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Cursory Glance At Multifamily Shows I’m Still Right

I’ve been right about multifamily since 2011. A certain cadre of analysts I love to hate on have been wrong for the same timeframe.

I’m not going to get into a detailed breakdown of the argument or the recent numbers that came out. But I will give you a very brief, very definitive explanation for why I am and will remain in a winning position, invested in the likes of AEC and MAA, and that will do.

Multifamily occupancy is at 95%+. Multifamily occupancy has remained at 95%+ for years. Multifamily occupancy will continue to remain at 95%+ for years yet to come.

Very much to the contrary of what certain professional analysts would like you to believe, this was not “obvious, mainstream knowledge” which “everyone totally saw coming”. Moreover, it certainly is not “irrelevant” or “priced in”.

Apartment occupancy through the 80’s was averaging in the mid 80% range. In the 90’s (interestingly enough) it expanded to the low 90% range. It was not until the boom (and subsequent bust years) of the 2000 bubble era that this present level of 95% was even challenged. Perhaps companies were caught underbuilding inventory. Perhaps they just got good and filling space. I don’t know.

As the housing market took off in those early 2000 years, that occupancy level began to subside and many analysts began calling for a return to the 80’s (in occupancy terms, by way of a deathspiral in demand for apartments). In tow with this expectation, multifamily CEO’s began repositioning their businesses for less renters, less lease space. Apartment demand was dead, we were told.

Except that it wasn’t. In an effort to absorb the shock from fewer renters year over year, multifamily new development was virtually nonexistent for half a decade. Yet, as you all know, the actual result was very much the opposite. A colossal failure of housing ensued, and demand for multifamily apartments has risen dramatically.

Every new building that gets brought online is hitting 95% occupancy virtually overnight. The demand is so hot, companies like AEC and MAA can’t build fast enough.

I want you to take a minute to look at AEC’s acquisition and development budget. Look at MAA’s next.

This is, as one might say, “kind of a big deal.”

These companies are cheap; they don’t have much premium baked in. You can pick them up and pocket 5% dividends for years, while you wait for their stock price to go on a nice little 30-40% run, no problem. Look back, find you’ve averaged 10% annually, call it a decade.

Sure, eventually the cycle will run it’s course and the stocks will take a hit on overdevelopment. But how much money do I stand to make in the meantime?

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BAS Just Saved My Day

If not for Basic Energy Services turning on a dime and sprinting away from the rest of the trash that comprises this trading session, I would be having a pretty bad day.

UEC is down over 50% since I bought it. Mind you, as I have stated repeatedly, it is a small position. At its peak, it was under 5% of my account. So I’m not panicked here. But damn it, that was my 5%.

Give me my money back.

The trouble with the uranium miners (and the reason I’ve been very adamant up until now to just keep it simple and avoid the smaller businesses) is pretty forwardly summed up in UEC’s latest filing. They sold $0.00 in revenue in the first three months of 2014.

That’s $0.00.

The 2014 YEAR OF URANIUM BLISS (or whatever the hell I called it) …has been cancelled. Uranium spot just nosedived this week and, even though I suspect this flash crash is nearer the end of the turmoil, that kind of godless price action can only portend one thing.

Somebody is about to get liquidated.

I just pray it isn’t UEC.

CCJ is treading water daily. It’s all she can do to hold the line, but one false move and it’s a quick list to the side and down she goes.

The rest of my positions are holding up fairly well, actually. The multifamily theme remains tantalizing, particularly now that the primary argument against them – a resurgence in homeownership rates and a drop in occupancy for rentals – is such obvious bunk. AEC and MAA should continue to perform.

NRP has held up decent enough, following the 25% washout it took this year. That’s probably been my worst idea so far in 2014. But they are getting things under control, I have a hunch coal may be a terrific investment here, and I get to collect 8% annually while I wait.

I’m definitely not +10% for the year anymore, but there’s another 8 months to make something happen yet. My fear isn’t my positions, it’s what consequence an entire index of investors getting their combined comeuppance will have on me.

The NASDAQ traders got stupid. Real stupid. Will that spill over to me? It’s looking likely.

Like it or not, the stock market tends to take on a real flare of the vineyard effect. You pop up five vineyards next to each other, they all do well. Plenty of room to visit each, for the patrons. In fact, it draws in more business.

But if one of those bastards let’s an infestation go unattended; suddenly you have nothing but tears and reek wine.

Tesla earnings are out after the bell. Let’s see what happens there.

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Bought Back Into MAA For $67.74

Good morning and I hope I find you well.

The 9th Floor’s estate is in tatters from the storm, with many trees down and trash littering the landscape. The weekend was warm and pleasant save for Saturday, which brought wanton destruction to many in this good state.

I bought back MAA this morning for $67.74 a share. Cash is down to 10% of account value.

I owned MAA as a legacy position from CLP being bought out last year. I sold the shares back when I was raising cash heavily towards the beginning of 2014. I always communicated a desire to buy back in and if you would like to read up on the position and reasons for owning, a quick search of my archives under MAA or CLP should get you plenty well started.

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First The Good News, Then The Bad

Most of my portfolio is now solidly shrugging off Yellen’s slip of the tongue. Our good bankster friends over at JPMorgan said it best – Yellen is fresh and inexperienced, and she still needs to learn how to speak without actually saying anything.

It will come. It will come.

Despite my state of shock at watching Yellen crack the market like an egg yesterday, I didn’t react. I want to watch a few more days before I make a move, even if they should lose me money. With a +14% year going, I have buffer room.

Now, the good word here is that CCJ and BAS are both moving higher. I suspect HCLP will join in soon as well (that position can be rewarded a little breather, it’s come a long way). The energy themes are solid and intact.

The bad side of the coin is that fear/reality of higher interest rates is going to just ravish the REIT and associated housing space. Check out VNQ over a five day period, and you can almost sink the cracking point up with Yellen’s comments. My current position AEC is breaking down again this morning, and an old position MAA is following.

This has to be treaded carefully. If you’re juggling garbage like NLY, I’d say you’re one four day panic away from another round of 30% losses.

I’ve said well before today, back when I never imagined Yellen would spook interest rates higher, that I was interested in rebuying MAA. This is sort of a blessing in that regards. I’d venture a guess that long term damage to multifamily REITs from higher interest rates will hover somewhere between “negligible” and “not damaging, actually positive”.

But well before that point, there will probably be a lot of indiscriminate selling from emotionally driven fund managers. The climax of that, if it should materialize, is the buying opportunity.

Between then and now, it’s important to keep a wary eye on reform efforts to Fannie and Freddie. There’s been some “bipartisan chatter”. Mortgage origination is >70% dominated by the government backed mortgage giants, and the entire housing market is totally dependent on them. A poorly thought out reform effort could rain chaos. But there’s no sense even having a discussion about that just yet. First things first, interest rates.

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Monetary Policy Remains Overwhelmingly Accommodative (And Outlook)

The fed decision to test the waters with a taper while I was away did surprise me, somewhat. Yet it did not phase me much and so I elected to remain on vacation, silent on the issue.

I would state now in hindsight that a $5B per month taper (with as much as another $5-10B in the works) would still put the Federal Reserve on path to add another ~$800B to its balance sheet in 2014. This remains colossal and would have the Fed assets outstanding at just under $5 Trillion by 2015.

They may very well have tapered by $5B/month just because they were running out of things to buy…(laughter)

If I were to state things that concern me as potential impediments to the US economy and growth, they would list (1) consumer slowdown from budget impacts (pension, healthcare costs, rents/mortgage, increased retirement contributions, etc), (2) foreign existential shocks (EU breakup, Asian crisis, similar collapse that disrupts foreign trade) – where exactly did the EU government debt go and why is it now suddenly not an issue? Who is buying it (ECB, Fed, banking scheme, inter-government trade imbalances, etc)? And what stops non-payment concerns from popping up again in the future? and (3) the election of a Republican majority

But banking solvency just isn’t on that list right now. Neither is inflation, really, although long term prospects of an uncontrollable outbreak of inflation remains a viable possibility. With credit expansion in this country limited to growth of government balance sheets, deflationary pressure is set to commence…until it doesn’t. In the meantime, another ~$1 Trillion of free money to those closest to the trough will keep a major disruption of financial assets here at home as a low probability outcome. Of course, this bodes ill for the “wealth equality” lot, but they’re too dumb to call the system out on that, so we maintain the course.

Concerns aside, I am optimistic. Recessions don’t last forever, and my concerns are outweighed by hope in outlook. I am very long (no margin) and prepared to reap the rewards of economic growth. It’s been almost six years; the system has been on a hyperactive outlook for problems which greatly reduces the likelihood that a real “Black Swan” manages to crop up. It could still happen of course, but with hundreds of thousands of financial professionals calling bubbles as quickly as problems crop up, and a full time central banking staff armed with an unlimited supply of money attacking them at first sight, how exactly is a crisis supposed to materialize from all of this?

The only room for crisis in the US is rampant commodity/asset appreciation, which remains benign. That or an elsewise major shock to the consumer. Financial assets and liquidity issues are covered.

Now, that being said, historically we haven’t had a period longer than 10 years without a recession since at least 1789 (and probably not since long before that either – I just lack records to verify a more robust claim). I’d say the expectation of a correction since the Great Depression is 5-10 years with occasional 1-3 year shocks intermittently. We’re past the small shocks phase, which would put the expectation at right about where we’re at.

These times are unprecedented and the support the Fed is willing to lend the markets (unlike any time in recorded history) makes me think we blow through the averages. I want to say this ship will have the wind to sail to years seven, eight or nine, uninterrupted. We may even match the record holder of 10 or above.

However, it would be foolhardy to doubt another recession will most likely crop up before 2020. The ever growing levels of margin debt to buy equities may well be the first sign of the beginning of the final run before that. Of course it could be nothing.

My belief then is that a long commitment remains the way to go. I have been positively surprised by recent developments that have overridden prior comments on wanting to have a larger cash position by about this time (end of 2013) that I made late last year. However, as gains are taken, a portion should begun to be set aside, starting sometime mid 2014 to early 2015. This should create a reserve build-up of steadily marching intervals (10-20%, with a 1-2% increase every month topping out at around 40-50% of ones account value) sometime around late 2015 to early 2016.

At such time, a second hard look should be had. Earlier and exceptional strength should trigger a reassessment of these statements. Casual to quality growth does not necessarily change them. A major weakness (such as a shock of a GOP majority and fear of monetary policy interference) of course may necessitate a sudden course change.

My most hated places to invest are land/real estate (excluding multifamily or renting derived), oil companies (excluding natural gas predominated), and retail (excluding facilitation to the ultra-rich).

My favorite places center around natural gas production expansion, uranium, coal, multifamily REITs, and I remain interested in holding physical precious metals in a full position in the event an inflation shock from significant expansion in credit hits the economy.

I’m indifferent to the insurance market – especially health insurance. It could swing either way; they crawled into bed with the devil so it’s all political at this point. On the one hand, the entire market is shifting in wild and unpredictable ways. On the other, the feds are rigging the game in the insurance companies favor. Just stay away.

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A Quick Survey Of Housing

Pundits are largely cheering a Case-Shiller release that shows housing prices pushed higher ~13% year over year. However, this celebration is largely premature and in hindsight.

I’ve been keeping a fairly close eye on housing and land in my own home state of Michigan, and have been listening attentively to any mortgage generators I come across. The story that I’ve been getting is not one of imminent growth and prosperity, but rather a tale of disguised rot.

Why just last week, a banker in a mortgage unit happened to sit next to me in one of my favorite water spots. Striking up a conversation, I asked this individual, upon learning his profession, if housing was set to begin a long price appreciation, in his opinion.

His sharp laughter rang out for a spell of almost a minute and a half…

As this is likely to depend greatly on where you live, you’ll forgive me if your own real estate markets are much better off and the content I am presenting does not apply to you.

But, if your market looks anything like ours, then this is likely what you are seeing:

1) realized prices on homes and land are indeed higher. But that’s because very few sales are actually being finalized (only ones that match the storyline get settled)
2) mortgage generation remains soft and loan approval remains scarce, mostly to the upper echelon of credit worthiness
3) large amount of land and home assets that were seized by banks are flooding the market, at prices that are, frankly, ridiculous and unrealistic

The other day, I inquired on a 33 acre parcel about 50 miles north of Detroit. This land was a foreclosure, which is now being offered by some miniscule, no name bank. The asking price amounted to almost $20,000 an acre.

This was just vacant land – no house.

Tell me, who in their right minds would buy that?? It’s not local to any job opportunities, its only saving grace is nearby highway access, and you’d need another $100,000-200,000 just to put a “decent” home on it.

This is probably my most egregious example, but other things I’ve seen include houses that frankly, need to be demolished to the foundation, with $200,000 sticker prices. Or two bedroom starter homes that look like they need total renovations with $120,000 requests.

This is madness.

People are still retaining this forlorn hope that they will somehow break even on their excesses from 2005-2006. But it won’t happen.

I want you to consider what a normal, “well functioning” housing market looks like. There are two key criteria I want to bring up:

1) local rents to housing prices need to be sufficient that an entity could pay off all mortgage servicing and expenses and still generate reasonable profits AND
2) there exists a natural progression from starter homes for young adults with two or three “trade ups” to the American “dream home” – until age and retirement when a scaling down and cashing out process are supposed to occur

These two general characteristics I think are sufficient to make my point. Now, as to rents, at this point the income generated from a lease is more than sufficient to cover all costs of a home plus mortgage for a prospective buyer. However, it is worth stating; rents are really quite high right now. The renter nation we’ve become is putting big pressure on rents (which is why I happen to really like multifamily units). So point 1, while important, I think is on shaky footing because if the housing market is to really recover, gross income from renting (rents multiplied by occupancy) will necessarily need to diminish.

Which takes us to point 2. You cannot argue with me successfully that we are anywhere near a healthy functioning housing market. The baby boomer generation is built from a 76 million birth boondoggle; and I think we all know, they liked themselves some housing.

And at the same time that this generation is trying to unload $500,000, 4,000 square foot homes to safely enter retirement, the new base generation, the 20 and 30 year olds as of 2010, are still living in their parents basements with no savings, barely making ends meet.

This is a serious wrench in the cogs of the long term housing market. Consider, that in many respects, the ability of a baby boomer to unload their house is in fact dependent on the ability of a 20 or 30 year old to purchase that first, smaller starter house.

The baby boomer needs the 40 year old to sell their eight bedroom, four bath palace to. But the 40 year old still has a mortgage and needs the 20 or 30 year old to monetize the remaining loan, taking over the three bedroom, two bath house with the nice yard. The 20 or 30 year old maybe has a starter home they’re trying to unload, or maybe is just trying to push straight into the $150,000-200,000 price range. But in any respect, the financial well being of those on the bottom is imperative to and essential for the turnover all the way up the ladder to the top.

Looking at the financial state of the younger Americans, this bodes ill for a strong housing recovery.

The old rule of thumb was that a man or woman could afford a mortgage equal to about three times their annual income, minus any other debts. Seeing all the families in this country with $50,000-60,000 household incomes, that would suggest an upper range of $150,000-180,000 for a modest, middle income home. Until you figure in the $30,000 in student loans and $10,000 in credit card debt…

The only reason banks, at this point in time, are seriously getting away with offering these properties at these prices is because there’s very little pressure on their bottom lines. The Fed is making sure of that. But the same low interest rates that are giving banks the freedom to offer these properties at stupid prices, pretending that the market will break even to its excesses any time in the next two decades, is also doing a number on retiree budgets.

Interest rates will have to rise or we’re going to edge tens of millions of retirees into poverty, destroying great swaths of savings/investment principal they have.

It’s a catch 22, and either path you take ends up looking bad for housing after too long. For the moment, we’re in the eye of the storm, as no one else is desperate to sell. But lots of people could be desperate, if the numbers change against them just a little bit.

Give retirees too long in a zero interest rate (or God forbid negative interest rate) environment, and suddenly they need to liquidate the real estate to preserve their retirement nest egg and standard of living. Or, if you prefer, help the retirees out by raising interest rates, and suddenly some of these small fry banks get toasted alive and the need to get those non-performing foreclosure assets off the books becomes a lot more urgent.

I am being assured by some of the mortgage guys I know that the foreclosure backlog is as long and demoralizing as ever. We were hit with the crisis of a generation and you don’t just jump up and walk away from that.

It’s not enough to go from the losses of 2008-2009 to neutral. Too many people are still holding out hope that they can “break even”. But there isn’t enough room for everyone to call it a wash. Based on what happened, there needs to be more than that – there will be losers.

For the moment, we are avoiding admitting that truth by creating a temporary, unsustainable oasis of higher perceived prices, built up on virtually no sales. But prices are not all that matters; rather what is truly important is the product of sales quantities are prices, together. Through this lens, the housing market remains in a steep depression.

It is my remaining suspicion that this mirage will eventually break to two or more decades of housing slump that largely disappoints everyone. This is not unprecedented when considering the magnitude of this financial crisis, next to the time it has taken other crises to work their way out of the economy.

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