03-09-07
The hobby known as “train spotting” dates back to nineteenth century England, when a speculative railroad boom overwhelmed the country. At the height of the mania in 1845, there were three journals and more than sixteen newspapers devoted to the railroad trade.
The fever has waned since then, but train spotters still exist. An estimated 100,000 of them live in the United States. The truly devoted train spotter likes to set up klieg lights and video cameras at railroad crossings, filming train movements for 24 hours at a stretch… and often knows more about a passing locomotive than the engineer driving the thing.
In homage to these odd birds, your Macro Musings editor has dreamed up a similarly quirky pastime: Pain Spotting.
To be a pain spotter, there are no video cameras or railroad crossings required. All you need is a highly overpriced neighborhood with “for sale” signs on every block—like so many of the neighborhoods in Reno / Tahoe, for example.
Pain spotting is meant to be a leisurely activity. It is best done on foot, when the air is pleasant and the sun is shining. When you come across two houses for sale of similar appearance, square footage and curb appeal—yet with $40,000 or more difference in the asking price—you’ve found what you’re looking for.
Big swings in the offer price indicate seller distress, which typically takes one of two forms. Either the lower-priced seller is feeling the heat of an oppressive mortgage, or the higher-priced seller stubbornly refuses to accept market reality. This silent volatility increases as buyers dry up; in Northern Nevada, at least, ten and twenty percent price swings have become notably common.
Pain spotters can also find rich pickings in the Wall Street Journal, whose recent motto seems to be “subprime all the time.”
For example: in the past few days we heard how Second Curve Capital, a top-flight hedge fund with $600 million under management, has already dropped twenty percent or so due to subprime troubles. Another top fund, Greenlight Capital, has been badly singed by the implosion of New Century Financial (NEW:NYSE), a subprime lender teetering on the edge of bankruptcy. (NEW’s share price has fallen roughly 85% year to date.)
So, whither the housing market? Mixed signals abound.
Robert Toll, the eponymous CEO of home builder Toll Brothers (TOL:NYSE), tried to bring an upbeat message to audience members at a recent Citigroup housing conference.
He was upstaged by Donald Tomnitz, CEO of megabuilder D.R. Horton (DHI:NYSE), who said—direct quote here—“2007 is going to suck, all 12 months of the calendar year.”
All 12 months, eh? If Wall Street had an executive candor award, that man would win hands down. Come to think of it, they should launch one and call it the Tomnitz.
In yet another case of mixed signals, consider the following snippets from Bloomberg and the Associated Press.
You’ve got the good:
(AP) The net worth of U.S. households climbed to a record high in the final quarter of last year, boosted mostly by gains on stocks, the Federal Reserve reported Thursday. That marked a 2.5 percent growth rate from the third quarter, the previous quarterly record high. Stocks gains helped fuel the increase in net worth, although real-estate gains played a role, too.
The bad:
(Bloomberg) Federal Reserve Chairman Ben S. Bernanke and other policy makers were warned that rising mortgage foreclosures are likely to get worse, as the central bank reported the slowest pace of loan growth in four years.
And the just plain ugly:
(Bloomberg) “We have found neighborhoods with abandoned homes, 200 at a shot,'' said Louise Gissendaner, senior vice president and director of community development in Cleveland at Fifth Third Bancorp, the 10th-biggest U.S. bank by assets. She said abandoned housing has ``devastated our city to a great degree.''
…``We feel like a canary in a coal mine,'' said Stella Adams, executive director of the North Carolina Fair Housing Center in Durham. ``It is sad for us to know that there are 1.2 million families at risk from foreclosure.''
Is it possible for overall household net worth to rise smartly, even as watchdogs warn of foreclosure crisis at the subprime level? Certainly, when one considers that well-capitalized equity investors and over-stretched subprime borrowers live at opposite ends of the spectrum. It’s the little guy who gets pinched first.
The $64 trillion question is whether or not subprime weakness will bleed into the broader market. Possibilities of a credit derivatives blowup—Long Term Capital redux—also loom large on a lot of investor’s minds.
So far, the jury is still out. We have already seen the immediate fallout of subprime pain in other areas of the market—like precious metals and emerging market ETFs—that might not seem to be connected at first glance. They are indeed connected, though, because of the way hedge funds manage their portfolios.
If an aggressive fund takes a hard hit in its short yen position, for example, it may have to sell off gold and emerging market holdings to shore up losses. Trouble in one part of the portfolio often requires closing out positions in another to reduce risk. The pain gets spread around… and this is a big reason why so many markets fell hard and fast last week.
The good news is, no matter what hedge funds do or don’t do, precious metals remain an excellent long term bet. From a short-term technical perspective, gold looks ugly and silver atrocious. Step back to a multi-year timeframe, though, and the recent action is a mere blip.
Why are gold and silver still the place to be? Because of the speculator’s greatest and truest ally, underlying conditions.
Inflation is tightening its hold as the lower end of the consumer market weakens. This creates a win-win situation for precious metals. The Fed can’t raise rates much for fear of hurting the consumer; a few savvy observers even think the Fed will be cutting again soon. If the Fed does choose to cut, or just sits on its hands, inflation picks up where it left off… and gold and silver resume their upward march. (Your humble editor sees $2,000 gold at minimum before all is said and done. As for how high silver can go, who knows.)
By the way, as long as we’re talking real estate and precious metals, it isn’t far fetched to ask: “Could grains be the new gold?” Consider this tidbit from Bloomberg:
Farmland from Iowa to Argentina is rising faster in price than apartments in Manhattan and London for the first time in 30 years.
Demand for corn used in ethanol increased the value of crop land 16 percent in Indiana and 35 percent in Idaho in 2006, government figures show. The price of a Soho loft appreciated only 12 percent, while a pied-a-terre in Islington near London's financial district gained 11 percent, according to realtors.
Between developing world growth trends and hunger for alternative fuels, it’s no wonder farmland is in big demand. Not enough gold, not enough silver… not enough corn. Gold has many virtues, but you can’t eat it or put it in your gas tank! As the energy debate rages on, perhaps it’s time to introduce “peak soil.”
