Followed The Fly Into BALT

I like the idea, so I’m leeching off his hard work. In for $5.39.

I made some adds to HCLP in November; on the sixth I bought a batch of shares for $30.80. I sold that batch today for $32.83, +6.6%

Love the name, but I have more than enough. I little profitable trading around the core position never hurt anyone.

I made a small spread today, with AEC, BAS, and MAA up and everything else down.

MAA hiked their dividend yesterday but a couple tenths of a percent.

We are well into the banal month, so I don’t know why I’m bothering to write. I suppose I want to give the shadows something to read. The 9th floor is deserted, but my work somehow remains busy.

The healthcare situation is a fiasco. Little shits on the internet, working for pasty ThinkProgress-type blogs, are heralding the triumphant relaunch of the HealthCare.gov website. Meanwhile, we’re still basically 7 million people shy of where we thought the enrollment process would be right now. And there are <28 (27 now??) days now on the clock.

I want to make this very clear to you right now – this is not some technical difficulty. This is a big fucking deal.

Suppose you got kicked off your plan. You go to the website and can't enroll. At this point, you don't have health insurance any more.

"But Cain, they can just enroll with the insurance companies directly now."

Except they can't, no, not really. The HealthCare.gov website is the primary mechanism for pushing the subsidies that are supposed to help make this law affordable. Those subsidies come in two flavors: benefits enhancements and cost reductions. And without the fancy linking that's supposed to occur through the website, you are left looking at the non-subsidized cost of coverage.

That means signing up through any place other than the website will be very expensive relative to what you were paying before. How many people do you know that will be able to readily absorb a several hundred dollar a month hit to their budgets? I'm guessing not many. The other option is to slash your coverage away to nil. Which isn't much of a choice if you're sick.

Of course, lots of schmucks are trying to say the subsidy issue isn't an issue, by pushing subsidy calculators from secondary sources and suggesting the uninsured just roll with it. Just how bad are these secondary sources? I know of one instance already with a six figure income showing subsidy eligibility.

So I'm gonna say pretty damn bad…

And that's not even talking about the garbled nonsense being reported getting delivered to carriers. Let me just lay out a few very real situations that are likely to crop up over the next six to twelve months.

There will be people who cannot sign up in time.

There will be people who think they've signed up only to discover (God willing not in a life threatening situation, but yes, probably) that they were never processed.

There will be people who sign up for coverage that has become unaffordable to them, only to be forced insolvent.

There will be people who took benefits reductions to keep their premium in line, to avoid insolvency, only to become sick, be unable to meet the higher cost sharing, and become insolvent anyway.

There will be people who think they know what they're paying, only to have subsidy restatements issued that render them with unaffordable, unchangeable insurance coverage.

There will be people with terminal illness who learn after the fact that their network no longer includes their providers.

There will be insurance companies that experience major system failures, dropping God knows what, where. (Rumors are a quarter of Blue Cross of Michigan's system already crashed in October)

You are in for a year of horror stories slowly seeping to the surface, like a tar pond.

And of course, there will be winners. There will be people who make out like bandits because of this law. There will be people who are so much better off, while it slowly dawns on the 80%+ of Americans that were just fine with their healthcare that the reason their neighbors are being raked across the coals is to provide those winners with better coverage than any of them could buy in the same circumstance.

If you missed it, the Wall Street Journal came out today with a centerpiece on fracking sand. This is great exposure to the space.

If you’ve been paying attention, I took a position in the partnership HCLP this summer for $24-26, with some adds and trading around the position since then. They sell exactly this sand to well services companies.

A few recent big developments with HCLP include a settlement with Baker Hughes and inclusive six year supply agreement that helped send it to the $32 price it’s at today. Other developments include an almost million share issuance from a parent/sibling company (non-dilutive).

The share price has come under downward pressure (from the million share issuance); however, this exposure is exactly what’s needed to get more money flowing into the position. The partnership is expensive and small, but I love the positioning and think it’s in exactly the right place for major growth over the next decade.

Another position similar to HCLP (and Chuck Bennett honorable mention) is SLCA. They specialize in a similar alternative to the fracking sand HCLP offers.

(Business Insider) The German Federal Motor Transport Authority, Kraftfahrt-Bundesamt (KBA) has concluded an investigation into three recent Tesla Model S fires and found “no manufacturer-related defects,” Tesla said today.

In a press release, Tesla said it provided the KBA with relevant data on the accidents, and received a letter saying “no further measures under the German Product Safety Act [Produktsicherheitsgesetz (ProdSG)] are deemed necessary.”

In November, the National Highway Transportation Safety Administration (NHTSA) opened an investigation into the three fires. Tesla said it has “requested” the process, but NHTSA Administrator told a House panel that was untrue, according to The Detroit News.

That investigation is ongoing, but at least the Germans have been placated.

If you woke up this morning and read this, as I did, upon seeing TSLA up 6% before the open and my puts reversing lower on this “news”, you could be forgiven if your first impression was, “when the hell did Germany open an investigation?”

You see, I remember being told about the investigation being conducted by the NHTSA, the US based auto safety agency. I remember they opened an investigation following three fires, two of which occurred in the US, and the remaining one in Mexico. Barely a few weeks ago…

But it’s funny, as I don’t recall there ever being an announcement of a German investigation. It must have got lost under the Blankenship resignation announcement.

In fact, swinging over to Tesla’s Investor Press Releases – it’s astounding – but it seems completely devoid of any bad news at all. Not even a mention of the US based investigation, much less a German one, or a peep about the VP of sales leaving the company.

Meanwhile, in the real world, real men and women are throwing their money into this company, shaking off oversold conditions on a hard bounce. And class action lawsuits are raining from the sky. I’ve mostly been thinking those lawsuits were warrantless before now, but if this is how Tesla handles communications, I’m not so sure.

This isn’t a game, people.

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.