The S&A Digest: The Last Real Estate Bull Market

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As of 06/17/2013

As falls home equity, so fall credit cards... It takes a thief like Obama...Time to buy the three Gs... Wachovia's doomed currency... P&G's pricing power... Patience, the investor moat...The last real estate bull market...

I'm once again reminded of the old Pat Metheny album, titled As Falls Wichita, So Falls Wichita Falls. My version would be called As Falls Home Equity, So Fall Credit Cards.

The home-equity ATM is tapped out, as the overvalued equity disappears. Credit cards, then become the last refuge of debt-tapping "stuff mongers" across America. They need to buy stuff, and they'll borrow until they can't anymore to buy it. Even Extreme Value pick American Express (AXP) is having trouble selling its credit-card loans, according to a story in today's Wall Street Journal.

Credit-card companies must sell their credit-card receivables if they wish to continue making new loans. Since March, the monthly sale of bundled credit-card loans has fallen by about 56%, from $10.1 billion to $4.4 billion in July. That's what a credit contraction looks like. The credit-card issuers are imploding right before our eyes.

One person quoted in that WSJ article said credit cards were the next shoe to drop on the American consumer. The poor saps. It's raining shoes.

Hillary Clinton said it takes a village to raise a child, but Demopublican presidential candidate Barack Obama seems to think it takes a thief to be president. Obama says he'd like to steal some money from oil companies and use it to write every family in America a $1,000 energy rebate check.

This is the infamous "windfall profits tax," popularized (and proved worthless and destructive) by Jimmy Carter. Obama said nothing of what a windfall profit might be.

Just between you and me, I'm starting to become quite concerned (otherwise known as terrified).

I've been reading up on the Great Depression because I know the government will clamp down on the U.S. economy as it deteriorates, just like it did back then. The clamping will make everything worse, just like it did back then, like it always does, like it only can.

We have all the elements in place for a run on the currency and a huge step toward a more statist economy: huge trade deficits, war, government bailouts, and decreasing civil liberties (taken away for expedience and by parts, to paraphrase the appropriately paranoid Edmund Burke).

If you don't own gold, guns, and plenty of extra groceries, this looks like one of those times when you might want to stock up. Worst case for the investment: Everything turns out OK; you sell your gold, shoot your guns for fun, and have a big barbecue with all the extra food you buy. Worst case for our society: You'll be glad you did it. My wife wants me to buy a big freezer and put it in the garage. Maybe I will...

Look for Wachovia to raise new equity. New CEO Robert Steel told analysts he wouldn't raise new equity or put the company up for sale. Wachovia is straining under the weight of an imploding $121 billion option-ARM portfolio it acquired when it bought Golden West Financial at the peak of the housing bubble.

According to our friends at T2 Partners, Whitney Tilson and Glenn Tongue, $440 billion of option ARMs recast into new loans with higher monthly payments this year.

Option-ARM mortgages have three payment options. You can make normal payments, which cover principal and interest. You can make payments that account for interest only. Or you make the choice 80%-90% of option-ARM borrowers make... submit the minimum payment, which doesn't even cover the interest. Borrowers who do that tack the unpaid interest onto the principal, the toxic phenomenon known as negative amortization.

When option-ARM loans recast, which happens every 60 months, the new minimum payment is the old maximum payment, i.e., sufficient to pay the loan if amortized normally. That can't be good for Wachovia and other option-ARM holders.

Negative amortization is killing companies like Wachovia. I'll be shocked if the bank survives in its present form. A deposit run would shut it down within hours, possibly minutes.

As far as Wachovia's new CEO saying he won't sell new equity, that's just like a government saying it won't weaken its currency. The denial tells you it's a foregone conclusion.

Lest you think all is gloom and doom, uber-consumer-brand hoarder Procter & Gamble showed off the pricing power of its 23 billion-dollar brands. P&G's net profit last quarter rose 33%, mostly due to price increases that more than offset higher commodity and energy costs. That's how you know you've got a real economic moat on your hands, by its pricing power. And that's why you buy stocks like P&G when they get cheap and hold them forever. At 16 times trailing free cash flow, I don't think P&G is in Extreme Value territory, but it's something to keep an eye on.

Extreme Value short Lehman Brothers (LEH) may sell its entire investment management division, according to CNBC. The sale would include its Neuberger & Berman asset-management division, stakes in hedge funds D.E. Shaw and GLG Partners, and private-equity funds. The sale comes as Lehman weighs different options to raise capital, including selling all or part of itself to a private-equity firm.

More developments in the airline industry... To attract customers, Delta is installing wireless Internet in its planes. Apparently, the warnings that wireless devices interfere with cockpit controls are bunk.

And JetBlue will begin charging $7 for pillows and blankets on flights two hours or longer. The sets, which passengers can keep, include a 10x12-inch pillow, a fleece blanket, and a $5 Bed Bath & Beyond gift certificate.

Our favorite "chairman" is still crunching the numbers for-his long awaited letter. Stay tuned...

New highs: Anheuser-Busch (BUD), H&R Block (HRB), Novartis (NVS).

Lots of socialist, namby-pamby, fence-sitting jibber jabber about politics in the mailbag today. Please write us at feedback@stansberryresearch.com... And try to have a point of view.

"'Value investor Richard Pzena, who lost big on Citigroup and Fannie Mae, is still buying financials.' Pzena is simply... A Fool (Simpleton?). Too bad if you are an investor with him, unless you wish to Hold for about Five Hundred Years." – Paid-up subscriber Robert M.

Ferris comment: I'm sure Rich Pzena learned a long time ago he can count on almost everyone to think he's smart when the market loves him, and stupid when it hates him.

As far as holding "for about Five Hundred Years," I bet two or three years does seem like 500 years to you. (Has Pzena owned Fannie for even one year yet, let alone two or three?) That's OK with me, and I bet it's great with Rich Pzena, too. The more investors focus on the shortest-term results, the easier it is to acquire and exploit the competitive advantage of patience.

Regards,

Dan Ferris

Medford, Oregon

August 5, 2008

The Last Real Estate Bull Market

By Ian Davis

Home prices in the U.S. have fallen by the largest amount since the 1930s. Since July 2007, the median price of an existing home in the U.S. fell by 16.2% (peak to trough).

Despite the Great Depression-sized correction, one property market is bucking the trend...

Over the last year, the value of all land and buildings on farms rose 8.8%. The largest gains came in the Northern Plains... States like Kansas, Nebraska, and the Dakotas saw the value of their farmland soar 15.5%, making them the best-performing real estate markets in the United States.

This bull market in farmland comes from a bull market in agriculture. Wheat, corn, and soybean prices all rose double digits last year. Wheat rose 77%, corn 17%, and soybeans 78%.

But the bull market in agriculture still pales compared to what's happened in other commodity markets. Take a look:

Agricultural Commodities Are Playing Catch-Up

% Change

From 1/4/2002

As you can see, agriculture prices are only up 45%... less than half the gain of energy prices.

However, this hasn't daunted legendary investor and commodity bull Jim Rogers.

At the most recent Agora Financial Investment Symposium in Vancouver, he "pounded the table" on agriculture. He says agricultural commodities are still way below their all-time highs. For instance, sugar is still 80% off its all-time high, even before you adjust for inflation.

So there's plenty of upside potential for agricultural commodities... which means farmland and agriculture will continue to thrive.

If you want to invest directly in agriculture, you can now do so through an ETF. It's as easy as buying a stock.

About half a dozen agriculture ETFs trade on the market. My favorite pick is the PowerShares DB Agriculture Fund (DBA). This fund tracks the Deutsche Bank Liquid Commodity Index, which consists of corn, wheat, soybeans, and sugar.

Also, if you want to juice up your returns, PowerShares offers a similar ETF that doubles the exposure to the agriculture markets. It's called the PowerShares DB Agriculture Double Long ETN (DAG). It offers two times the return of the Deutsche Bank Liquid Commodity Index, plus the monthly Treasury bill index return.

Good investing,

Ian Davis

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