Showing posts with label real estate. Show all posts
Showing posts with label real estate. Show all posts

Thursday, January 12, 2012

When Should Wall Street 'Investment Strategists' Be Fired? Calling Out "Dr. Bob" Froehlich


In most professions if you are consistently wrong you lose your job. If for some reason you do not lose your job, you will at least lose your credibility. Oddly, that is rarely the case with Wall Street Investment Strategists. In fact, regardless of how their calls turn out, many show up day after day on the media circuit merry-go-round (and investment conference merry-go-round).

What brings this up is a recent meeting I attended where Dr. Bob Froehlich was the main speaker. You have probably seen him on CNBC, Fox News and the like. Somehow I seem to cross paths with "Dr. Bob" a couple times a year. He currently is the "Chief Investment Strategist" for The Hartford. He used to have essentially the same job for DWS Investments. In fact, I remember a rep from the firm bringing him by our office in mid-2008. And yes, he was in full permabull mode. According to him, The Fed was gonna keep lowering rates and you don't want to fight the fed! It was worth a good chuckle (after all, he still thought housing was only a "subprime" problem).

If you ever wanted a shining example of a "permabull" this is him. In his own words from his Jan 3rd commentary he says "As a strategist who always sees the glass half full......" However, honestly, I'm not sure he ever sees the glass as anything but completely full. Now there is nothing wrong with being optimistic....But blind optimism does justice to no investor.

Just to illustrate how consistently bullish this guy is...........BussinessWeek April 2000 - Branding a Bull, Kemper-Style (yes folks, this is about a week after the market peak, when the S&P was around 1500).
"Undoubtedly another reason Scudder Kemper is "branding" itself by featuring Froehlich is that he's an unabashed bull. He has produced a series of audio tapes called From Wall Street to Main Street that extols the great benefits of investing in stocks. He has penned a recent book, The Three Bears are Dead!, which makes the case that the "three bears" of investing--inflation, interest rates, and government spending--all died in 1997. And Froehlich is a big believer in "Boomernomics"--that is, that baby boomers are just starting to drive the economy and stock market and that their impact will be much greater than anyone thought, prolonging the bull market well into the 2010s. The Chicago Tribune wrote about Froehlich, "There are [those] who have the eyes to see the dust in the distance, ears to hear the hoofbeats of the thundering herd, and noses to smell the money to be made. One of those is Robert Froehlich."
Dr. Bob couldn't smell money to be made if someone shoved it up his nose. That is, unless we are talking about how he really makes his money (because we know it's not by investing). He knows he makes his money as an "investment strategist" by selling blind optimism.

Yes "Boomernomics" would prolong the bull market well into the 2010s.......and nearly 12 years later here we are........

Despite his continued bad calls, mutual fund companies continue to employ this guy. Why? Because apparently they believe optimism sells! When DWS Investments finally got rid of the guy in late 2008 (after another market crash he was completely blindsided by), Hartford was quick to swoop up the hype machine.

Dr. Bob puts out his 10 investment themes yearly and they tend to always be good for a laugh. For example, the below was Dr Bob's Top 10 Investment Themes for 2011.
10: Investment Theme: “I WANT TO TAKE YOU HIGHER” (INTEREST RATES RISE)
Strategy: OVERWEIGHT PRODUCTS THAT HAVE A POSITIVE CORRELATION TO A RISING-RATE ENVIRONMENT 
Not Quite......

9) Strategy: OVERWEIGHT THE TECHNOLOGY SECTOR  
8) Strategy: OVERWEIGHT THE INDUSTRIAL SECTOR
7) Strategy: OVERWEIGHT GERMANY 
6) Strategy: OVERWEIGHT ENERGY SECTOR
5) Strategy: OVERWEIGHT THE MATERIAL SECTOR
4) Strategy: OVERWEIGHT CHINA
3) Strategy: UNDERWEIGHT THE U.S. DOLLAR
2) Strategy: OVERWEIGHT INTERNATIONAL STOCK
1) Strategy: OVERWEIGHT COMMODITIES
Well let's first look at how his sector bets turned out (I included commodities using the S&P GSCI). Dr. Bob's sector "overweights" are in red.

Gee, if he only would have picked financials he would have been perfect.........at picking all the WORST performing sectors. The story isn't really any different if we look at global sector performance either (except the negative numbers are much larger).

How about his country overweights? China and Germany were both down about 18%. That compares to the MSCI World index which was down just over 7%. Clearly not a good call. And it goes without saying that his call to overweight international stocks (with an emphasis on emerging markets) and underweighting the dollar were both bad calls.

Now anyone can get calls wrong, and everybody does. But the consistency with which he makes bad calls and the degree to which he misses every crisis is amazing.

So what are his themes for 2012?
10) STRATEGY: Overweight Large-Cap Stocks  
9) STRATEGY: Invest in Tax-Free Municipal Bonds 
8) STRATEGY: Overweight Dividend-Paying Stocks Over Non-Dividend-Paying Stocks.
7) STRATEGY: Invest in Japan
6) STRATEGY: Invest in International Bonds 
5) STRATEGY: Overweight the Energy Sector
4) STRATEGY: Overweight the Health Care Sector
3) STRATEGY: Invest in China
2) STRATEGY: Overweight the Media Industry
1) STRATEGY: Invest in Commodities 
It will be hard for him to do worse than 2011. Here are a few gems from the above letter. First in regards to China
"I believe the economy has a major reversal growing at 9.5% to 10% instead of the 7%-7.5% consensus the market is currently calling for in 2012."
He was also very adamant about the China story when I saw him speak. The funny thing is this part where he claims to be able to spot bubbles...
"Look, the one thing that I’ve learned in my 35-year career is what the chart looks like for an asset bubble. It looks just like gold where the chart simply goes higher, and higher, heading straight up with no end in sight"
So he has had a 35 year career but about 23 years or so into it he wasn't able to spot the tech bubble, and then he wasn't able to spot the real estate bubble. But NOW he has it down! Wait, what was that about China again? So he learned to spot bubbles but yet doesn't see one in Chinese Real Estate?

But the best is this one, and he repeated this many times also when he spoke.
"First of all, Europe won’t fall into a recession"
The above is a perfect reflection of how long Dr. Bob stays in denial. The reality is the Eurozone is already in recession!

Again, the purpose of this post was not to point out individual bad calls (although I did that). The purpose was to point out how ridiculous it is that the financial industry pays so much attention to (and regurgitates) opinions without any regard to the credibility or supporting facts behind those opinions.

Let me leave you with Dr. Bob's most ironic comment from his most recent letter. This is from his theme #9: Invest in Tax-Free Municipal Bonds (where he tries to call out Meredith Whitney for her call on Muni's)
"It never ceases to amaze me how the doom and gloomers tend to get all of the media headlines and hype. I guess it’s true that “bad news” sells"
News for you Dr. Bob. If bad news sells, why do you still have a job? Furthermore if accuracy matters, why do you have a job? And while he doesn't say it in his letter, when I heard him speak, he actually spoke about how upset he was that Meredith Whitney "was not held accountable" for her call! Really Bob? Really?

Friday, December 9, 2011

Real Estate Markets in Canada, China and Australia = CaCA

The investment world loves its acronyms (BRICS, PIIGS...etc) but I thought it was missing one which describes the housing markets in Canada, China and Australia. Then it hit me like a bag of.......CaCA! While Canadians, Chinese and Australians appear to still be living in a world of denial, evidence that their housing booms are in fact bubbles has been overwhelming. Similar to the smell of, yup, CaCA.

The Bank of Canada recently released its December "Financial System Review". It highlights some concerns about Canadian household finances and housing prices. However, it mostly down plays the housing concerns in typical central banker speak.
"In Canada, the elevated levels of household debt and housing prices require continued vigilance and close co-operation among Canadian authorities."
"Some measures of housing affordability suggest continued imbalances, owing to the robust performance of this market. In particular, house prices remain very high relative to income (Chart 26). Since the adverse impact of elevated residential property prices on affordability has been largely offset by low interest rates, affordability would be considerably curtailed if interest rates were closer to historical norms (Chart 27).
Certain areas of the national housing market may be more vulnerable to price declines, particularly the multiple-unit segment of the market, which is showing signs of disequilibrium: the supply of completed but unoccupied condominiums is elevated, which suggests a heightened risk of a correction in this market."
Gee, where does that 3rd paragraph sound familiar (see around the 1:20 mark in the below video, although the whole thing is classic.).  Obviously, in the US, it was more then the condo market and it will be in Canada too. Although, Vancouver will be Canada's version of Miami.

Clearly Canada's party will end at some point. Then in Australia we have another disaster waiting to happen (although, it has likely already begun there). Similar to Canada, it's fate was only delayed after the 2008 crash. The case of Australia's bubble is laid out in great detail in "Bubbling Over: The End of Australia’s $2 Trillion Housing Party" by Philip Soos.

Believe it or not, housing prices cannot deviate from rents by that margin forever. Fundamentals do matter.

Then of course we have China. What more can be said about China's pending disaster. We had all seen the videos of China ghost cities and malls. Of course the deniers are still in full force claiming that China's centrally planned economic structure has everything under control.......until reality becomes undeniable. The question is not whether it will burst, but how long the Chinese government can prop it up. Some of the ghost cities are already being hit such as China's city of Ordos which is discussed below. More pictures of China's out of control building can be seen here.


And as Reuters recently reported:
"After a housing bubble that doubled values in 35 cities between 2004 and 2009, prices are now falling nationwide. The central bank said on Friday property prices had reached a turning point while banks are worried a price slide of 20 percent could trigger panic selling."
"But prices in Ordos have already fallen below the level that analysts say would cause serious problems if mirrored nationally.
Prices have plummeted 20-30 percent in certain property developments in Beijing and Shanghai.
Nationwide, the decline is so far more modest. Home prices fell slightly in October from September for the first time this year, official data showed, but private surveys indicated prices began falling in September and continued through November.
With local governments often dependent on land sales to fund payments on a staggering 10.7 trillion yuan (1.1 trillion pounds) of debt, Beijing worries that a collapsing property market will trigger a wave of defaults that in turn will hit the banks."
"In Ordos, the government announced a bailout fund of between 7.5 billion and 10 billion yuan to support its beleaguered developers.
Still, that may not be enough. A commercial real estate agent, who only gave his surname Li, said that despite the government actions he was planning to return to his native Guangdong Province after six unsuccessful months in Kangbashi.
"There isn't much commercial real estate here. You need private businesses for that, and here it's all government money." 
The shock to natural resource demand from a China real estate bust is what will really bring the Australian and Canadian markets back to reality quickly. After all, its CaCA, a big interconnected mess!