Tuesday, February 5, 2013

JPMorgan is buying U.S. housing… Where Sjug sees real estate values today… The death of the shopping mall… Jeff Clark is going long Big Tech… Goldman likes Apple…

Retail space will be converted into cross docks and specialty niche stores as the prices collapse. Aivars Lode

 Another major player is getting into the landlord space…

Financial services giant JPMorgan is using client money (from its wealth-management department that caters to families and individuals with more than $5 million) to fund a partnership that purchased more than 5,000 single-family homes in Florida, Arizona, Nevada, and California.

According to David Lyon, a managing director at JPMorgan Private Bank, investors can expect 8% annual returns from rental income and gains when the homes are sold. Lyon says JPMorgan aims to sell the houses within three to four years in one of three ways: through an initial public offering (by going public as a real estate investment trust (REIT)), to an existing REIT, or to a major, institutional buyer.

 JPMorgan is the latest entrant to the U.S. housing market. (True Wealth holding Blackstone Group (BX) may be the largest player, having already put $2.7 billion to work buying homes.) The bank began pooling client money in mid-2012 to make the purchases.

 That was a smart move… In a market where bonds yield next to nothing and equities are fairly valued, housing was one of the only obvious values.

Consider the deals you could get in 2011… Porter personally bought a waterfront home in Miami Beach that February. He paid around $400 a square foot. Today, he says similar properties are selling for $800-$1,400 a square foot.

 Porter also invested money with some private, real estate investors who are buying apartments… He's generating 15%-20% pretax yields from those investments.

 "It's hard to find a private-equity firm on the planet that doesn't have a strategy in this space," Gary Beasley, CEO at California-based Waypoint Homes, told the crowd at last week's American Securitization Forum conference in Las Vegas.

 "There's a lot of capital out there that is chasing these investments," so there may be price inflation, Morgan Stanley managing director Craig Pastolove told Bloomberg. He believes buying single-family homes to rent is one of "the smarter ways to invest going forward." But he advises clients do it themselves if possible (as opposed to investing with Blackstone or a REIT).

 Morgan Stanley isn't buying houses itself, but it is making loans to its high-net-worth clients at lower interest rates than typical mortgages.

 I asked Steve Sjuggerud – who has been recommending taking advantage of dirt-cheap housing since February 2011 – for his thoughts on the U.S. housing market today…
It's still hard to make the housing trade… REITs aren't paying you well enough. Plus, with most REITs, you're buying a shopping center, not residential… And how are you going to buy JPMorgan's housing portfolio?

The "V" bottom is behind us in the housing market. But there are still good values… And I think the best route for people now is Silver Bay [the portfolio of homes spun-off by Two Harbors]… It's a national portfolio of homes that were all bought at low prices that are mostly paying rent already.

It's the most direct trade… And it hasn't run up nearly as much as anything else.

If you missed the opportunity to buy a house in your local neighborhood, there are still opportunities around the country. Personally, I'm looking to make low-ball offers on property owned by banks that are obviously "worst in class" and need to dump their properties.

I'm making low-ball offers, around half of the asking price, because these banks are desperate.

Better-capitalized banks aren't looking for low-balls today… They know they're going to survive and they're willing to hold their real estate portfolios.

In one case, I offered one-third of asking for a bank-owned property… They came back at below half of what they are asking. But I still walked away.

 In the January 30 Digest, we updated you on the latest numbers from online retail giant Amazon… And how e-commerce is destroying traditional, brick-and-mortar retailers.

Financial Times article today supported our thesis… Experts expect around 15% of our nation's 1,300 regional shopping malls to shutter over the next five years as e-commerce continues hurting the sector.

"I think 200 are going out of business," said Gerry Mason, executive managing director at property group Savills. "We're 15-20 percent overbuilt. There are just too many stores."

 And the credit markets are reflecting that oversupply. Fewer retail properties are being put into commercial mortgage-backed securities (CMBS)… the pools of mortgages backed by commercial real estate, which are collateralized and sold as bonds to investors. In 2010, retail property accounted for 56% of the CMBS coming to market, according to the Royal Bank of Scotland. That number fell to 42% in the second half of 2011 and 36% in 2012. This year, retail property only accounts for 30% of CMBS deals.

 S&A Short Report editor Jeff Clark sent out a brand-new trade recommendation this morning. While the market is rallying, one sector has been left behind. And he's going long. Here's what he wrote:
Stocks are overbought.

The S&P 500 was up 5% in January, and another 1% on the first day of February. More than 90% of stocks are trading above their 50-day moving averages. Investor sentiment is overwhelmingly bullish.

The New York Stock Exchange and Nasdaq Summation Indexes – intermediate-term measures of overbought and oversold conditions – are extended and are flashing "warning signs." And the bullish percent indexes for the financial and energy sectors are overbought and on the verge of rolling over.

[E]ven though all the signs are in place for a decent market correction, the seasonal influences are just too bullish this time of year to try to make money on the short side. Stocks generally move higher between December and April.

Of course, it's also tough trying to chase stocks higher into overbought conditions. Today, traders are faced with the "too early to short, but too risky to buy" dilemma.

Tech stocks usually lead the market. But that hasn't been the case so far in 2013. The market has run up without them. If the market starts to fall at this point, tech stocks don't have a lot of gains to give back. So we can stop out of any tech trade for a small loss. But if the market is going to run higher for the next couple months, the tech sector is going to have to play "catch up." And the gains could be explosive.

 Jeff recommended a low-risk trade on one of the safest stocks in the market… And if it rallies, readers can make up to 260%. If you'd like to learn more about the S&A Short Report and how to gain access to Jeff's latest trade, click here.

 On the topic of tech stocks, according to a recent report from investment bank Goldman Sachs, Apple is one of its favorite stocks right now… The bank cut its price target for Apple by $100 per share to $660, but it's still rated a "buy."

Goldman's chief U.S. equity strategist, David Kostin, released a report of the 40 most undervalued stocks the bank covers relative to their analysts' price targets. Apple tops the list. At its current price of $455, Goldman believes Apple shares could climb nearly 45% higher from today's levels.

 In today's Digest Premium, Porter offers his current take on Apple… and whether the blue-chip tech giant's stock is a good buy. If you'd like to sign up forDigest Premium for only $10 a month, click here… New subscribers will also receive a free copy of our friend and master speculator Doug Casey's new book, Totally Incorrect.

 New 52-week highs (as of 2/4/13): Alleghany (Y) and Becton-Dickinson (BDX).

 "Hi, in a delayed response to your request, I wanted to drop you a note and thank you for what you've recently taught me about options. Although I find your recommendations too conservative, I wanted share my story, which I owe entirely to you. A year ago I would have never even imagined that I would be trading options – they seemed way too complicated and every time I had tried options in the past (buying calls, of course,) I lost money – every time.

"But since subscribing in March, I finally took the options plunge selling naked puts that last week of May. I gained $2,136 that week. I wasn't able to trade again until the first week of July, but from July to the end of Oct, I averaged a weekly gain of $2,522 (not including commissions) placing 37 trades with only 3 of those trades where I covered for a small loss. While I don't trade every week, my best weekly gain to date is $7,260 and my smallest weekly gain is $340. I took a trading break in Nov as I was too busy with work and the mkts too challenging. But I resumed trading in mid December and since then my average weekly gain is $1,563 per week. My total gain from May thru January before taxes is about $41k.

"Since trading options this way, I've been put a few times but I don't mind, as these are issues I would want to own anyway, and when I am put, I just start selling covered calls where I continue to add to my weekly gain while further reducing my basis. I have, however, tweaked your approach by trading the weekly 3x ETF's and several weekly tech stocks, which more suits my trading style. Perhaps you should consider offering a newsletter like this for your more aggressive traders. You've taught me how to sell naked puts and calls and I can't thank you enough for offering your expertise to the little guy/gal, as you've changed my (trading) life forever." – Paid-up subscriber PK

 "I have been buying some gold & silver bullion here & there since 2008. This weekend, after reading some of last weeks publications & listening to your podcasts, I decided it was time to convert some more greenbacks into bullion. So I went to my local gold & silver dealer (Dallas/Ft Worth area) today & they were out of 1oz gold maples; they had a handful (literally a handful) of eagles & Krugerrands. They were out of 1oz silver eagles & probably won't be getting more real soon. They did have some other odds & ends in silver. This is the first time I've ever had any difficulty buying bullion.

"I asked him, 'if silver supply is scarce, doesn't it seem odd that the price hasn't gone up much lately?' His answer was, 'I think the shortage just hasn't hit home yet with most people.'

"While I'm at it, I also wanted to say thanks for the education. My formal education is in science & medicine. Around 2008 I decided I wanted to beef up my investing/finance/economics knowledge, so I enrolled in a local university & got started with an evening class… step one of many to get a MBA or whatever. I soon realized that it wasn't going to be practical, as far as time, because I work a lot running 2 businesses and also have kids. Around that same time I started reading some of your publications. I started out w/ 1 or 2 newsletters, then moved to PWA, then upgraded to full Alliance a couple years ago. It didn't take very long for me to realize that I could self-teach myself the exact things I wanted to learn by reading your publications in my spare moments – and for less cost and time than an MBA that would have taken. I haven't taken a class at the university since.

"One more thing… once upon a time, I was a herbal life distributor. I thought their products were great, but as a business, Porter is exactly right… only a tiny percent make enough money at it to bother with it… and only a few will become wealthy… and most will end up stuck with a closet full of products." – Anonymous

 "In your Friday Digest, you used a term that I have used many times in my 30+ years of business, only in a manner that may more accurately define its meaning. A lot of business is done with 'Other People's Money' who's acronym happens to be 'OPM.' When said quickly, it sounds like what it really is to many Public Company Execs and ETF managers, 'Opium.' Weird, but incredibly accurate. They spend 'OPM,' act like they are on 'Opium' or some other hallucinogenic, throwing caution to the wind, foolishly high on OPM. Unfortunately, for all OPM addicts, there comes a day of reckoning." – Paid-up subscriber Randy Wedel

Porter comment: You got that right. I like to tell people to think about it this way…

The further a dollar travels from the man who earned it and saved it, the more likely it is to be lost doing something that's almost laughably idiotic.

For really big laughs… just watch the sovereign wealth funds. Here you have a pile of money that no one earned (it just accumulated by currency manipulation), that no one really owns (politicians control the funds, but don't own them), and that no one will ever miss if they're lost. It's other people's money. And it's only good for Wall Street.


Sean Goldsmith

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