Wednesday, January 21, 2015

A Really Nice Project

It is not often you can invest in a property that borders a city that has halted all new construction, and we also get to collateralize not just the land but additional lots.  This project has already started selling phase one, has 30 some remaining lots/homes to sell, selling approx 3 a month, and is now ready to prepare the dirt on phase two.  The cool thing is as they sell those lots/homes in phase one, they buy down our loan at a 1.1 to 1 ratio.  Very good collateral coverage at 69% loan to cost, and high 50's loan to value.  Short term, max is one year.  They will then finance the next phase of construction and pay off the remainder of this loan.

Ping me at for more info and risk disclosures.  We will fund this loan by the 30th.

Sunday, January 18, 2015

This Captures My View completely

From Zero Hedge

Submitted by Paul Mylchreest of
Exter’s Pyramid “in play” (and is Martin Armstrong right?)
In a global debt bubble, it concerns us when the benchmark debt security still looks good value, albeit on a relative basis.
Source: Bloomberg, ADMISI

In spite of this, the consensus is (once again) calling for higher US yields and FOMC “lift off.” The two-year Treasury yield has been pricing in the latter…
Source: Bloomberg, ADMISI

…but the question is what is the long end of the Treasury curve pricing in?
Slower growth and lower inflation, most likely. Risk of global contagion, possibly. That the FOMC makes a mistake (in raising rates)…maybe that too.
The Fed might be desperate to raise rates ahead of the next downturn (how embarrassing not to) but this analyst would be surprised to see more than 1 or 2 token 0.25% increases – and that’s if things are rosy.
As we know, the narrative from central banks can change at the slightest hint of trouble, e.g. Ballard’s QE4 comment during last October’s selloff. Watch the spin as the Fed portrays lower energy prices as “transitory” and no reason to alter its desire to tighten, while the ECB’s desire to ease only grows, even though neither is achieving its mandate on prices.
Do what thou wilt shall be the whole of the law?
The key point is that you can’t normalise rates in the “Winter” phase of a long wave (Kondratieff) cycle. There is just too much debt. It’s debt that drives these cycles and eventually brings them to an end.
This is the fourth cycle since the Industrial Revolution and the longest by far. The lack of a gold standard has allowed the central banks to extend it through unprecedented credit creation.
Here is our timing of these cycles:
1788—1843 56 years
1844—1896 53 years
1897—1933 37 years     (1937 was a policy error when recovery established in our opinion)
1934—?        81 years    (and counting)
The next cycle doesn’t begin until the excess debt from the previous cycle has been purged. Historically this has occurred via debt deflations of varying length and severity. In a world of unlimited credit creation, inflating the debt away remains an option and we question whether renewed onset of debt deflation will ultimately be dealt with via central bank-created inflation? Mr Abe and Mr Kuroda are conducting such an experiment.
In the meantime, we see a possibility that the Fed could raise the Fed Funds rate in several months’ time only for long-term Treasury yields to continue their decline, while the ECB could instigate sovereign bond QE and long term sovereign yields (ex-Germany certainly) could rise…which was the experience of the US (QE1, QE2 and QE 3 pre-taper).
Talking of flattening yield curves…
We’ve been looking at yield curves in the run up to the last two peaks in the S&P 500 in March 2000 and October 2007.
It basically doesn’t matter which part of the Treasury curve you choose in terms of 2s, 5s, 10s and 30s, but spreads declined to roughly zero, or negative, prior to the equity market peaks.
Here is the 2s10s...
Source: Bloomberg, ADMISI

The 2s30s...
Source: Bloomberg, ADMISI

The 5s10s.
Source: Bloomberg, ADMISI

And the 5s30s, although we could have added the 2s5s and 10s30s just for the hell of it.
Source: Bloomberg, ADMISI

Could the same thing happen again in a structurally (much) lower interest rate environment this time around?
Well 190 bp of flattening in the 2s30s might be pushing it, but 46bp in the 5s10s is certainly possible in the fairly near future with the way things are going. Funnily enough, if the 10-year Treasury yield was in line with the 10-year Bund, the 2s10s spread would be -8bp, i.e. close to zero.
While we expect the S&P to be lower at the end of 2015 than the beginning of 2015, our point is that more flattening might be in order prior to a major correction in equity markets like the S&P 500, Footsie, DAX,, etc. In general terms, it also suggests that it might be too early to lose faith in “bond proxies” such as Utilities and some Consumer Staples.
A significant further flattening in the curve is looking increasingly more likely...
Indeed, the major story for us right now is that the broad concept incorporated in “Exter’s Pyramid” is in operation. This something we mentioned in Autumn last year and it’s occurring across currency and credit markets and, to some extent, in equities.
To recap, John Exter (a former Fed official, ironically) thought of the post-Bretton Woods financial system as an inverted pyramid resting on its apex, emphasizing its inherent instability compared with a pyramid resting on its base. Within the pyramid are layers representing different asset classes, from the most risky at the top down to the least risky at the bottom.
He foresaw a situation where capital would progressively flow from the top layers of the pyramid towards the bottom layers.
“…creditors in the debt pyramid will move down the pyramid out of the most illiquid debtors at the top of the pyramid…Creditors will try to get out of those weak debtors & go down the debt pyramid, to the very bottom."
Below is his drawing of the inverted pyramid as he saw it in the late-1980s, when the riskiest assets were Savings & Loans (“thrifts”), Third World debt and (relevant to today) junk bonds, etc.

We think that Exter’s Pyramid went “live” in in late-June/early-July 2014 when the dollar index (DXY) began to strengthen…
Source: Bloomberg, ADMISI

…along with junk spreads.
Source: Bloomberg, ADMISI

The perfect illustration of Exter’s Pyramid is across the credit markets (as seen via ETFs) with capital flowing from HY through IG…
Source: Bloomberg, ADMISI

…and from IG into Treasuries.
Source: Bloomberg, ADMISI

There is some evidence that this is happening intra-equity market.
For example, here is the chart of the S&P 500 High Quality Index versus the Low Quality Index, where “Quality” is measured in terms of growth and stability of earnings and dividends.
Source: Bloomberg, ADMISI

The point about Exter’s Pyramid is that there is a large amount of capital in riskier financial assets in the upper layers of the pyramid which can flow downwards.
Consequently, the valuations of perceived “safe” assets could obviously overshoot if there is no let up.
Capital flows into dollar assets are a major part of this process right now.
We haven’t mentioned Martin Armstrong’s “Economic Confidence Model” (ECM) for quite some time but we’ve been thinking about it recently. The ECM, based on 8.6 year cycles, is often very successful at tracking turning points in the “hot money” flow of global capital.
Now is not the time for a detailed explanation, but for anybody not familiar with the ECM, Armstrong’s report “It’s Just Time” (google it) from several years back is one of the best we’ve ever read and provides excellent background.
The ECM’s peak on 2007.15 (i.e. late-February 2007) picked out the emergence of the sub-prime problems almost to the day. It did the same with the peak in the Nikkei Index in December 1989 and, we know this because we checked, the Great Crash of 1929 (which was 7 x 8.6 years back from the Nikkei’s peak). The 1987 crash was an intermediate peak in the cycle which ended in 1989.
What is fascinating is that the current ECM cycle peaks on 2015.75, i.e. at the end of September this year. The low point of this cycle was 2011.45, i.e. June 2011 which Armstrong refers to as:
“The 2011 bottom was the peak in oil and gold and the start of the breakout in stocks and the beginning of the Euro Crisis in full bloom.”
In contrast, we think that the 2011 low in the ECM marked the low in the dollar…here is the DXY again back to 2010.
Source: Bloomberg, ADMISI

Furthermore, the intermediate peak of 2013.60 (July 2013) and the intermediate low of 2014.68 (early-September 2014) also align quite closely with the dollar, as is obvious from the chart.
Armstrong is talking about this September 2015 being the peak in the “bond bubble”.
If our interpretation is correct, the dollar AND long-term Treasuries could have further strong upward moves between now and late-Summer 2015.

Wednesday, January 14, 2015

Enough Reward for your Risk?

Check out this article.  Blackstone is paying investors practically nothing on their rental units, and you are not even in first Lien position, and you are holding over multiple years.  I get my Investors 10-12% net on brand new residential construction, and they sit in control of the property.  Plus they are in and out of each transaction in less than a year.  Drop me a line at to learn more.  Only 10K minimum investment.

Blackstone Group LP (BX) is offering the first securities of 2015 tied to rental homes, the start of what Morgan Stanley analysts predict may be a more than doubling of issuance this year in the nascent market for such debt.
Blackstone’s Invitation Homes is planning a $513.8 million deal backed by 3,072 properties, a person with knowledge of the matter said. A total of $227.8 million of top-rated securities may be sold at yields that float about 1.35 percentage points above a borrowing benchmark, said the person, who asked not to named without authorization to speak publicly. That compares with the 1.3 percentage point-spread to the one-month London interbank offered rate at which it sold similar bonds in its last offering in November.
Sales of the securities, after totaling about $7.1 billion since Blackstone’s inaugural transaction in late 2013, could reach $15 billion this year, according to Morgan Stanley analysts Richard Hill,James Egan and Jeen Ng. The next frontier will be issuance tied to loans to smaller single-family rental investors and bundled together, the analysts said in a report, a market being targeted by firms including Blackstone’s B2R Finance LP and Cerberus Capital Management LP’s FirstKey Holdings LLC.

‘Significant Growth’

“Successful issuance of a multi-borrower deal could serve as a catalyst for significant growth of the sector,” the New York-based analysts said in the Jan. 6 report.
Denise Dunckel, a spokeswoman for Dallas-based Invitation Homes, declined to comment on the company’s planned offering.
While the biggest institutional landlords, led by Invitation Homes andAmerican Homes 4 Rent (AMH), have been more visible in gobbling up properties in the wake of the U.S. foreclosure crisis, they own fewer than 500,000 homes, compared with the more than 14 million owned by smaller investors, according to the report. Investors with small enough pools of properties can also turn to taxpayer-backed Fannie Mae and Freddie Mac for financing.
Seven different issuers sold about $6.5 billion of rental-home bonds last year, according to data compiled by Bloomberg. Investors have been demanding to be paid more to buy the securities than at the market’s start after supply rose and yield premiums climbed on competing debt such as speculative-grade corporate bonds.
Invitation Home sold the AAA rated securities in its first deal in November 2013 at a spread of 1.15 percentage points over one-month Libor, and the riskiest portion at a spread of 3.65 percentage point. The most-junior-ranking debt it’s offering this week may sell at a spread of 4.5 percentage point, the person said.
Libor, the rate at which banks say they can borrow from one another, was set today at 16.8 basis points for one month. A basis point is 0.01 percentage point.

Sunday, January 11, 2015

Fetch is Building

As many know I focus my trading on volatility, and since the end of QE the action in said instrument has changed.  Looking at VXX one can clearly see higher lows, and the SPY, getting toppy.  The swings are getting more frequent, as well.  This is looking like the pre-start of a sailboat race, and one of these moves is going to break out and up.

For me, I profitably closed my SVXY position and UVXY puts on Thursday, and am neutral expecting to go long TVIX and VXX calls this week.

At the first of the year I started a portfolio of taking $50,000 to $1,000,000 in five years going long and short vol.  Once I get enough trades under my belt I will post a graph of my progress.  Follow me on Twitter as I will post the buy/sell signals real time (see above right on blog).

Wednesday, January 7, 2015


OK, signals will trigger this morning on volatility, oil and the indexes.  Taking my shots.  Also, will take my first trade on turning $50,000 into $1,000,000 in five years trading only SVXY, cash, and TVIX.  I will post results every Saturday on progress.

I also will post an another trade experiment selling credit spreads on SPY based on another traders SPY reversal signal. I expect the first reversal today. I will post there, as well.

Both will outperform the market, and we will see how much, over time.

Here are some charts, enjoy.

Sunday, January 4, 2015

Keeping it Simple

As I look back at my trading for 2014, the area I most consistently outperform is in the volatility area. There are natural edges trading the fade in fear, and the built in contango in XIV et al, which is nearly always good for a positive trading bias.  Also since the end of QE the market has begun swinging more allowing for a two way trade to develop.  Therefore, 80% of my trading will be swinging between TVIX, and SVXY, with occasional purchase of puts on VXX or UVXY.

The other area that will benefit from the end of QE is the Gold/miner trade. I am not saying gold and miners are ready to rock, but we will start swinging again which will allow some trading profits.  I intend to trade and follow the following.  SLW, NUGT/DUST, DGP/DGZ.  This will keep me quite busy n the stock market for 2015.

Specifically regarding the volatility trade, I will post the performance in a weekly graph. My goal is to take $50,000 and turn it into $1,000,000 in 5 years.  My intent is to be fully invested either long or short, and I will use no leverage or options.  The other trades I will post buy my buys or sells only.

Right now, there is no official stock position in vol right now, but I did post a purchase of Jan UVXY 25 puts on Friday.  I am waiting on my signal to fire to  buy some SVXY.

Thursday, January 1, 2015

2015 - The Year of Opportunity

Happy New Year everybody.  Like everyone else,  I am reflecting on last year, and what the new year holds.  In my view, it will be a year of divergences and great opportunity.  Many people (the sheep and the hyper aware) are convinced that the crash is guaranteed for the U.S. in 2015.  But I hold a different view.

As the largest debtor, largest amount of debt denominated in our currency worldwide, and current account deficit holder, we will enjoy incredible advantages when the dollar carry trade unwinds.

Whatever the spark or reason, commodities priced in dollars started to fall, governments and companies connected with these commodities are over leveraged in dollar debt, and now as they default or close the loan, a need for currency dollars to satisfy the credit dollar loans become in great demand, thus a loop forms of higher dollar price, which drives down commodity prices, which drives defaults, which drive dollar get my point.  At the same time in the futures market as prices fall commodity owners start to sell futures to hedge their underlying asset, thus creating a loop of driving prices lower, and since these paper markets dwarf the real market, prices can way overshoot on the downside, which helps with point one above.

So how does this help us?  We borrow in the reserve currency, a currency that is appreciating, so net good for us, and brings in investment from abroad from those seeking to protect from their own depreciating currency.

The cost of everything in the U.S. will fall that has a commodity attached to it.  I own a solar energy company, and the price of fabricated steel for some of my projects have fallen 20% with many additional services provided to me at that cost.  Same with electrical copper wiring, prices are beginning to fall, as well.  This brings down the cost of solar, which then competes with Natural Gas, which drives down get the point.  Now multiply that across all industries.

The two most liquid markets in the world is U.S. stocks, and U.S. bonds, and the money will pour in to these markets and create their own feedback loop.  I think the moves in both of these markets will be breathtaking.

The next market that will enjoy these gains is real estate.  I don't think a home in CA, within 5 miles of the ocean or has a view stays on the market for more than a week.  Investors/citizens are bailing out of Asia with the hope of securing a safe place for their families, and holding something tangible. You can get a 5% cap rate on a 5% annual appreciation, with a appreciating currency, and with rising rents, and that smells like victory.  For Americans, forget about all of the talk around rising interest rates.  Simply is not going to happen.  Thus putting a floor on real estate for the rest of the folks.

Ok, sounds great,  sounds pollyanish.

I think what kills the party is when the yield curve inverts, and the whole curve drifts down, depriving the banks of oxygen.  They are already constrained in assets and lending constraints, and with Silicon Valley creating Prosper, Loan mart, etc, they are losing consumer lending.  In my space with Trust Deeds, we own a very profitable niche lending to corporate home builders.  Our investors see double digit returns, and protective equity in the 30-40% range.  Losses are infinitesimal (for us, none), and the homebuilders are still making incredible margins.  (I will do a post on where the real profit is in real estate).  The banks are increasingly reliant on Fed reserve money to leverage, and that has stopped increasing, so they will need to double down in the market to squeeze out profits.  They will take it too far, then the party ends.

But that looks like a 2H 2015 event in my mind.  Enjoy the year.