The rate cuts in November and then December were supposed to save Australian house prices.

Yet less than six months later, recent economic data suggest things are getting worse.

According to RP Data, capital city house prices lost a combined 4.5% last year.

 
But ever the optimist, RP Data called this decline in April a ‘renewed softness’.

Even Tim Lawless, RP Data’s research director, admitted interest rate cuts won’t help the housing market. He said:

‘Our estimate of transaction volumes to February suggest that the two interest rate cuts in November and December last year are yet to provide a sustained stimulus to the market, with transaction volumes remaining reasonably steady around 31,000 each month. Comparing this with the sales rate through mid 2009 when around 45,000 homes were selling each month, the slowdown in buyer activity becomes quite clear.’

 

Housing sales by volume are down 31% since mid-2009. Adding to the housing woes is the amount of ‘housing stock’ available. It’s double that of five years ago.

 
And not only are more houses available, but they’re cheaper as well.

Increased housing stock is dragging down house prices. Yet, what will happen to house prices when high debt levels catch up with us?

Take a look the two charts below. In the first chart, the blue line shows you Australia’s private debt to disposable income. It stands at 150%. In comparison, at the peak, Americans had a private debt level of 300%.

The peak in American private debt levels occurred just as house prices began to fall.

The next chart gives you an idea of just how big the housing crash was in the US (blue line)…and a warning of what Aussie home owners can expect:

 
Those charts come from Professor Steve Keen. He’s an economist who predicts a US style housing crash in Australia. He’s convinced that high personal debt levels will bring on a crash in Aussie home values, much like what happened in the US.

Professor Keen’s thinking used to be at the fringe of economic thought. Today, it’s mainstream.

The International Monetary Fund (IMF) has confirmed the correlation of debt levels and house prices. In their World Economic and Financial Surveys publication, the IMF said:

‘Based on an analysis of advanced economies over the past three decades, we find that housing busts and recessions preceded by larger run-ups in household debt tend to be more severe and protracted.’

 

The thing is, even if we don’t see a US style housing crash, monthly housing data suggests home values are falling at a steady rate.

So rather than a quick housing bust, Aussie homeowners face a long-term housing bust.

And it’s already underway. Even so, some spruikers still won’t admit it. They won’t say prices have fallen, they’ll tell you prices are soft…weakening…easing…. Or any other word they can think of to avoid saying, ‘Aussie house prices are falling‘.

The good news is the spruikers can’t hide behind industry-speak for much longer. Each month, fresh numbers show a dismal housing market.

One in permanent decline.

How long will it last? We don’t know that for sure. But this sort of decline could drag on for years. The US is into its sixth year of falling house prices.

The housing bubble took two decades to build up…it might take another two decades before house prices go up again.

Shae Smith
Editor, Money Weekend

via moneymorning.com.au

On Friday night we had April’s US employment numbers. They showed that the economy added just 115,000 jobs during the previous month.

That may not sound too bad, but doesn’t go very far across a population of 312 million people recovering from a financial crisis.

 
The other problem is that this is now the second month in a row that these numbers have been a bit ‘soggy’.

From October of last year to this February, the monthly job numbers seemed to be gathering momentum. After being up and down like the proverbial for the last two years, they finally seemed to be forming a trend.

 

 

But these last few months have put the US economic ‘recovery’ into question.

This is a big reason why the US markets fell so badly on Friday night. The S&P500 fell 1.61%. And the Dow Jones Industrial Average fell 168 points, or 1.27%. Where the US markets go, the Australian market follows. This morning the Aussie market is down more than 1%.

Unfortunately, this rule works much better when the market falls than when it rises.

What is strange is that even though April’s employment numbers were disappointing, the US unemployment number actually FELL from 8.2% to 8.1%.

This has been falling steadily for months now. It was 9.1% just 6 months ago. But the market wasn’t impressed, and with good reason. The number is pretty meaningless, as it ignores those people that have given up looking for work.

My good pal and colleague, Murray Dawes, the editor of Slipstream Trader, has been following this for his subscribers, so I picked his brains for you this morning. Here’s a snapshot of our chat this morning. I started off by asking him what the job numbers meant for the markets…

Murray: ‘Friday night’s data has put the nail in the coffin of the idea that this recovery is gathering steam. The numbers are even worse if you dig a little beneath the surface. The BLS (Bureau of Labor Statistics) keeps fudging the numbers to make them look better than they are. For example the participation rate fell yet again by 0.2 to 63.6%. It is now at its lowest level since 1981. By lowering the participation rate the unemployment rate falls. Therefore the reported unemployment rate dropped 0.1 to 8.1%. This figure is a mirage. Without the falls in the participation rate the US unemployment rate would be well over 11%. The household survey said that the number of people employed actually fell by 169,000. The situation is much worse than it appears.’

Alex: ‘So Murray, you’ve been expecting the market to turn down for a while now, and Friday night’s drop in the US markets was fairly meaty. You have been telling your readers to short the market in preparation for this. Just how bearish are you now?’

Murray: ‘I have a strongly bearish view. In Slipstream Trader we currently have the biggest short position that I’ve had for over a year. US markets are having a false break of last April’s high and my immediate target for the S P 500 is 1280-1300. That’s 7% below current levels. But that’s only an initial target. If Europe unravels the S P 500 could head even lower – unless [US Federal Reserve chairman, Ben] Bernanke waves his wand and prints more money.’

Alex: ‘The Australian market is down on the back of the US data, but wouldn’t you say yesterday’s French election result is having an effect too? It’s ‘Au revoir’ to Mr Sarkozy, and ‘Bonjour’ to Presidente Hollande. As France is the second biggest economy after Germany, what do you reckon this election result means for the mess that Europe is in?’

Murray: ‘The elections in Europe are just a continuation of the change of leadership that’s occurring across the whole Eurozone as a result of the crisis. I don’t think France will be saved by installing a tax-and-spend socialist. The reason they are in the mess they’re in is because of the Welfare State paradigm. Now they want to do more of what caused the problem. Expect to see yet more ‘can-kicking’ at every opportunity until the whole thing blows sky high. Watching the bond market’s reaction to the French election will be interesting.’

The New Dynamic in Europe

 

The relationship between the outgoing Sarkozy and the German Chancellor, Angela Merkel, has been a cornerstone of how Europe has handled the crisis. But President Hollande was voted in on a mandate of renegotiating this relationship, and their countries plans for Europe.

Symbolically, his first meeting as President will be with Merkel, so he’s not wasting any time.

Those European bond markets Murray mentioned start trading later on today. The Spanish yields in particular had been worrying the markets as they jumped in the last few months. They have since pulled back. But that could change with so much uncertainty around Europe.

One thing looks certain. The market will see a lot of volatility in the coming weeks. And if there’s one thing traders like, its volatility. For traders that’s great news as it gives them the chance to profit from both rising and falling prices. To see where Murray thinks the market is heading next, check out his stock market update on his YouTube channel tomorrow, for a special update on the French elections, US employment data and the significance of the US market breaking through a key technical level.

Dr. Alex Cowie
Editor, Diggers & Drillers

via moneymorning.com.au

In order to talk about cycles, and how they can help your understanding of world markets, brings me to an idea I want to share with you. It’s also an idea that describes and predicts great change in the world.

The idea is that the world’s financial markets might be subject to the same kind of polarity reversal our own planet has periodically experienced. This reversal amounts to an enormous change in asset allocation models and even the way people think about risk. And according to PIMCO’s Ramin Toloui, the way to start preparing for this rebalancing of growth is to buy more government bonds in emerging markets.

A rebalancing of the world’s available pool of investable cash, based on a fundamental shift in attitudes toward risk, is basically the end of the world for the US dollar standard. PIMCO doesn’t say that. But it’s telling investors to plan for it and to profit from it.

But let me back up a second and explain what I mean about reverse polarity in scientific terms. For the planet, I’m talking about an event where the magnetic poles of the Earth reverse. North becomes South and South becomes North. It’s actually happened quite often, according to scientists And it will certainly happen again.

As you might expect, this kind of change can be pretty disruptive, especially if you’re eating your lunch at your desk on a Tuesday. It probably won’t be good for real estate values…anywhere. In fact, some scientists speculate that reverse polarity is what allowed the solar wind to blow away the atmosphere on Mars and make that planet less hospitable to life.

A Sudden Change of Direction for World Markets

I thought of reverse polarity because it’s one of the only metaphors that could describe a sudden change in the way the world’s large money managers and investors perceive risk. The current distinction is between the developing world and the developed world, between emerging markets and emerged markets, or between the US/Europe/Australia/ Japan and Brazil/China/Russia/South Africa/India/Indonesia/Korea etc.

Up until 2007, the idea is that one category of countries (the developed world) is “safe” while the other countries are “risky.” Thus, “risk on” trades saw investors buy emerging markets and commodities while “risk off” trades saw rallies in the US dollar, yen, euro (generally) and blue chip developed world stocks.

It’s a pretty simple way of thinking about the world markets and where to put your money at the right time. The only trouble is this description of the world no longer matches the world. The description needs to change. And like any change in investment markets, being ahead of it is better than getting run over by it.

Besides, after two years of constant crisis, the government bonds of developed world countries like the US, Spain, the UK, and Italy can hardly be described as “safe.” And in any event, their yields (on the shorter-term debt) are all nearing zero in nominal terms and below zero in real terms. The news about various bond auctions is a giant distraction.

Meanwhile, in the so-called developing world, government debt ratios as a percentage of GDP tend to be lower, savings rates higher, and GDP per/capita growing (rather than shrinking). Yet investments in the so-called developing world are still considered “risky” while US debt is considered “safe.”

This general attitude toward risk is subject to a pole reversal. It occurred to me that attitudes toward risk can change quickly too, with huge investment consequences. Attitudes at the margin are already changing. The fact that it’s showing up in PIMCOs advice to clients is another sign that the idea could reach a “tipping point.”

But a “tipping point” is another way of saying an event needs a catalyst to initiate what chemists would call a “phase change.” Solids don’t turn to liquids without a phase change. Liquids don’t turn into gasses without a phase change. And investors don’t suddenly change their attitude toward the world without a similar phase change.

Dan Denning

Editor, Australian Wealth Gameplan

I always preach caution to investors lured by mining towns.

They’re the ultimate risk-return conundrum for the mum-and-dad investor.

The considerable appeal of high rental yields and fast capital growth needs to be weighed against the risk of all that collapsing amid a GFC or a reversal of fortunes for a key employer.

The typical package for an investor buying a capital city suburban house in the past 10 years is rental yields around 4 per cent (which means a loss-making investment or, as the industry likes to term it, a negatively-geared one) and capital growth averaging 10 per cent a year.

Outside of the capital cities there are regional locations where capital growth has averaged better than 20 per cent a year over the past decade.

There are also places where you can get double-digit rental returns, delivering an investment that provides weekly income.

Here’s the thing: those high-capital-growth places and those high-rental-return places are the same places.

They’re all mining towns or regional centres which service mining towns.

One of them has averaged 33 per cent in annual growth in its median house price. It also can provide rental returns around 15 per cent.

This extraordinary place is Moranbah. It’s in the Bowen Basin, Australia’s greatest coal province, in central Queensland.

No one can say for sure what its population is, because so many people who work there don’t live there – or live there temporarily as fly-in-fly-out or drive-in-drive-out workers.

The permanent residential population is around 8,000 but there could be double that number in the town at any point in the working week.

Ten years ago you could have bought the typical Moranbah house for under $50,000. Today you pay twelve times as much.

As the town’s importance as a mining hub expanded, there was exponential price growth from 2003 to 2007. Growth stopped around the onset of the GFC, which put a dampener on the resources sector for a couple of years.

Unlike other mining towns, however, Moranbah did not suffer any noticeable loss of values – just a short-term pause in the growth. It resumed strongly last year and now appears headed for the stratosphere again.

Australian Property Monitors records a long-term growth average of 33 per cent a year, which means values doubling every two years or so.

The only other markets in Australia that come close to that performance are Dysart, another coal mining town in the Bowen Basin, and Port Hedland in Western Australia.

The other extraordinary thing about Moranbah is that rents have grown recently at an even faster pace than prices.

The Real Estate Institute of Queensland records a median rental yield for the Isaac Region (of which Moranbah is the key mining town) of 15.3 per cent. In 30 years of writing about Australian residential property I haven’t seen a number like that.

Properties currently for sale in Moranbah include a three-bedroom house tenanted at $2,000 per week and with an asking price of $820,000, which equates to a 13 per cent yield. Another rented at $1,900 per week had an asking price of $789,000, which equates to 12.5 per cent.

A four-bedroom house with an asking price of $920,000 has a two-year company lease in place at $3,100 per week. That’s $161,200 in annual rent and a yield of 17.5 per cent.

There are many others with similar numbers.

While the median price for Moranbah is now around $600,000, I can’t find anything for sale at the moment for less than $750,000 – and we’re not talking about palatial modern homes, in most cases.

This is why such investments are so risky. When you’re paying $800,000 in a small country town for a house that might fetch $350,000 in an outer Brisbane suburb, you known the values are at best tenuous.

They depend on the resources sector continuing to grow and also depend on the current lack of housing supply in Moranbah. Both situations could change in the future.

I do believe the current upturn in the resources sector has long-term horizons because the industrialization of new growth nations like India and China is only just beginning. And that’s where the demand for Bowen Basin coal originates.

Certainly BHP Billiton thinks so, moving forward with the $4 billion Caval Ridge project, while Anglo American is tipping $1.7 billion into the Grosvenor project.

These and other projects are forecast to bring another 10,000 FIFO workers into Moranbah, effectively doubling its population.

But be aware of the risks. BHP showed at Ravensthorpe in Western Australia, where it closed a $2 billion mine only months after completing its construction at a cost of 1,800 jobs, that it’s prepared to take ruthless action if the world economic climate turns south.

via moneymorning.com.au

Before the start of last year, we thought investing in 2011 would be hard.

Turns out we had no idea just how hard.

The good news is last year’s market behaviour is set to repeat this year. Now, saying that’s “good news” may seem strange considering the poor performance of shares in 2011.

But that’s exactly why it’s good news.

 
Share market volatility and a falling market is what any cashed-up speculator dreams of. Simply because volatility and falling markets scare investors away. And when investors are scared, share prices fall…

A Great Buying Opportunity for Small Cap Investors

If you’re cashed-up, you’re in a great position to benefit from the coming year of volatility.

The only question that remains unanswered is how you’ll profit.

Of course, investing in small-cap stocks is a risky business. To give you a comparison, the S&P/ASX Emerging Companies Index is down 11.11% since January 2011. And the S&P/ASX 200 Index is down 9.21% in the same time.

Click here to enlarge

 
That gives you a clue about the risks of investing in the market.

But it also shows you something else… that diversifying a portfolio for the sake of it doesn’t work.

That’s why it’s more important to focus on good business ideas rather than just buying any old stock or sector that moves….

Three Small Cap Investing Themes for 2012

We’ve targeted three big themes: “creative destruction”, “disruptive technology” and “entrepreneurial vision“.

Understanding why these are important and the role they play in the economy will be vital to making money from small-cap stocks in 2012. But in case you’re not familiar with these themes or you need a refresher, here’s a quick rundown…

Creative destruction is a term coined by early 20^th century economist, Joseph Schumpeter. In simple terms it’s the idea that new ideas and ways of doing business emerge to replace old or inefficient ways of doing business.

An example we like to use is the typewriter. Functionally, there was nothing wrong with the typewriter. But as technology developed with the invention of computers, it became obvious personal computers could replicate and improve on anything a typewriter could do.

Another example is music players. Over time technology has seen the arrival and departure of the gramophone, record players and cassette players. And one day CDs will disappear too, as music buyers shift to MP3 players.

The important point is that creative destruction is a positive process. It results in consumers getting a better or more efficient product.

As for disruptive technology, well, that’s slightly different.

Rather than destroying one thing and replacing it with something new, disruptive technology shifts the market in a new direction.

For instance, catalytic convertors didn’t destroy anything. And they didn’t replace anything. They simply shifted the auto industry in a new direction, away from leaded petrol and towards unleaded petrol.

Again, disruptive technology is a positive process. It’s about innovation… new ideas.

And ultimately, that’s what small-cap investing is all about.

It’s identifying companies that could change the shape of their industries.

But, creative destruction and disruptive technologies don’t just happen. They’re only possible if they contain a key ingredient –

Entrepreneurial Vision

Entrepreneurs are the driving force behind any economy.

Without them, there’s no progress.

Economies need men and women who forego the safety of 9-to-5 jobs. Those who prefer to borrow, scrimp and save to see their ideas through to completion.

But remember this: most entrepreneurs fail.

Either they get their timing wrong on what the market wants or they’ve just got a bad idea.

But that’s what makes small-cap investing so rewarding. Because if you back the right idea at the right time, the payback can more than make up for the risk.

The thing is, which ideas should you invest in and how do you find them?

Over the last few weeks we’ve been working on a brand new presentation that explains exactly that. In it, we also reveal our top five speculative ideas for 2012 and 2013.

Each of these tiny companies is run by true innovators in their industry. Of course, they could fail. But these guys are not after safety. They are after success. And if they succeed, they’ll make a fortune.

More importantly for you, so will the shareholders in their companies.

The market was rubbish in 2011. And right now there a whole raft of brilliant companies like these trading for prices we haven’t seen since the lows of 2009.

For speculative investors, it truly is a paradise to play in. And in our new presentation we aim to show you how to best profit from it.

So keep an eye on your inbox over the next couple of days.

Cheers.
Kris.

What a difference a day makes. Last night we saw a bad Spanish bond auction, which kneecapped European peripheral bond yields. Portuguese, Spanish and Italian bond yields all raced higher by over 20 basis points!

I noted the fact that their yields were starting to trade higher yesterday and that the LTRO2 had already run out of puff. The cracks are certainly beginning to appear and equity markets are finally starting to react.

 
Let’s have a quick look at those bond yields again today for those who missed yesterday’s Money Morning.

Portuguese 10-year bonds

Spanish 10-year bonds

Italian 10-year bonds

 
A move of over 20 basis points in one night is big news. As I said back in February, if European bond yields start rising again soon after the end of LTRO2 then watch out. I think we saw the first concrete signs of this last night.

Things are deteriorating at a rapid pace in Spain. Why anyone would buy 10-year bonds at a 5% yield is beyond me. Obviously others are starting to think the same.

There are some very strange things going on in equity land. We are continuing to see major redemptions from US mutual funds on a weekly basis. Even though the stock market is rallying to new highs. Also we are continuing to see major insider selling.

 
It looks like investors no longer believe the hype created by the algorithms that continue to buy stocks into the stratosphere, even though nearly every other indicator is sending warning signs.

It was interesting to note in the Commitment of Traders (COT) data released last week that the big boys are short and getting shorter while the retail punters are long and wrong.

Click here to enlarge

Have a look at the data within the ellipses. The dealer/intermediary (i.e the big boys) are short 690,000 and long only 137,000 contracts. And they increased their short position by 50,000 in the week prior to 27^th March. Also the Leveraged funds are short 783,000 odd and only long about 374,000. And they increased their short exposure by 22,000 in the week before 27^th March.

The non-reportable positions (retail punters) are long and increased their long position in the week leading up to the 27^th of March. Who do you think will get it right?

As I said yesterday, high-yield debt has also started diverging in a big way from equity markets. And the bond market is often proven right in the end.

The warning signs are there. But people get lulled into a false sense of security when the equity market continues to slowly trade higher on little volatility. I liken it to a frog boiling in a pot.

If you want to boil the frog you have to place it in there when the water is cold and then slowly heat it up. The frog will sit there happy as Larry until it finally boils to death.

I think this is what will happen to complacent investors who ignore all the warning signs and just point at the rising stock market as proof that all is well with the world.

As far as I am concerned the stock market is absolutely kidding itself and the technicals are now pointing to a large fall dead ahead.

As I mentioned yesterday, the ASX 200 looked like it was on the verge of re-entering the distribution that we have been in for the past eight months. I said that if the ASX 200 closed below 4266 in the short term then a long-term sell signal will have been generated. I wouldn’t be surprised at all if we closed near that level today.

ASX 200 daily chart

Click here to enlarge

If we analyse what is really happening in that distribution you can understand why so many traders end up losing money so consistently. Classical technical analysis is often looking to buy breakouts. But the fact is that the market moves in a series of false breakouts.

Let’s have a closer look at that ASX 200 chart:

ASX 200 daily chart

Click here to enlarge

You can see that the last few months of trading has seen what looks like a widening distribution. I have drawn in the blue lines to make it clear.

Basically the market continually breaks outside the current range thus setting off any stop losses that would have been placed outside the extremity of the current range. Then it proceeds to re-enter the range and head towards its midpoint (i.e. the point of control) and then shoots back out the other side.

This type of price action is happening across all markets and all time frames because it is this type of price action that fools and whips out most traders. It is not until traders are fatigued and have capitulated that the market will be ready to make its big move.

This is what I try to focus on in Slipstream Trader and even though it is never easy – because trading is hard – whichever way you look at it, it does make sense of the price action.

You are basically trying to take advantage of other traders’ mistakes to give you great risk/reward entry points into stocks and futures. If you fade the false breaks (that is, if you trade against the current move) then you only need to take a very small amount of risk to find out if you are right or wrong. This means you can increase your position size for the same amount of dollars at risk.

I’ll show you a lot more about this process over the next few weeks, where I’ll explain how something called the “Hamartia paradox” can help you to trade the markets effectively over time by looking for these types of structures.

The current distribution has been an incredibly arduous process and I can tell you that it has fooled me even though I know how it gets created. I think there will be a lot of traders out there who will be caught long and wrong over the next few weeks so you have been warned. If you are overly exposed right here you should consider dumping at least some of your position or at the very least taking some profit off the table.

Murray Dawes
Slipstream Trader