Wednesday, March 31, 2010

Your house’s last hurrah: setting up the top

The final upsurge of the 1996 to 2010 real estate boom is at hand. Sometimes history repeats itself. Readers who are investing (speculating?) in the real estate market should review this carefully . . .

In February, I wrote an article describing how the 1987 stock market crash set up the 1989 real estate market top ( ― Friday, February 5, 2010.) House prices declined from 1989 to 1996. Tough times.

Then I pointed out that the 2008 stock market crash seemed to have been followed by an identical series of financial events and wondered if perhaps a real estate market top is at hand.

What Happened the First Time
1. After the 1987 stock market crash, many investors became fed up with the stock market. They turned to real estate for something more stable, less risky.
2. The 1987 crash was followed by a US ‘Savings and Loan’ crisis. (In the USA. they refer to trust companies as ‘savings and loan’ companies.) And that crisis was followed by a junk bond crisis. Those crises triggered a huge drop in interest rates, including mortgage rates.
3. These two factors caused an increase in both volume of sales and house prices.
4. In late 1988/early 1989, there was an up-tick in interest rates, including mortgage rates. This triggered a rush to buy houses, which resulted in an even greater flurry of home sales and house price increases.
5. In April 1989, a hush settled over the Canadian real estate industry. The top of the cycle had arrived.
6. House prices dropped and did not start up again until 1996. The world’s biggest real estate company, the Reichmann brothers’ Olympia and York, went broke. Construction was stopped on the monolithic office tower between Bay and Yonge Streets in Toronto (just south of The Bay); the unfinished building stood there for years. The game was over. It took seven years for the real estate down trend to stabilize.

What’s Happening This Time?
1. Many investors were fed up with the stock market after the 2008-09 crash, when market averages dropped 50% in only nine months. Many disgruntled investors turned to real estate for something more wholesome, less risky.
2. The stock market crash was followed by a world banking crisis, a crisis in corporate America, and the continuation of the US sub-prime mortgage crisis. These crises triggered a massive drop in interest rates, including mortgage rates.
3. These two factors combined to create a flurry of real estate activity. Volume of sales is up and prices are up. (Reference: Toronto Real Estate Board, February 2010)

The 1987 crash sequence led to a top in real estate in 1989. I wonder if the 2008 crash sequence is setting up a top in real estate prices now.

The Trigger Has Been Pulled
In 1988-89, the first up-tick in mortgage rates triggered the last surge of home buying. And when that surge of buying ended, the top was in. Earlier this week (March 29, 2010), Canadian banks announced up-ticks in their mortgage rates.

What to Expect
If this pattern is repeated, we should see a surge in home sales starting right now. Buyers who had been holding off will rush into the housing market. Volume of home sales and house prices will rise dramatically in April and May 2010. And once that buying spree is over, house prices will start to fall: the game will be over.

We hear that mortgage bankers are run off their feet this week, locking in today’s mortgage rates for 5 years because borrowers are worried that this is the beginning of many mortgage rate increases. It’s like a financial feeding frenzy to lock in these low rates now.

What to do about it
If you are an owner of investment real estate, you should sell to the surge of buying that lies immediately ahead. If the market does drop, as it did in the early 1990s, investors with lots of cash will be poised to buy at the bottom.

If you have been thinking of selling your too-large house and buying a smaller one, do it now. If you are more venturesome, you might consider selling now and renting for a few years.

If you are an ordinary homeowner who lives in the right size of house for your needs, there is nothing for you to do. You watched the price of your house rise these past 14 years, and now you’ll see it fall for a while. It’s all the same. Home is home, regardless of what you think it’s worth.

How long will Canadian house prices continue to go up when American house prices are going down? My guess: 90 days more. Then the game will be over.

In my book, Beyond the Bull, I talk about what it takes to become a better investor. One of the five keys is knowing when to sell. Another key is learning from your own experience (remember 1989 to 1996?). Another key is learning from the experience of others (think about our American cousins now or the Reichmann brothers in the early 1990s.).

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit (Bullmanship Code = SS32). Contact Ken directly at

Tuesday, March 30, 2010

Financial Olympics

People love athletic competition: there’s something exhilarating about winning. We seem to get a high from Olympic victories.

But there is another international competition going on this year. It’s a friendly competition between two great super powers, China and The United States. It involves currency. Right now, the Yuan is pegged to the US Dollar: it’s a dead heat. But, unlike the Olympics, the goal in a currency race is to lose. America wants to come in second. America wants the Chinese Yuan to become a free-floating currency like the Canadian Dollar. Their feeling is that, if allowed to float freely in the international currency arena, the Chinese Yuan would float upwards. That opinion is shared by most currency analysts. It’s as if the Chinese monetary athletes are taking performance-inhibiting drugs to keep the level of the Yuan low. If the Yuan were allowed to rise against US Dollar, Chinese goods would become more expensive for American consumers, and American goods would become cheaper for Chinese purchasers. A higher Yuan would favour America: the Americans want their currency to finish second. In the international currency Olympics, the winners or losers are the average working people of China and America.

US President Obama has alluded to this problem in some of his recent speeches. He is renewing his pressure on the Chinese to allow the Yuan to appreciate. And if the Chinese do not cooperate, America’s veiled threat is protectionist trade regulations. America could erect artificial barriers to Chinese imports into the USA.

But there’s another way to look at this race. Is America really talking about devaluing her own currency? That’s how it looks to the Chinese.

Right now China holds about 10% of America’s public debt; about $790 billion. Some analysts estimate that China owns approximately double that if they include non- Federal government securities. If these estimates are accurate, and the US Dollar was devalued by 10% vs. the Yuan, the Chinese would lose about $158 billion. Ouch!

And right now our American cousins are running massive government deficits – their country is going even further into debt. In order to finance that debt, they borrow. They sell treasury bonds and bills. And, so far, the Chinese have been willing buyers.

And now the Americans are rocking the boat so their consumers will lose [Americans would pay more for cheap Chinese imports.] and their workers will win [American exports would become cheaper for Chinese buyers.]. They talk about a more level playing field. They want the Yuan to win and the US Dollar to be devalued.

And how should the typical Canadian investor react to the Sino-American Currency Olympics?

As usual, our advice is to be over-cautious. An unnamed Chinese philosopher is credited uttering the curse: “May you live in interesting times.” “Interesting times” means challenging, disruptive times. You can see that his curse has come true: we do live in financially interesting times. In the past ten years, the stock market has dropped in half twice. We’ve had an international banking crisis. The prices of oil and gold have sky-rocketed. American house prices have dropped sharply. We’ve had two recessions. The world’s biggest manufacturer, bank, brokerage firm, mortgage company and insurance company all had to be bailed out by the American government. People have had to re-think their retirement plans. In the same way that the 1980s and 1990s were times of economic growth and stability, the 2000s have been times of instability and economic chaos. And now the Americans and Chinese are squaring off for a currency contest. These seem like good times to be over-cautious.

If financial instability increases this spring, it would be a good time to sell your higher risk investments [stocks, investment real estate] and purchase less risky securities. [Bonds, treasury bills] And how can we tell if instability increases? The stock market will drop. A stock market drop of 13% or more from last week’s market highs could indicate that the current 54 week rally has reversed. The risk is that the decline that began in 2007/2008 could begin again. In the financial Olympics, it’s sometimes best to not enter the race rather than lose.

Ken Norquay, CMT.
Financial Philosopher
Market Street Investment House

Links for buying Beyond The Bull: Bullmanship code: K44N

Passing the Bucket: the Citibank bailout story.

In early 2009, the American government bailed out Citibank, the world’s largest bank, by buying treasury shares. The USA wound up with 25% of the outstanding shares and Citibank got $25 billion of cash in the kitty. (In addition to buying shares, American tax payers loaned Citibank another $20 billion. Citibank has already repaid that loan.) And this week, the US Treasury announced it will start to sell its 25% stake, 7.7 billion shares.

What effect do you think this sale might have on the price of Citibank’s stock?

Well, on the day the sell announcement was made March 29, 2010, Citibank shares dropped 3% with a trading volume of over one billion shares. One billion shares is hightrading volume for this stock, but it has traded over 2 billion shares per day several times in the past two tumultuous years. As a market technician, I judge today’s trading action to be a significant indicator of things to come, but not an outrageously obvious danger signal.

One of the most important influences on any stock’s price is the presence of a large seller or buyer in the market. The sheer size of gigantic buy or sell orders can move the stock’s price up or down. Big institutional traders know this, and use stealth in their buying or selling. But when a shareholder of the size of this one (the US government) sells a stake as big as this one (25%), securities law requires the big buyer or seller to disclose their intention so as to be fair to all the smaller shareholders. That’s why the US Treasury made this week’s announcement. If it wasn’t a legal requirement, it would have been more effective for them to sell their giant stake quietly, with no fan fare. But they couldn’t do it this time. They had to announce their intention.

How do you think potential new investors in Citibank might react to this news that a giant seller will be in the market place until it sells 7.7 billion shares? Would it not be logical for new investors to postpone their purchase in hopes that this mega-sale might push the stock price lower? If it were you, wouldn’t you delay your investment in Citibank for a few months just to see if the price drops? After all, if the share price were to go up, the US treasury would flood the market with its 7.7 billion shares and cool the price back down. The risk that a new investor in Citibank will miss out on a big rise in the price of the stock vanished when the treasury announce their sale. The real risk is that government selling will drive the price lower.

And what about investors who currently own the stock and have been thinking of selling? What should they do? Most will sell now, before the government sells. This week’s announcement has put a lid on the price of Citibank shares until the government’s selling program is complete.

The government bailed out Citibank in the 2008-9 banking crisis: and now they will try to pass the bailing bucket to the investors of America.

In my book, Beyond the Bull, I discuss why stock markets were invented in the first place: to help large investors sell large investment positions. The Citibank saga is a perfect example it. And now we’ll see how efficient today’s markets are at finding liquidity for those really big players.

The Chancellor of the Exchequer will be watching too, because the British government bought a huge stake in Lloyds Bank and the Royal Bank of Scotland. They will be hoping that the Citibank share sale goes smoothly because they have a big investment position to sell too.

What about the Bank of Canada? Does our government have any shares of giant Canadian banks to sell? No. Our banking system came through the 2008/9 crisis in relatively good shape.

And what about you: what should Canadian investors do as big governments distribute their bank bailout bounty to the world’s investors? Follow their lead: sell your bank stocks now, before the longer term effect of the American and British government’s mega-sales takes effect.

Ken Norquay, CMT,
Financial Philosopher
Market Street Investment House

Links for buying Beyond the Bull: Bullmanship code: K44N