Tag Archives: housing

Go Against The Herd To Profit From Emerging Markets

By Carl Delfeld History shows that trades and investments that deliver big returns have one thing in common – they are all based on thinking differently from the herd. Hitting movie theaters in December 2015, The Big Short focused on this theme. While everyone deemed mortgage-backed bonds (especially the higher-quality mortgages) a safe investment, a few perceptive investors saw the reality – that they were a house of cards. The investors in the film, realized the truth because they did some serious independent thinking backed by on-the-ground research. Their research included going door to door in Florida to see just how speculative the housing market had become. This same formula applies to all sorts of markets, but is perhaps most effective in overseas investing. In a recent issue of Foreign Affairs , Ruchir Sharma of Morgan Stanley puts it like this: ” No amount of theory can trump local knowledge… there is no substitute for getting out and seeing what is happening on the ground. ” Networking – Strength in Numbers Whatever my experience in economics, finance, investments, politics, and foreign affairs brings to bear, it’s multiplied many times over by my network of contacts based all around the world, which I’ve spent years putting together. This intelligence network includes chief investment officers, analysts, investment advisors, bankers, stock brokers, hedge fund, private equity and pension fund managers, a sprinkling of tycoons, diplomats, naval captains, professors, and intrepid tycoon entrepreneurs. Others are top-ranked economists and strategists, partners and investment bankers in the U.S., Latin America, Asia, Australia, Japan, and Southeast Asia. And there are also others like me in the equity research business constantly scouring the world for hidden gems across the world. Some of this network is based in major financial centers like San Francisco, London, Hong Kong, Vancouver, Singapore, and Tokyo. But I really prize those contacts plugged into places like Santiago, Panama City, Jakarta, Saigon, Manila, Rangoon, Kuala Lumpur, Malacca, Melbourne, and Taipei. But to take advantage of this intelligence, we all need to start thinking differently to get ahead of the crowd. Here are just some of the new realities we need to act on. New Reality #1 : Wealth and capital, power and diplomacy are making a dramatic pivot to the Pacific Rim. Just as the 20th century was centered on the Atlantic, the 21st century belongs to the nations bordering the Pacific Ocean – including the United States, Canada, Mexico, Panama, and Chile. New Reality #2 : Where the West sees chaos, turbulence, and poverty in emerging markets, the new tycoons sense emerging growth, profitable change, and opportunity . They don’t need a think-tank or professor to tell them about the rise of the middle class in the Pacific Rim and emerging markets – they see and profit from it every day. New Reality #3 : While this economic pie of $6 trillion in new spending power is huge, the new tycoons would laugh at investing in traditional blue chips like Procter & Gamble Co. (NYSE: PG ). Instead, they invest in the next blue chips with some serious monopoly power. New Reality #4 : Markets always swing sharply between euphoria and despair. This is why we need to pay very careful attention to price – investing in high potential opportunities only when they are “on sale.” This minimizes downside risk and maximizes upside potential. New Reality #5 : In order to survive and prosper, it is important to anticipate shifts in politics and diplomacy, and look beyond stocks and bonds to alternative assets such as timber, property, commodities, precious and strategic metals, and even rare coins and stamps. As economist Rudi Dornbusch said, “Things take longer to happen than you think they will, and then they happen faster than you thought they could.” So rather than just react to headlines and events, we need to think three to four steps ahead. That’s the difference between you being a king or a pawn. Original Post

5 Real Estate Fund Picks On Record Construction Outlay

The real estate industry is off to a solid start this year ignoring the winter weather, which always acts as a resistance. Construction outlay touched a record high in January, while building permits remained unchanged. Existing home sales also posted record gains in January indicating that the housing industry is firmer than what most believed. In February, the NAHB/Wells Fargo housing market index that reflects home builders’ sentiment continued to remain above the 50 mark, indicating improvement. Moreover, historically low mortgage rates and a rise in wages is expected to give the real estate industry a boost. Hence, it will be prudent to invest in real estate mutual funds for solid returns. Construction Spending Rises in January Outlays on construction rose 1.5% to a seasonally adjusted annual rate of $1.41 trillion in January from the upwardly revised estimate of $1.12 trillion in December, according to the Commerce Department. Construction spending touched the highest level in January since Oct. 2007. Spending also rose a whopping 10.4% year over year. Money was spent on both private and public infrastructure. In the private sector, spending increased 0.5% to $831.41 billion in January from December’s figure of $827.35 billion. Single family residential construction and multifamily construction soared 7.7% and 30.4% from year-ago levels, respectively. Private non-residential construction too surged 11.5% year over year. Coming to the public sector, total spending increased 4.5% in January following a 3.3% monthly gain in December, with spending on educational facilities gaining a solid 11.7% year over year. This sharp rise in spending in January came in after outlays gained momentum last year. In 2015, construction spending was up 10.5% to $1.097 trillion from $993.4 billion in 2014. This steady rise in spending toward new construction is a telltale sign of the health of the real estate industry. Moreover, construction spending as a percentage of GDP rose 6.2% in the quarter ending Dec. 31. This is a commendable rise from the year-ago increase of 5.8%. However, if we consider the last 50 years average during this period, spending gained 8.4%. This shows that the rise is still below the historical average, which in many ways represents pent-up demand. Building Permits Remain Steady There is also good news on the construction permit front. Building permits are a precursor to construction activity. It indicates the future growth of housing activities. Building permits were revised to a seasonally adjusted rate of 1.204 million in January, unchanged from December’s figure, according to the Commerce Department. Earlier, it was reported that permits were down 0.2% to a seasonally adjusted rate of 1.202 million in January. Meanwhile, the other part of the report that shows the number of privately owned new houses on which construction has started was not so encouraging. In January, housing starts declined 3.8% to a 1.1 million annualized rate from 1.14 million in December. A crippling east coast winter storm was cited to be the reason behind this drop in housing starts. If this be so, it is a seasonal factor, which in the long run won’t leave any impact. Moreover, with the job market strengthening, it is expected that demand for more construction will increase. Average hourly earnings gained almost 0.5% in January from the previous month’s figure to $25.39. Average hourly earnings also rose 2.5% year over year. And this happened while the unemployment rate declined from 5% in December to 4.9% in January, the lowest since 2008. Record Home Sales Existing home sales for January hit the highest level since July last year. This indicates that the housing industry is in better shape than earlier estimated. Existing home sales increased 0.4% in January to a seasonally adjusted annual pace of 5.47 million. This is contrary to the consensus estimate of sales of homes owned earlier dropping to 5.33 million from December’s revised pace of 5.45 million. Additionally, existing home sales registered an annual increase of 11% in January, the largest yearly increase registered since Jul 2013. Pending home sales mostly track existing home sales. Pending home sales also advanced 1.4% in January from year-ago levels, its 17 straight month of year-on-year gains. However, purchase of new-single family homes decreased 5.2% in January from a year earlier. Nevertheless, home loan rates are drifting downward, which is expected to boost home sales in the near term. The 30-year fixed mortgage rate is about 3.8%, while the 15-year fixed loan rate is down to around 3.2%. Rates are currently hovering at historically low levels. 5 Real Estate Funds to Invest In Investors continue to remain optimistic about the outlook of the real estate industry in the U.S. According to KPMG’s 2016 Real Estate Industry Outlook Survey, 91% of real estate investors and executives surveyed said that real estate fundamentals will improve this year. Almost 74% of them believe foreign investment in the U.S. real estate will increase over the next 12 months. Record rise in construction activities, steady permits for building activities and healthy surge in home sales at a time when weather plays a spoilsport have boosted their sentiment. Add to this, low mortgage rates and you know why they sound so confident. Moreover, there are hints that spending plans on infrastructure may rise in the future. Democratic presidential candidates Hillary Clinton and Bernie Sanders have already promised to increase infrastructure investment. While Clinton plans to spend $275 billion on infrastructure, Sanders wants to deploy $1 trillion. Banking on these positive trends in the real estate industry, it will be prudent to invest in funds related to the housing space. Here we have selected five such real estate funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, offer minimum initial investment within $5000 and carry a low expense ratio. Franklin Real Estate Securities A (MUTF: FREEX ) seeks to maximize total return. FREEX invests a large portion of its assets in equity securities of companies operating in the real estate industry. FREEX’s 3-year and 5-year annualized returns are 8.2% and 9.1%, respectively. Annual expense ratio of 0.99% is lower than the category average of 1.29%. FREEX has a Zacks Mutual Fund Rank #2. Neuberger Berman Real Estate A (MUTF: NREAX ) seeks total return. NREAX invests a major portion of its assets in equity securities issued by real estate investment trusts and other securities issued by other real estate companies. NREAX’s 3-year and 5-year annualized returns are 6% and 7.4%, respectively. Annual expense ratio of 1.21% is lower than the category average of 1.29%. NREAX has a Zacks Mutual Fund Rank #2. PIMCO Real Estate Real Return Strategy A (MUTF: PETAX ) seeks maximum real return. PETAX seeks to achieve its investment objective by investing in real estate-linked derivative instruments. PETAX’s 3-year and 5-year annualized returns are 4.3% and 11.6%, respectively. Annual expense ratio of 1.14% is lower than the category average of 1.29%. PETAX has a Zacks Mutual Fund Rank #2. Davis Real Estate A (MUTF: RPFRX ) seeks total return. RPFRX invests the majority of its assets in securities issued by companies principally engaged in the real estate industry. RPFRX’s 3-year and 5-year annualized returns are 6.6% and 7.9%, respectively. Annual expense ratio of 0.96% is lower than the category average of 1.29%. RPFRX has a Zacks Mutual Fund Rank #1. T. Rowe Price Real Estate (MUTF: TRREX ) seeks long-term growth. TRREX invests a large portion of its assets including borrowings for investment purposes in the equity securities of real estate companies. TRREX’s 3-year and 5-year annualized returns are 9.1% and 9.4%, respectively. Annual expense ratio of 0.76% is lower than the category average of 1.29%. TRREX has a Zacks Mutual Fund Rank #1. Original Post

Raskob’s Folly: When Optimism Fails

Optimism has a funny way of feeding off itself sometimes, bleeding into enthusiasm and excess. You’ve seen this story before with the internet boom and the housing bubble. But before that, it led to the rise of the 1920s, where people like John J. Raskob fueled the easy money market that “Everybody Ought to be Rich”. Raskob’s bold claim in the August 1929 issue of Ladies’ Home Journal was typical for the time: Suppose a man marries at the age of twenty-three and begins a regular saving of fifteen dollars a month – and almost anyone who is employed can do that if he tries. If he invests in good common stocks and allows the dividends and rights to accumulate, he will at the end of twenty years have at least eighty thousand dollars and an income from investments of around four hundred dollars a month. He will be rich. And because anyone can do that I am firm in my belief that anyone not only can be rich but ought to be rich. – John J. Raskob The Roaring ’20s ushered in a new economic prosperity that would last. Or so people thought. Raskob’s idea was simple. Systematically invest $15/month into stocks of good companies. At the end of 20 years, you could live off the $80,000 nest egg that he promised. (Let’s put these dollar amounts into perspective. The average person spent about 18 cents per meal in the 1930s, with an average income around $1,100. By 1950, the average income was about $3,200. So, $15/month – $180 per year – was possible, and interest on $80,000 would easily cover the average person’s income 20 years later.) Raskob’s idea wasn’t too far-fetched… except for his expectations. A month after his interview, on September 3rd, the market peaked at Dow 381, and on October 29th, the market crashed. The Dow wouldn’t see 381 again until 1954. Raskob’s timing was terrible. Or was it? I ran the numbers to see what would happen if someone jumped on the bandwagon and invested $15 on the first of every month starting in August 1929 until the end of 1949. Instead of finding “good companies”, I settled for investing in the Dow (but also ran the numbers for the S&P 500, along with a 60/40 split with 10-year Treasuries). Totals for 15/month Investment from Aug. ’29 to Dec. ’49 Total Investment Dow S&P 500 60/40 Dow/US 10-year 60/40 S&P/US 10-year $3,675 $9,951.70 $9,744.93 $7,924.93 $7,943.37 The S&P 500 and the Dow produced fairly similar results. The $15/month fell far short of Raskob’s expectations, but it shows he wasn’t entirely wrong. Putting money away every month was probably the best idea for the time, since it performed better thanks to the market crash . So, a savvy investor with a secure job, disposable income, trust in the financial system, and an iron stomach could have done just fine. Of course, for the average person, this was literally impossible. If the aftermath of the ’29 crash didn’t scare investors away, the Great Depression did. If they weren’t unemployed, their pay was being cut. Few people trusted their local bank. Why would they trust Wall Street? The average person wasn’t saving or investing. They were trying to survive. (The assumption of frictionless investing – no cost or taxes – covers the rest). But since we’re dealing in hypotheticals, I thought I’d reach a bit further to see if any other investment or strategy got closer to Raskob’s $80,000 target. Other Investment Totals for 15/month from Aug. ’29 to Dec. ’49 Savings Account Gold Small Cap Stocks Large Cap Mom. Small Cap Mom. Large Cap Value Small Cap Value $3,858.48 $2,043.07 $5,108.12 $14,157.04 $37,333.19 $15,730.23 $25,541.50 Everything fell short by more than half (I actually ran the scenario for more options, but left out the middling performers). The benefit of hindsight makes this a fun exercise, but that’s it. Costs, taxes, and the law (you couldn’t own gold after 1933) make it impossible or would severely drag down real results further (accuracy of the data from that far back is another issue to consider). Besides, it’s unlikely the average person suffered through the crash of ’29, the volatility of the 1930s, and the Great Depression and came out unscathed. It’s more likely they never got started. Even though stocks were the best-performing asset over that time, they were also the most hated, which explains a lot. Still, the lessons remain. Excessive optimism causes people to ignore the risk of being wrong. Raskob’s folly was an extremely enthusiastic view of the future, but his call to average into the market was solid advice, because averaging into a depressed market can actually help performance. Hated assets eventually perform well enough to become loved again. And as tough as it might be, saving more money and staying the course probably offers the best protection in case optimism fails you.