Options to Stimulate Growth Include Open-Ended QE Plan

Federal Reserve Chairman Ben S. Bernanke, who last month defended his unorthodox monetary policies, has a new tool at hand should he seek one to a revive a flagging economy and labor market: open-ended bond buying.
Barclays Plc forecasts the Federal Open Market Committee this week will announce monthly purchases of $50 billion to cut the jobless rate while holding inflation at 2 percent. Economists at Goldman Sachs Group Inc. (GS) and BNP Paribas, responding to last week’s report of slowing job growth, also say they expect an announcement of an open-ended plan on Sept. 13 after a two-day FOMC meeting.
The Fed’s practice of specifying an amount and an end-date for purchases has resulted in abrupt withdrawals of stimulus that later was renewed after the central bank failed to reach its goals. By contrast, an open-ended program would tie purchases to a sustained improvement in the economy, said Michael Gapen, senior U.S. economist at Barclays and a former member of the Fed Board’s Division of Monetary Affairs.
“As a Fed chairman, 2 percent growth isn’t doing it for you, 8 percent unemployment isn’t doing it for you -- they need a faster acceleration,” said Gapen, who is based in New York. “So, the decision is, ‘OK, let’s hit the pedal.”

Fed Stuck at Zero Into 2015 Seen in Swaps, QE Odds Reach 99%

Just six months ago, money market traders expected the Federal Reserve to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens.
Bond market measures from overnight index swaps, which indicate no rise in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.
Investor expectations for sluggish growth and low inflation remain intact even though the collapse of Lehman Brothers Holdings Inc., which triggered the worst financial crisis since the Great Depression, happened four years ago. While the economy expanded in the second quarter, the unemployment rate remained above 8 percent for the 43rd-straight month in August.
“The problems have been bigger than anticipated and it will take a while to work our way through these issues,” Larry Dyer, a U.S. interest-rate strategist in New York with HSBC Holdings Plc’s securities unit, said in an interview on Sept. 6. “The bond market is pricing in pretty close to a very prolonged period of low growth,” said Dyer, whose firm is one of the 21 primary dealers that trade with the central bank.

 Draghi Lured by Fractious EU Leaders to Build Euro 2.0

The European Union’s 19th crisis summit was winding down when European Central Bank President Mario Draghi made an unusual request. He wanted some alone time with EU President Herman Van Rompuy to thank him for charting the path toward a shock-proof euro zone.
Only later did the significance of the blueprint sketched out at the June summit in Brussels emerge. The commitment to tighter bank supervision, budget coordination and a nebulous “political union” was instrumental in persuading Draghi that governments are putting the currency on a sounder footing, leading to yesterday’s ECB decision to buy bonds to help them get there.

Draghi Says Officials Agree on ECB Unlimited Bond-Buying

European Central Bank President Mario Draghi said policy makers agreed to an unlimited bond- purchase program as they try to regain control of interest rates in the euro area.
The ECB needs to be in a position to ensure the transmission of its rates in all euro-area countries, Draghi said after the ECB held its benchmark rate at a record low of 0.75 percent.
“We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability,” Draghi said at a press conference in Frankfurt today.
Draghi has staked his credibility on the bond plan, telling lawmakers in Brussels this week that the ECB needs to intervene to wrest back control of rates in a fragmented euro-area economy and save the single currency. Now it’s up to governments such as Spain and Italy to trigger ECB bond purchases by requesting aid from Europe’s rescue fund and signing up to conditions.
“Governments must stand ready to activate” the rescue fund in bond markets when needed “with strict and effective conditionality,” Draghi said.
The ECB reserves the right to terminate bond purchases if governments don’t fulfil their part of the bargain, Draghi said.
Purchases will be fully sterilized, meaning that the overall impact on the money supply will be neutral, he said.

Draghi Told Lawmakers ECB Must Buy Bonds for Euro’s Survival

European Central Bank President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival.
Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union. Bloomberg News obtained a recording of his comments, some of which were published by Italian news agency AGI yesterday.
“We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most,” Draghi said. “They have no importance whatsoever in the rest of the euro area.” ECB bond purchases are therefore “a way to comply with our primary mandate,” he said, adding: “Frankly, all this also has to do very much with the continuing existence of the euro.”
The Frankfurt-based ECB referred to the closed-door format of the hearing and did not provide any further comment. Draghi’s comments come two days before the ECB’s Governing Council is due to decide on his bond-buying proposal, expectations for which have already driven down yields in Italy and Spain. In the testimony, Draghi rebuts arguments that bond purchases stretch the central bank’s mandate.
“Do we give up our primary mandate for maintaining price stability?” he said. “It’s exactly the opposite situation.”

Mario Draghi’s Big Moment, Continued

Europe emerges from its summer torpor with untapped disasters in waiting.
On Thursday, attention turns to Mario Draghi, the president of the European Central Bank, and the plans, if any, he will announce to help manage the European Union’s financial crisis. Next, on Sept. 12, Germany’s constitutional court will rule on the legality of the European Stability Mechanism, the euro area’s new permanent bailout fund, and the fiscal pact that curbs government deficits. If either event goes badly, watch out.
In July, Draghi aroused expectations that he has so far been unable to meet when he promised the ECB would do “whatever it takes” to defend the euro system. This was seen as a pledge of unlimited bond buying aimed at lowering the long-term interest rates that Spain, Italy and other distressed sovereign borrowers must pay.

SNB’s Franc Defense Swells Reserves to 71% of GDP

The Swiss central bank’s foreign- currency reserves surged to a record in July as the euro region’s increasing turmoil forced policy makers to step up their defense of the franc ceiling.
Switzerland’s cash pile swelled 11.3 percent in the month to 406.5 billion Swiss francs ($420 billion), the Swiss National Bank said on its website today. That pushed holdings to 71 percent of gross domestic product. Walter Meier, an SNB spokesman in Zurich, said “a large part” of the increase resulted from currency purchases to defend the minimum exchange rate.
SNB President Thomas Jordan has pledged to enforce the franc ceiling of 1.20 per euro “with unlimited purchases of foreign currencies if needed.” The central bank implemented the cap in September to fight deflation and help exporters. Its reserves have soared 44 percent since the end of that month, according to SNB data calculated to International Monetary Fund standards.
“The SNB can keep its pace of interventions for a pretty long time unless there is a massive disruption like the collapse of the euro area,” said Maxime Botteron, an economist at Credit Suisse Group AG (CSGN) in Zurich. “As they increase liquidity through their purchases, the only limiting factor is inflation. However, that is not a concern at the moment."

SNB’s $380 Billion Pile Makes Jordan Wonder

Swiss central bank President Thomas Jordan is wondering how to invest his currency reserves as euros pile up at the bank at a record pace.
“The SNB has the same problem as lots of wealth managers,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. “Safe assets have become very expensive. So for the time being, they prefer cash over investing.”
With Europe’s debt crisis hurting returns on the least risky bonds, the Swiss National Bank is keeping reserves in cash after its policy to cap the franc swelled currency holdings by 50 percent in the four months through June to a record 365 billion francs ($380 billion). Money held at central banks, the International Monetary Fund and the Bank for International Settlements accounted for 72 percent of the gain.
The SNB has been piling up euro holdings to defend the franc ceiling of 1.20 versus the single currency introduced in September 2011. While the central bank previously mainly invested foreign currencies in government bonds of AAA-rated nations, the surge in cash reserves suggests policy makers are finding it more difficult to find the right investments.

Another Illustration That the Mania is not Over

Yet another day, and another "new paradigm" during this Great Mania which started decades ago now.

(Bloomberg) — BlackRock Inc.’s Quintin Price has advised his 80-year-old mother-in-law to hold more stocks as rising life expectancy pushes the elderly to seek higher investment returns.

“The conventional advice, when life expectancy was lower in the past, was to move more investments into fixed income,” Price, who is responsible for active equities and fixed income as BlackRock’s head of alpha strategies, said in an interview yesterday at the firm’s offices in Zurich.

“This conventional wisdom was born during a time when life expectancy was much lower and is simply no longer valid,” he said.
[...]
“We’re going to see this kind of investment evolve to the point where people are going to change behavior and going to take longer-term views and going to own more high-yielding equities,” Price said. “A shift to this new investment strategy will give investors a better inflation-hedged income.”

Even in Bankruptcy, Lehman is Still Speculating in Real Estate — No End in Sight for the Housing Bubble in the US

Bullishness and speculation in the real estate sector of the US is showing that the mania is not over, and signals that we are still far from the bottom. Look for yourself:

Chart of the Day:

For some perspective on the all-important US real estate market, today's chart illustrates the inflation-adjusted median price of a single-family home in the United States over the past 42 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased -- increased. All those gains were given back during the following 6.5 years. Over the past five months, however, the median price of a single-family home has surged by over 20% -- the biggest five-month gain on record (the data goes back to 1968). The sharp downward trend that began in mid-2005 is now over.

So not only prices have jumped — something that will look like a blip in a few years — but the bullish tone of this report and the overconfidence are gutting.

And now, so staggering I checked my calendar to see if we weren't the first of April: Lehman Brother is still speculating in the real estate market. And the report below gives the tone: not only Lehman is not selling its assets, but they are actually buying more, hoping to sell at a higher price in a couple of years. We all know how good the real-estate forecasters were last time, and how Lehman went down, but they don't seem to remember what happened in 2009, only 3 years ago. How MAD!


(Bloomberg) 2013-08-14 — Hawaiian-condo investors, homebuyers in Montana and travelers seeking a room at Miami Beach’s upscale Setai Hotel all can turn to one company to meet their needs: Lehman Brothers Holdings Inc.

Four years after filing the largest bankruptcy in U.S. history amid soured real estate bets, Lehman is still in the property business, wagering it can recover about $12.9 billion from mortgages and assets around the globe. Its $3 billion purchase this year of the remaining 53 percent of apartment owner Archstone Inc. made it the biggest buyer of U.S. commercial property by value in the last 12 months, according to research firm Real Capital Analytics Inc.

Lehman has invested $5 billion in real estate since its demise, acquiring loans and buying out joint venture partners. Instead of selling to vulture investors, it’s waiting for opportune times to unload properties as the commercial and residential markets recover. The company last week moved to take Archstone public to capitalize on soaring demand for rentals.

“The entire strategy was ‘don’t put yourself in a position of having to sell,”’ said Jeffrey Fitts, Lehman’s New York- based head of real estate and a managing director at Alvarez & Marsal, the advisory firm managing the liquidation. “If you’re selling with a gun to your head and people know it, you’re dead and you will leave hundreds of millions of dollars on the table.”

[...]  It intends to retain some assets at least through 2015, according to a statement last month, in which the firm boosted its forecast for real estate recoveries by $1.6 billion compared with its outlook a year ago.

The bank filed for bankruptcy in September 2008, 158 years after its founding as a cotton brokerage in Alabama, and five months after David Einhorn, president of New York-based Greenlight Capital Inc., said he was betting against Lehman’s stock because he believed it overvalued some real estate assets.

[...] Even as housing prices began to fall in 2006, the bank continued making loans, including for commercial properties. In October 2007, it financed and invested in the $22 billion takeover of Archstone with Tishman Speyer Properties LP, eventually converting the loans to equity after Archstone faltered during the credit crisis.

[...] As of March 31, the firm reported commercial real estate holdings of $9.6 billion, including more than $2 billion of commercial mortgages and mezzanine loans. The tally doesn’t include the final 26.5 percent stake in Archstone that Lehman acquired in the second quarter from Bank of America Corp. and Barclays Plc.

“If I were a creditor and I were not real estate savvy, I would almost look at Lehman as my real estate department,” said Lawrence Longua, director of the REIT Center at New York University’s Schack Institute of Real Estate. “They’re taking an asset and maximizing it. That should be beneficial to me as a creditor.”

[...] Lehman’s largest bet since filing for bankruptcy is on rentals. The Archstone acquisition in May valued the business at $16.5 billion, according to Real Capital, making the bank a bigger buyer than Blackstone Group LP (BX), the world’s largest private-equity firm, and Simon Property Group Inc. (SPG), the No. 1 U.S. mall owner.

It also turned Lehman into the eighth-largest apartment manager in the country, overseeing 78,000 units, according to the National Multi Housing Council, an apartment industry group in Washington.

It announced plans to take Archstone public as rising national rents fuel investor demand to own apartment buildings.

Sales of apartment properties totaled $16.2 billion in the three months ended June 30, the second highest quarterly total since 2007, according to Real Capital. Apartment developers are also hastening their acquisition of land sites, buying $2 billion worth in the first half of the year -- almost double the total for all of 2011.

“The timing makes sense,” Rod Petrik, an analyst with Stifel Nicolaus & Co. in Baltimore, said in a telephone interview. “You have at least a two-year window where fundamentals are going to be strong and you are not going to have the competition of new supply. So the matter of getting it out and public gets Lehman a step closer to liquefying their position.”

Petrik estimates Archstone may raise more than $1 billion in the initial public offering, and that the stock would be sold in several stages “over the next few years.” He expects Lehman to sell assets as a way of paying down Archstone’s debt.

Lehman’s also in the hospitality and homebuilding business. In January it acquired Mooonlight Basin, a ski-and golf resort community in Montana, and plans to begin marketing land to homebuyers while operating a resort there, Fitts said. It’s also planning to sell 73 unsold condo units at the Ritz-Carlton Kapalua in Hawaii that it took over through foreclosure in December after the borrower defaulted on a $260 million mortgage.

[...] In Miami, where hotel revenue per available room climbed 11 percent in the year through June, Lehman isn’t planning to sell the Setai, its luxury hotel on South Beach, Fitts said. Lehman replaced the hotel management in March, bringing in Trevi Luxury Hospitality Group Inc.

Lehman also is keeping the On the Avenue Hotel on Manhattan’s Upper West Side, which it gained control of through a deed in lieu of foreclosure in June 2011, said Fitts. While revenues per available hotel room in Manhattan climbed 5.7 percent in the year through June, Lehman is mulling whether to renovate the 282-room property.

[...] Lehman is holding onto a 21-story Manhattan office building at 237 Park Ave., after buying a $255 million junior note from an investor in 2010 as a way of protecting its claim to the property. The company financed the acquisition in 2007 with about $1.23 billion in loans, according to a July 2011 filing.

[...] Lehman has $8.2 billion of cash available for creditor payments after raising $4.7 billion in the second quarter from real estate sales, derivatives and settlement of a lawsuit, according to a July regulatory filing.

The firm plans semi-annual distributions, including a second payment to creditors in September and is “focused” on maximizing cash for that purpose, according to the filing.

“I can’t tell you how many lunches and dinners and meetings I’ve had with opportunistic guys, all of them very smart and very good,” Fitts said of vulture real estate investors seeking to buy some of Lehman’s assets.

“And I say to them: ‘If I sell to you I haven’t really done my job.’ ”

AAPL $1,000 Target $1Trillion Revenue Forecast Announced

Bloomberg reports:

Apple Inc., already the world’s most valuable company, will see its stock price reach $1,001 within 12 months, lifted by growth in China and the debut of a new television product, according to Topeka Capital Markets. 

The new target, issued yesterday by Topeka’s Brian White, is the highest among the 45 analysts tracked by Bloomberg and represents a 62 percent increase over the current price. 

The gains will be fueled by demand for the next iPhone, in addition to the expansion into China and the TV market, he said. “Apple fever is spreading like a wildfire around the world,” White said in a report, which initiated coverage of the company with a buy recommendation. 

Apple will get to $1,001 by introducing a TV within a year, as well as an upgraded iPhone that works with speedier wireless networks, he said. [...] 

Apple’s stock also is getting a boost because of a relatively seamless transition since the death of co-founder Steve Jobs, he said. The stock has risen more than 60 percent since he died in October. Tim Cook had assumed the role of chief executive officer from Jobs the previous August. 

“Steve Jobs’s health was such a fear that was hanging over the stock,” White said in an interview. “Now you’ve seen that Tim Cook is doing a good job.” Steve Dowling, a spokesman for Cupertino, California-based Apple, declined to comment on the report. 

Apple’s management should aim to become the first company to generate $1 trillion in revenue, a goal that’s achievable in the next decade, he said. Apple had sales of $108.2 billion in its last fiscal year, which ended in September. [...]

Top of the Heap White previously covered Apple for Ticonderoga Securities LLC, where his last price target was $666. The next closest prediction to his new $1,001 target is the $800 target of Morgan Keegan’s Tavis McCourt.

Share price target of $1,000 after a parabolic 60% rise, expectations of revenue raising by 1,000% in 10 years. These kinds of forecasts appear only during manias, and are more likely to be a sign of a top than of an imminent bull run.

Thanks to my friend SS for forwarding me the report.

Volatility Lowest Since ’07 in Stocks, Bonds, Currencies

I don't have anything to add to this Bloomberg report:

Markets for equities, bonds and currencies are the calmest they’ve been since 2007, and that’s making some investors nervous. 

Options that protect against Standard & Poor’s 500 Index losses plunged 64 percent in the last two quarters, the most ever, data compiled by Bloomberg show. Interest-rate volatility is near a five-year low, while demand for hedges against extreme moves in the dollar is close to the weakest since 2008. Bank of America Corp.’s Market Risk cross-asset volatility index reached a level not seen since November 2007. 

Becalmed markets have fooled investors before. The Chicago Board Options Exchange Volatility Index fell to a 13-year low of 9.89 in January 2007 before the financial crisis of 2008 wiped $37 trillion from share prices worldwide. As the gauge of options prices slipped within 5 points of that level last week following a 28 percent S&P 500 rally, demand has risen fivefold for exchange-traded products whose value increases should volatility rebound. 

“Nobody is scared right now, but the fear will come back,” Sean Heron, who manages options strategies at Glenmede Trust Co., said in a March 30 phone interview. The Philadelphia- based firm oversees about $20 billion. “All bets are off as soon as we get beyond the next three months. Europe could rear its ugly head again and it’s an election year in the U.S.”
[...] 

“There clearly seems to be some underestimation of risk in the markets,” Natividade, the London-based head of foreign- exchange quantitative strategy for Deutsche Bank, said in a March 29 interview. “People may think we are in a new paradigm of low volatility, but that is not what we expect,” said Natividade, whose firm is the world’s largest currency trader, according to Euromoney Institutional Investor. 

Harry S. Dent Turns Bullish on Stocks, Forecasts New All Time High

In one of the most amazing bear-capitulations of the past many months, Harry S. Dent, interviewed on GoldSeek Radio (link to the MP3 file embedded below, interview starts at about 42"30') on Friday, announced that stocks will make a new high, at about 1,600 S&P 500 points.

Points from the interview:

• QE3 in the next 2-3-4 months
• Stocks and gold will like it
• It will be inflationary
• Now believes the stocks will finish 2012 in record territory
• S&P to reach 1,600 and Dow 15,000 by early next year before the Fed runs out of bullets
• Gold to gain 10-15%, Silver to reach the $40s but not make new highs
• At least a 70% crash to follow (2013?)

 

For those of you who have been following my blog or Harry S. Dent, you are probably quite aware of him being a vocal deflationist, and forecasting a market crash just a few months/weeks ago.

If Harry S. Dent is proven wrong on this call, it could very likely to be one of those capitulations which marks tops. Jeremy Grantham did it back in April 2010. Will it be a long term or a short term one? I can't tell yet. 

Facebook Valued at $102.8 Billion in Final Auction on SharesPost

Facebook is now valued more than $100 billion, for profits of about $1 billion. That would put the company for an initial PER of about 100.

Now, with already about 800 million users, how many more users can Facebook have? Remember FB is blocked in China, and you still need a computer and/or mobile phone connected to the Internet, to play with it. How much more can FB grow?

I hope I'm wrong, as I think the FB guys have done a fantastic job and are great technologists. But $100 billion will be a very high valuation, and given the current euphoria on the markets, the IPO day could be the perfect day for a major top.

(Bloomberg) Mar 31, 2012 — Facebook Inc. (FB)’s implied valued rose 8.9 percent to $102.8 billion yesterday in what was expected to be the last auction of its stock on SharesPost Inc.’s exchange before the social-networking company’s initial public offering. 

SharesPost completed the auction at a price of $44.10 for 150,000 units, the firm said in an e-mailed statement. That’s up from an auction earlier this month with a price of $40.50 a share, valuing the company at $94.4 billion, based on a share count of 2.33 billion. 

Facebook (FB), the world’s most popular social-networking service, filed for an IPO last month that could value the business at between $75 billion and $100 billion, people familiar with the matter have said. The Menlo Park, California- based company, which has more than 845 million users, is seeking $5 billion in what would be the largest Internet IPO on record. The company decided to halt the trading of its shares on secondary markets at the end of this week as it prepares for the IPO, two people with knowledge of the matter said. 

Facebook aims to hold the offering in early May, one person said. SharesPost moved up the date of the Facebook auction to yesterday from April 2 to meet the deadline. Earlier this month, the U.S. Securities and Exchange Commission settled with SharesPost to resolve claims that the online marketplace acted as an unregistered broker of shares. It was the first action in a broad probe of trades involving nonpublic startups.

Earnings/profits source:

(SearchEngineJournal.com) During the first six months of 2011, Facebook, which has over 750 million active users, has reportedly earned $500 million on $1.6 billion of revenue. When compared to the $355 million earned on $1.2 billion of revenue during the first nine months of 2010, the financial indications of Facebook’s future look bright.

Building Pyramid Schemes, the Singapore Way

A few days ago, I was at a dinner party and got to meet a lot of nice and interesting entrepreneurs and senior executives in telecoms and technology.

One of them decided to share some of his investment wisdom with me — I didn't tell him about my background — and here's what he told me:

1. You buy a house for say SGD 700k. You'll need say 200k as a downpayment, and borrow 500k from ABC bank (I'm not going to name the bank involved).
2. Then, you withdraw those 200k equity you have at say 2%.
3. With the 200k, buy bonds of ABC bank (which lent you the mortgage in the first place). Those bonds pay about 5%.
4. Then, because you've bought your home with money borrowed from ABC, and you've bought bonds of ABC with the cash of your equity withdrawal, the bank will lend you some more money, up to about 50% of your bond holdings, if you agree to buy more of those bonds. So you get another say 100k with an interest of about 2.5%, that you'll invest in the ABC bank bonds at 5%.

You end up with:

• about 120% of the value of your home borrowed
• almost 50% of the value of your home invested in ABC Bank bonds
• being an interest rate speculator, and buying illiquid debt from a bank which future is obviously more than hazardous given the schemes it's setting up.

What do you think?

Irrational Exuberance — Cover Magazines

Here are three cover magazines that SS, a friend of mine sent me:

1. The Economist: the Recovery is Here
2. The Atlantic: Ben Bernanke Saved the Global Economy
3. Barron's: Home Prices Ready to Rebound

Generally speaking, magazine covers are amazing contrarian indicators. Today, with bullishness at an extreme, having these 3 covers appear at almost the same time should be very worrying for the bulls.

Has the Mania era finally topped?

Back from China - Portfolio and AAPL update

I got back from China last Sunday, and took some time to do touristy things and relax.

In the meantime, the Euro sunk, and my options hit their stop-order. I don't know where was the Euro trading, but the time of the trade is suggesting somewhere around 1.32$ per Euro.

I don't know where the Euro will go, but the ECB is flooding so much the market, that a potential rationalization could be this flood of Euros coming in the market. Has the Euro topped? and will the USD rally continue? I need to spend more time on this, but I'm currently lacking time.

Finally, today, the S&P was touching the 1,400 mark at the some time where AAPL was reaching $600. How sustainable is this? Not much. As you know if you've been following this blog for a long time, I own Apple shares, and have held them since 2000, where I bought them at the current level of $13. So I'm not playing the perma-bear guy here. The rate of growth and the current valuation of Apple are not sustainable.

Of course, the capitalization weighted S&P and Nasdaq have been largely driven by AAPL which is now such a massive one, easily toping the second largest market cap, Exxon, by about 20%. So when Apple tops, the markets top most probably, and we're not far from that.

Facebook Valued at $100 Billion?

Facebook to be valued $100 billion. But how much is it worth? There's a difference between price and value.

Nov. 29 (Bloomberg) -- Facebook Inc. is considering raising about $10 billion in an initial public offering that would value the world’s largest social-networking site at more than $100 billion, a person with knowledge of the matter said. 

The company may file for the IPO before the end of the year, said the person, who asked not to be identified because the deliberations are private. [...] 

Facebook’s $100 billion valuation would be twice as high as it was in January, when the company announced a $1.5 billion investment from Goldman Sachs Group Inc. and other backers. [...] 

At $10 billion, the offering would raise more money than any other technology IPO, a sign Facebook expects investors to clamor for a piece of the social-networking company.

Investors never learn the lessons and keep on bidding on the most overvalued IPOs (LinkedIn and Groupon, just to name a few), getting burnt every time but not enough to burn into flame — yet. But like the moth flying to the flame, at some point they will burn down badly and will never be able to recover. In the meantime, we can say that the Mania Era is still far from being finished, and that long term bullishness has not be squashed yet.

Epitome of the Financial Mania Era

I don't think I need to give any more details than this advert for an FX broker. The 30 sec clip is available on YouTube.

Why have a student job when you can speculate on the FX market and get a secondary income?

Am I a Perma-Bear? And Also, a Typical Example of What I Call Too Much Complacency

Part 1 — Am I a Perma-Bear?

I've been bearish for a long time. Actually, I started this blog because early in the year 2007, when I first starting to think about the collapse of the equity markets, I couldn't find much information about my case, and couldn't find many bears around.

Some will say that I am a perma-bear, and that I have been too bearish for too long. Tiho, over at The Short Side Of Long exemplifies that, as he's been very vocal in the comments and private email conversations about that.

Reading my blog, I can easily understand them, because I have not really posted about the times when I got long equities or commodities. The reason is simple, those trades I made were short term, some just a few hours, some a few months, but they didn't change the overall picture that I envision: a long bear market that will deflate most assets by about 80-90% from their peak, during the course of 5-15 years.

I will give a short list of the longs I opened in late 2008 and early 2009 to give an idea of what I did during those times:

• GLD: bought below $80 and sold above $115 too early.
• SLV: bought between $13 and $9 (many transactions, during the decline) sold too early... 
• PGH: bought between $8 and $6 (many transactions, during the decline) sold between $8 and $12
• AAV: bought between $4 and $2 (many transactions, during the decline) sold between $6 and $10
• HTE: got acquired a few months later with a premium of 45%... 
• PWE: bought between $11 and $8 (many transactions, during the decline) sold above $15 
• NXG: bought at $0.55 (single transaction) sold at $3.00 just a few months later
• TCK: bought between $8 and $4 (many transactions, during the decline) sold a few months later for a reasonable gain, but which looks extremely ridiculous since they went up all the to $60!! The main reason is that on one of their quarterly releases, the stock opened lower -20% hitting my stop order, before closing up that same day at +20%. Sad sad sad. This is one of the biggest missed opportunities I've ever had.

My biggest mistake was that I sold too early and that I underestimated how crazy and greedy market participants would be: by the end of 2009, most of my longs except SLV and GLD were closed.

More recently, during the decline in August 2011, I closed many of my shorts and long put options, and also sold short many put options, which resulted in a synthetic long position on the market, giving me easily 70 to 100% gains, in a mater of hours or just a few days. I don't discuss these positions as: they are very short term sometimes really a few hours and won't bring anything to my readers and also, I don't won't people to start shorting options and take huge risks when they don't know what they are doing.

Part 2 — Capitulation?

Complacency and  I have been talking about complacency and lack of capitulation in the markets — and again, some will say that I cannot see the evidences, such as what Strategists are showing: 

• The USA Today consensus showed that strategists have cut their year-end S&P 500 targets by 8%.
• Wall Street economists are at 40% recession odds, which means if the heads of research allowed them to really say what the probability was it would be 80%.
• Bank of America let its chief equity strategist go who was calling for 1,450
• on the S&P 500 and the most bullish seer out there (we wish him well).
• The AAII investor sentiment survey shows 30.2% bulls and 40.3% bears.
• The Investors Intelligence survey also did a switcheroo, with the bull camp in the past week down 3.2 percentage points to 35.5% and the bear share rising the same amount to 40.9%. That is the largest number of bears since March 2009 (was 21.5% at the July market peak). And we have the fewest bulls since the August 2010 retest of the lows back then. The "spread" is now -5.4% between the bulls and bears, well off the +28% gap at the July market peak.
• Short interest on the NYSE and Nasdaq surged nearly 4% in the second half of August; these positions are now being squeezed, which is the "buying" support" the market has been experiencing in the low-volume rally of the past few sessions.

Part 3 — Complacency?


I have been mentioning several times in the past few weeks that complacency is very high. Well, let me elaborate once more on this.

First, complacency can be seen as something relative. If the economy is booming and the market is trading close to their multi-year high, and a 2% decline makes the put call ratio drop a lot and strategists to revise their estimates, then it is a bullish sign for sure.

Now, if the economy has been in a  depression for 3 years, unemployment extremely high, sovereigns on the verge of default, yet, a 15% decline is seen as a buying opportunity and the put call ratio is just reverting to the mean instead of skewing massively toward fear, and if the strategists are still seeing the markets up by 10-15 by year end, then, in relative terms, there is complacency.

And the CNBC video below is an extremely good example of what I mean by that: we are terrified, but we are 100% (or more!) invested in stocks. You cannot judge people by what they say, but how they act. And with the current markets, everybody is still very much fully invested.

Here's a quote from the transcript:

i'm an optimist at heart, maybe i'm too worried. tell me i am. i'm a it terrified optimist, larry, and i think it's right to worry. there is huge problems. on the other hand, we peaked on april 29th. we had a vicious bear market.20%. we had a selling climax at 1100 on the s&p 500 index on august 8th. it was 8th. it was re-tested twice in the futures market. not in the spot market. and we have had a successive rally of higher highs and higher lows. we're fully invested. we think the markets going higher and we think stocks are strategically cheap, end of the decade, we're over 2,000 on the s&p 500 index. and we have a gdp in the united states at the end of the decade of $20 trillion which will produce the profits to support it. all that is quite possible by the way. we have nyu economics professor richard coming on to tell us about a 2,000 s&p and 20,000 dow. dr. bob frolic, the last word, what would your specific investment strategy be right now? because i love what's going on outside the united states, larry, and we have to realize we have this weak dollar and probably with the high budget deficit, stays with us for a while, i like technology, i like materials, both of those sectors by the way, larry, they get a mar majority, revenue and profits from outside the united states. so it's a way to invest in this country but benefit from what's going on outside the united states. i think it would be a great strategy going forward. if i can make one other thing, the one thing that isn't concentrated in our market is earnings. mult. industries, multiple sectors, making money on the bottom line, making money on the top line. is that the best bullish sign you'll see. we just have to realize it. thank you very much, dr. bob, godspeed to you. david kotac, steven wise, thank you for coming on.

Financial Mania

Signs that the financial assets mania is still well entrenched are abounding everywhere in the world, with advertisements for trading stocks or gold or oil or forex (strangely, nothing about bonds...) seen on general  public news papers or TV or public transports.

Here is a picture taken yesterday on Orchard Road in Singapore, the main shopping street of the City-State, equivalent to the Champs Elysées in France.

The stocks will not bottom until the mania ends, and here we can see that we're very closed to the highs of the mania, and not anywhere near the lows...

While US Equity Futures Rally 5%, Greece 1Y Gov Bond Yield 97%

In less than 24 hours, the S&P 500 Mini Futures ES rallied more than [Update: 55 points] 40 points, and in the process, making me hit my stop (grrr). The good news is? Greece 1Y bond is trading with a yield of [Update: 97%] 93% now.

The massive one-two day rallies are very typical of bear markets. Sooner or later, the "buy the dip" and the "stocks are cheap" mentality will come to an end. But before than, investors losses will zoom. This is the mentality that allows for bear markets to continue their course, and for us, evil short sellers to make bundles.

Survey Shows Fund Managers Still Bullish on Stocks

Too much bullishness in the markets still — where are the bears? The market action is HORRIBLE, yet every analyst and strategist is bullish. Europe is melting down, the banking system in both the US and the EU is on verge, credit spreads are extreme. But analysts are bullish...

Interestingly, accordingly to the last sentence below, the European shares which have decline more, are a better contrarian bet than the US or emerging market ones.

(Bloomberg) — Global fund managers are bullish on stocks for the third quarter, as the turmoil in financial markets offers investors “attractive buying opportunities,” according to a HSBC survey. 

A survey of 12 investment companies overseeing $4.4 trillion in funds showed 63 percent are holding “overweight” positions on equities this quarter, up from 44 percent in the previous three months, HSBC said in a statement today. 

Some 57 percent of fund managers are “underweight” bonds in the third quarter, compared with 38 percent in the previous period. “Current market volatility has created attractive buying opportunities for long-term investors,” Geoffrey Pidgeon, the head of global investments at HSBC Australia, said in the statement. 

“While there is continued uncertainty around growth in the U.S., corporate earnings forecasts remain positive.” [...] The 11 percent slump in the MSCI All-Country World Index this year means the gauge is valued at 10.9 times estimated earnings, less than the five-year average multiple of 13.6 times. Profits for Standard & Poor’s 500 Index companies may grow 19.4 percent in 2011 from a year earlier, according to earnings estimates compiled by Bloomberg. 

[...] “Global fund managers are looking toward the emerging markets for opportunities and are focusing on Greater China equities as market expectations of the end of the Mainland’s tightening cycle continue,” said Pidgeon. China’s Policies Inflation is no longer a major concern in China and tightening policies should be eased, Wang Jian, secretary- general of the China Society of Macroeconomics [...]. 

The proportion of fund managers holding “overweight” positions on Greater China stocks climbed to 57 percent this quarter, compared with 25 percent in the previous three months, HSBC said. Half of all fund managers are “underweight” on European equities, up from 11 percent in the second quarter, HSBC said.

And, from another report published today as well:

(Bloomberg) — “Stocks still offer good long-term value,” said Kevin Gardiner, the global head of investment strategy at Barclays Plc’s Wealth unit, which manages about $266 billion for clients.