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Saturday, November 15, 2014

Soros Short S&P 500 & Emerging Markets (Puts)

As previously noted on this site (Soros $2.2 Billion Bet On SPY Puts), Soros Fund Management LLC holds a large position in SPY (SPDR S&P 500 ETF Trust) puts. The position was reduced over Q3 (ending 30/09/2014), however the notional value of the position remained substantial, both in dollar terms and as a percentage of the fund.

Click Chart To Enlarge

Following the large decline and then bounce to all time nominal highs in the S&P 500 since the reporting period ended, I would be surprised if the position hasn't been further reduced in Q4, but we won't know for another 3 months.

Another interesting change includes a large short position on emerging markets (EEM put), with a notional value of $935M. It was the second largest position in the fund (by notional value, view all reported positions on Whale Wisdom) and over 2.5x larger than in Q4 2011 when Business Insider noted EEM puts were the largest position held. The iShares MSCI Emerging Markets ETF saw a large price decline during Q3.

During Q2 the Soros Fund increased positions in Gold miner ETFs (such as GDX & GDXJ), which some commentators saw as a bullish omen for this sector, however Q3 shows a reversal with the positions reduced and in the case of GDX calls the position was exited completely.

Of course as I've said before these positions don't tell us what strategy any single position might be a part of and a lot can change in six weeks (positions will have changed again since the reporting period ended).

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Sunday, November 2, 2014

Failed Triple Bottom in Gold

On Friday Gold broke below US$1180, an important price level from a chart perspective, which indicates a failed triple bottom.

Lower prices seem likely in the short term. The breakdown looks eerily similar to the one we saw in 2013 before a waterfall decline when the price broke below $1500 (as I covered on the blog here).

Not to say that I think another $300 decline in price is likely, but those holding long should prepare themselves for the potential of further downside. Australian readers might find the blow cushioned by a lower Australian Dollar.

A set of charts that is worth a look is this recent publication from Peter Brandt where he writes, "Gold is the ultimate charting market. Gold rarely begins a major trend without first ringing a bell and waiving a flag announcing its intentions."

Even if you aren't a trader you'll likely find the repeating patters quite interesting. I've rarely seen daily charts from some of the eras shown and the 1970s cyclical bear market in Gold shows some similar patterns to those we are seeing today.

It's my contention that we are only experiencing a cyclical bear market in Gold today, just as we saw in the mid 1970s pictured above.

Many have suggested that government deficits and QE has already and will continue to materialise into directly higher Gold prices (via high levels of inflation), but I think that narrative has been debunked. The price of Gold has fallen sharply as some of the most aggressive QE programs took place.

As I see it Gold rose over late 2008 to late 2011 as a result of instability in the financial system, stock markets and the perception that the central banks had lost control. However, over several years of QE and as stock markets returned to rising steadily with only small corrections, complacency has set in. I wrote on this theme last year:

Gold Driven By Financial Instability, Not Inflation

Ben Hunt calls it a narrative of central banks omnipotence and believes it has reached a top (via The Ministry of Markets):

"I’m calling a top in the Narrative of Central Bank Omnipotence because it has, in fact, reached its asymptotic limit of influence and belief."

But while the public may believe in the omnipotence of central banks, central banks rely on the omnipotence of Gold (as net buyers for the last half a decade).

In my opinion it will take a shift in perceptions to end this narrative that the central banks have control over the markets, to stop the Gold price decline and see the secular bull market resume.

The conditions that resulted in the Global Financial Crisis are far from over with western nations still saddled with large amounts of debt relative to their size of their economies, a situation that I don't see ending without incident.

The event or series of events that take place to drive that change in the market is anyone's guess. It may be realisation that the United States will be unable to normalise interest rates without sending the economy back into recession, it might be a shock from China or something less obvious at the current time (a black swan).

Short term traders with long positions have probably been stopped out in the Friday decline, but those with a long term view who are holding Gold as insurance or hedge against financial calamity should look past the short term chart patterns and be confident in the long term prospects of Gold.

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Tuesday, October 14, 2014

Property Narratives Using Data & Wording Obfuscation

In a recent article on Property Observer (Lies, damned lies and housing statistics) commentator Arek Drozda discusses Australian property statistics. He tells the reader many commentators write stories around property numbers that can't be relied on.
Drozda claims that "data does not lie". However, data is just a collection of facts and statistics for reference or analysis and, as Janine Skorsky of House of Cards says, "There is no arrangement of facts that is purely objective."
The above is my introduction to an article I wrote for publication on Property Observer in response to some recent observations by commentator Arek Drozda. You can read it in full here: Subjectivity, damned subjectivity and housing statistics.

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Wednesday, October 8, 2014

Property Professor Fudges Property Growth Numbers

Don't believe all the property stats you read on Twitter or view on TV. That's my warning as I watch The Property Professor (aka Peter Koulizos, who lectures on property investment and runs related courses) continue to mislead by publishing his miscalculated RP Data figures.
Last month I spotted The Professor on Twitter making some bold claims about prices in Australian capitals, such as:
"Melbourne dwelling prices have dropped 7.0% in the first 8 months of 2014. Ouch!"
"Sydney prices have dropped 0.8% in the first 8 months of 2014. 2014 is a very different year to 2013 for Sydney property owners!"
"Adel is the only capital city where dwelling prices increased over the first 8 months of 2014. It was only 1.0% but we'll take that!"
It was clear from what I'd seen via multiple housing price data providers (such as RP Data, Residex & ABS) that The Professor's claims had no place in reality, so I challenged him on Twitter:

I found that rather than using the 'year to date' figures that are published each month by RP Data, he was instead taking the median dwelling prices from the first page of each report and calculating the growth results manually.
Not only had these figures been published on Twitter, but in the middle of the year they also made local news!

These fudged figures do not reflect reality and thought I'd seen the last of The Professor's use of this methodology (after I'd highlighted the error of his ways)... but he's back this month with a new set of comments, including such corkers as:
"SYDNEY – Median House Price at 31/12/13 was $775,000. As of 30/9/14 it was $750,000. A DECREASE of 3.2%. No current property boom here!"
When RP Data's published year to date for Sydney shows: +9.8%
"MELB - Median House Price at 31/12/13 was $625,000. As of 30/9/14 it was $590,000. A DECREASE of 5.6%. No current property boom here!"
When RP Data's published year to date for Melbourne shows: +6.7%
And so on:

Here are the actual year to date figures from RP Data's latest report (Wednesday, October 1, 2014):

Professor, what are you doing? Please stop spreading ridiculous property figures!

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Friday, September 26, 2014

Why Serviceability ≠ Affordability (Australian Property)

Still today I see many commentators using the terms serviceability and affordability interchangeably in relation to Australian property. The most recent occasion I noticed was in a post from David Bassanese a week ago where he wrote:
A better measure of house price valuations – which at least allows for the structural change in interest rates over time, though not financial deregulation – is mortgage affordability.  As seen in the chart below, there has been no obvious structural worsening in mortgage affordability over recent decades. Assuming a 20% deposit, loan repayments to purchase the median-priced Australian house have averaged just over 30 per cent of average household disposable income since at least the mid-1980s.
And posted the following chart to support his assertion:
It shows that initial loan repayments on a median-priced house have remained fairly stable over time (as a percentage of household disposable income). The chart and commentary suggests that "affordability" was the same in the early 1990s as it is today (we have higher prices relative to income, but interest rates are lower), let's compare an example using figures between the two periods to see if affordability really is the same.
Based on Bassanese's house price to income ratio:

The ratio was around 3.5x in 1992 and 5.5x today. Keep in mind that other commentators who calculate these ratios use different methods, so while the ratio might change around a bit, the change between historical ratios and those today should be similar in a single set/series of numbers. Let's do the sums.
With a household on $100k. They save their deposit at a rate of 20% gross income and repay the loan at a fixed amount of $3,500 per month (using this mortgage calculator & interest rates from here to get my numbers below).
1992 Numbers: $350,000 purchase price (3.5x income)
Deposit (20%): $70,000. 3.5 years to save.
Interest rate: 11%
Loan amount: $280,000
Repayment: Loan is repaid in 12 years, 1 months. Total paid, $506,980.
2014 Numbers: $550,000 purchase price (5.5x income)
Deposit (20%): $110,000. 5.5 years to save.
Interest rate: 5.5%
Loan amount: $440,000
Repayment: Loan is repaid in 15 years, 8 months. Total paid, $657,061.
So even if interest rates had remained elevated the entire period of the loan, it still ends up more affordable over the long run to have double the interest rate, but lower price to income ratio. Not only that but it would be faster to save the deposit given that it's a lower amount (relative to income) and I haven't taken into account the higher interest rate on saving for the deposit which would have benefited the 1992 scenario. Costs such as stamp duty which are tied to the price paid would be lower too. Finally, higher interest rates tend to come with a higher rate of inflation, so the real value of the debt would be reduced faster as wages increased, meaning the buyer in 1992 would have found it easier to ramp up the level of repayment.
As I have mentioned in the past on housing affordability, I prefer the following basis as a definition for affordability:
"Afford: To manage or bear without disadvantage or risk to oneself."

It's clear that although initial loan serviceability might be similar with lower rates and higher prices, the buyer is also at a clear disadvantage over the term of the loan.
When considering affordability we need to take a holistic approach and not use a simple snapshot of a single repayment as the basis to make judgement calls on whether house prices or a mortgage used to purchase them is affordable. A mortgage is a long term commitment and shouldn't be treated so trivially by market commentators.

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