Thursday, March 31, 2011

Good News For Rare Earths

A positive development today in the Rare Earth industry as United States legislators seem to be waking up to realize that a dire supply crisis looms.  It appears that a 3 year study has been suggested.  Keep in mind that we have suggested passing on investments in mines forecasting post 2016 production so this study will likely be a waste of time.

Rare Earths Get Some Congressional Attention Posted: March 31, 2011 at 3:08 pm

US Congressman Hank Johnson of Georgia has introduced a bill directing the US Geological Survey to conduct a three-year, comprehensive global assessment of rare earth elements. Now this might be a good idea, but it might also be an idea whose time has passed. Geologists already know most places where rare earth elements can be found (virtually everywhere) and in what concentrations (very scarce). Mineable concentrations of the rare earths are, well, rare. The chances are minuscule that the USGS or another country’s geological survey will find a huge new deposit of the stuff that will break China’s current stranglehold on global supply. 

The United States can rest easy though as they have chosen the right man for the job.  Congressman Hank Johnson of Georgia is a geological expert.  He is willing to ask the tough questions that many are scared to touch.  Last year during congressional testimony he asked the Navy Admiral Robert Willard if he feared that stationing too many Marines and their families on Guam could cause the small island to tip over?  (Click forward to 1:20 into the video if you bill by the hour as we aim to never waste your time)

For now, we will hold our positions in the best Rare Earth names.  By the time Congressman Johnson's commission finds them they should be worth several multiples of their current prices.

Wednesday, March 30, 2011

Silver Market Update

This site has thoroughly covered the fundamentals driving silver prices higher on the physical market.  For new readers, Bear Stearns had a large silver short trade that was effectively scalping profits on the spot markets for years while suppressing the price of silver.  JPM inherited this book of positions when it "purchased" BSC for $2 a share, later raised to over $10 but still an undeserved government backstopped gift for JPM.

This trade continued to work until last summer when the massive quantity of short contracts began to put pressure on JPM.  In August the spot price began to rise rapidly eclipsing $30/oz before the end of 2010.  Exacerbating this problem was the fundamental fact that the earth's crust contains 17:1 parts of silver to gold while the value ratio on the spot market at times was more than 70:1 in favor of gold.  This divergence simply could not continue and aware market participants favored silver metal and miners to gold.

Now comes the next level of fraud which we must make readers aware of.

Physical metals trade in contract form on the Comex which is a division of the Nymex.  Contracts usually change hands many times but settle in cash allowing producers to sell production in advance.  This makes running their business much more predictable.  If the contract holder desires delivery at the end of the term notice must be given in accordance with Comex rules.  Physical metal in the quantity noted on the contract will be delivered from a Comex approved vault.  The process to become an approved vault is obviously cumbersome as the integrity of this system supports the market's faith in the process.

Kwan Box editors sensed that something fishy was happening when JPM began accepting physical metals as collateral on certain loans.  Now our suspicions are confirmed as we hear that this month JPM dashed through the Comex vault approval process in 2 days.  March is a delivery month on the exchange and guess who is one of the largest contract holders requesting delivery?  That is right, the same crime syndicate that holds the troubled short book can now deliver metal to it's own approved vault and settle it's own contract obligations.  This is truly amazing.

We must caution readers to avoid the temptation to label us "conspiracy theorists" and throw out these facts since the Wall Street Journal somehow missed this.  We are merely mercenary traders who attempt to profit from herd mentality behavior and fraudulently induced government protected manipulation.  This situation happens to have been a 2010 favorite trade as it satisfied both of these prerequisites.

Avery Goodman, a Seeking Alpha contributor, provides excelent commentary on this issue.

Tuesday, March 29, 2011

Market Fundamentals Return To Residential Real Estate Markets

KSIR Capital announced to deaf ears that "The era of the cash flow model" had returned to residential real estate investing in 2009.  Market participants were still chasing deals as prices fell.  Proudly belittling our cash flow model and promising that appreciation along with the $8,000 first time home buyer tax credit would leave us wishing we had listened. 

As we watched former tech-stock day-trading wanna-be types reach in front of a freight train of falling prices to pick up a penny we could hear them saying, "When the market comes back you will wish you had listened......."  Responsibility for proper management of capital precluded us from listening.

The proper model for purchasing non-owner occupied residential real estate is as follows:
  • R / (P + I) = X
  • X is the desired gross monthly rate of return*
  • R is the market rate monthly rent for the unit determined by accurate comparables
  • I is the amount of capital improvements needed to make the unit rent ready
Solve for P and you get the maximum purchase price that can be paid for the property.  This eliminates all emotion and fear of missing out on a deal.  If it does not fit the model then it is not a deal, move on.

*Gross monthly rates of return should be used in the model.  A separate calculation to determine how your holding company handles operating costs is appropriate. 

As the article below offers a clue that we may have again preceded the herd, new predictions are in order.  A bottom in residential real estate is near.  This bottom is not important to mark to the date but this will match the beginning of a new uptrend in gold bullion prices.  The second week of June 2011 appears to be the most probable date.

Also, this bottom will not form a V as it recovers on the chart.  In the future the herd will glance back to see that 3% annual growth rates in real residential real estate values succeeded the buyer's lost access to easy credit.  Nominal prices can not be predicted in this circumstance.

Click the headline for access to the full text

Cash-Paying Vultures Pick Bones of U.S. Housing Market as Mortgages Dry Up

Chairman of Delavaco Properties Andrew DeFrancesco
Andrew DeFrancesco, chairman of Delavaco Properties LP. Photographer: Mark Elias/Bloomberg
Delavaco Properties LP plans to spend as much as $30 million this year and $40 million in 2012 to buy bank-owned houses and condominiums in foreclosure-ridden South Florida. The private-equity fund will pay cash.
As lenders tighten mortgage standards and consumers stay on the sidelines amid a five-year slide in home prices, all-cash purchases are surging. The deals are done mostly by investors who can get properties for less than buyers needing loans, fix them up and resell or rent them.
“If there weren’t vultures out there, you’d have a city of dead carcasses,” Robert Theocles, an independent consultant for Fort Lauderdale, Florida-based Delavaco, said in a telephone interview. “It’s like the circle of life.”
A record 33 percent of existing-home sales were made to cash buyers in February, when an annualized 4.88 million properties changed hands, the National Association of Realtors reported March 21. That compares with 15 percent of the 4.82 million annualized sales when the Chicago-based trade group started monthly tracking of such purchases in October 2008.
In Florida’s Broward County, where Theocles is based, deals with no mortgages made up 69 percent of sales in February, according to Southeast Florida Multiple Listing Service data.
The national sales data don’t count homes bought in foreclosure auctions on courthouse steps, which are almost all cash-only transactions. The “lion’s share” of all-cash purchases are by investors, according to Walter Molony, a spokesman for the Realtors association, though the group doesn’t keep specific numbers.

Mortgage Bankers’ View

The weighted average FICO score for a home purchased with a Fannie Mae mortgage was 762 last year, up from 716 in 2006, the Washington-based mortgage finance company reported Feb. 24. Fannie Mae loans, which usually require a 20 percent down payment, had an average 68 percent loan-to-value at origination.
“It’s not surprising that the cash share has gone up if you couple both the number of distressed sales that are going on and the fact that, even outside of a foreclosure auction, mortgage credit is tightening,” said Michael Fratantoni, vice president of research at the Mortgage Bankers Association, a Washington-based trade group.

Rental Demand

The growth in all-cash deals occurs amid rising demand for rental housing as more homeowners go into foreclosure, Fratantoni said. The U.S. homeownership rate fell to 66.5 percent at the end of last year from a high of 69.2 percent in December 2004, according to a Jan. 31 Census Bureau report.
Mortgage financing to buy homes to rent is also shrinking, Fratantoni said. Residential-mortgage originations are expected to fall to $1.03 trillion this year from $1.57 trillion in 2010, his association said in a March 15 forecast. Investors submitted 6 percent of mortgage purchase applications in February, down from a 2007 average of about 10 percent, Fratantoni said. That’s a drop to about $6 billion in February from a monthly average of about $20 billion in 2007.
“What financing options will be available to investors in single-family properties who intend to rent them out?” Fratantoni said in a telephone interview. “That really has been cut back substantially.”
Delavaco, which hired Theocles as a consultant, financed about $400 million in deals last year, mostly in international oil and energy projects, said Andrew DeFrancesco, founder and chairman of the fund. Delavaco raises money from institutional and high net-worth investors in Canada and the U.S.

Delavaco Deals

The fund started buying homes in January 2010, acquiring about 70 foreclosed properties in Broward, Dade and Palm Beach counties with cash offers to get discounts, DeFrancesco said. While there’s still risk in Florida real estate, the downside is less than drilling for oil in the Ukraine or other places Delavaco has invested in energy projects, he said.
“Every time I drive by that house I know it’s there,” DeFrancesco said in a telephone interview. “I know the property and I know what county it’s in and I know it has a tangible value to it.”
The plan is to hold the properties between five and seven years, enough time for the market to absorb the glut of foreclosures and for resale values to rise, said Dallas Wharton, Delavaco’s chief operating officer.
In January, Delavaco paid about $32,000 for a bank-owned four-bedroom home in Pompano Beach, Florida, that had sold at the top of the market in 2006 for $285,000, Theocles said. Delavaco spent $11,000 to replace the interior sheetrock, plumbing and appliances. The house rents for $1,250 a month, and annual property taxes and insurance cost about $2,500, he said.
“We are the people that are going in, cleaning things up, renting the properties out to make nice homes for people,” Theocles said. “At the end of the day they’re worth a lot more.”