Monthly Archives: July 2016

Tear Downs Are On A Tear

Houston lost its locally famous Bullock-City Federation Mansion in 2014 to a developer who plans to erect townhouses on the site.

The house may not have been worthy of a place on a list of historically significant structures. But the 5,000-square-foot structure that was erected in 1906 on a 30,000-square-foot lot was the first in the sweltering Texas city to have air conditioning. And its demise was mourned by more than a few people.

“It’s a beautiful building,” Ernesto Aguilar, general manager of KPFT Radio, which sits next door, told the Houston Chronicle at the time. “It is sad to see a piece of Houston history going the same way as many others do.”

Tear downs — in which builders or private individuals purchase an aging, outmoded house, then demolish it and replace it with a modern home that will suit today’s homeowners — are currently on a tear in Houston. Permits for tear downs are up by 22% in the city this year.

And that phenomenon isn’t limited to Houston. Barry Sulphor, a real estate agent in the Los Angeles area, counts no less than 100 tear down sites in the so-called beach cities where he plies his trade: Hermosa Beach, Redonda Beach and Manhattan Beach. “And I’m sure there are just as many in Venice, Santa Monica and Beverly Hills,” Sulphor says.

According to the National Association of Home Builders’ best count, nearly 8% of all single-family housing starts in 2015 were attributable to tear down-related construction. That’s roughly 55,000 older houses gone forever, and that’s on top of the 31,800 single-family tear down starts in 2014.

In some instances, the houses that are destroyed are outmoded, functionally obsolete relics that no longer serve a useful purpose. But in other cases, they work just fine and simply lack up-to-date amenities. And some have historical significance that may or may not be worthy of saving.

Usually, the places that replace a tear down are larger, covering more of the lot and rising higher than the old place — often to the maximum height allowable under local zoning rules.

Sulphor recently sold two lots where the old houses were taken down. One was bought for $1.35 million by a builder who plans to put up a house with a nearly $4 million price tag. The other was purchased for $2.15 million by a retired couple who “love the creativity of working with architects to design luxury beach properties,” according to Sulphor. “When the new place is completed, it will fetch close to $5 million.”

Not everyone sees the benefit of tear downs. The leading opponent is the National Trust for Historic Preservation, which argues that they are an “epidemic” that is “wiping out historic neighborhoods one house at a time. As older homes are demolished and replaced with dramatically larger, out-of-scale new structures, the historic character of the existing neighborhood is changed forever.”

Richard Moe, a former president of the National Trust, said, “From 19th-century Victorian to 1920s bungalows, the architecture of America’s historic neighborhoods reflects the character of our communities. Tear downs radically change the fabric of a community. Without proper safeguards, historic neighborhoods will lose the identities that drew residents to put down roots in the first place.”

But the NAHB, which admits that tear downs “have become a significant modus operandi” for its members in some parts of the country, counters that the new houses often “breathe new life into older communities.”

Because tea rdowns are sometimes controversial, folks considering buying an older place with the idea of taking it down and putting up a new house should proceed cautiously. Often, these old homes are not advertised for sale on the open market or in the multiple listing service, so the challenge begins with finding out about one, says Sulphor. And once you do, the agent suggests making absolutely sure the condition of the current home is such that it cannot be salvaged.

Would-be buyers should also determine, before making an offer, whether what they plan to build conforms to local restrictions. Preservationists often use — or try to change — local building codes to push back against tear downs.

On the other hand, people trying to sell old properties that are tear down candidates should make sure whatever offers they receive are legit, Sulphor advises. Look for the proof that they have the funds to close the deal, especially if they say they will pay with cash and have no need of a mortgage.

Sellers should also realize that selling a property “as-is” does not insulate them from their obligation to disclose any issues that might impact value. The term “as-is” means only that the house is being offered and sold in its present condition.

by Lew Sichelman | National Mortgage News

Beware: The $10 Trillion Glut of Treasuries Can Suddenly Pull Interest Rates Up, as Big Deficits Loom

Net issuance seen rising after steady declines since 2009
Fed seen adding to supply as Treasury ramps up debt sales

Negative yields. Political risk. The Fed. Now add the U.S. deficit to the list of worries to keep beleaguered bond investors up at night.

Since peaking at $1.4 trillion in 2009, the budget deficit has plunged amid government spending cuts and a rebound in tax receipts. But now, America’s borrowing needs are rising once again as a lackluster economy slows revenue growth to a six-year low, data compiled by FTN Financial show. That in turn will pressure the U.S. to sell more Treasuries to bridge the funding gap.

No one predicts an immediate jump in issuance, or a surge in bond yields. But just about everyone agrees that without drastic changes to America’s finances, the government will have to ramp up its borrowing in a big way in the years to come. After a $96 billion increase in the deficit this fiscal year, the U.S. will go deeper and deeper into the red to pay for Social Security and Medicare, projections from the Congressional Budget Office show. The public debt burden could swell by almost $10 trillion in the coming decade as a result.

All the extra supply may ultimately push up Treasury yields and expose holders to losses. And it may come when the Federal Reserve starts to unwind its own holdings — the biggest source of demand since the financial crisis.

“It’s looking like we are at the end of the line,” when it comes to declining issuance of debt that matures in more than a year, said Michael Cloherty, head of U.S. interest-rate strategy at RBC Capital Markets, one of 23 dealers that bid at Treasury debt auctions. “We have deficits that are going to run higher, and at some point, a Fed that will start allowing its Treasury securities to mature.”

After the U.S. borrowed heavily in the wake of the financial crisis to bail out the banks and revive the economy, net issuance of Treasuries has steadily declined as budget shortfalls narrowed. In the year that ended September, the government sold $560 billion of Treasuries on a net basis, the least since 2007, data compiled by Bloomberg show.

Coupled with increased buying from the Fed, foreign central banks and investors seeking low-risk assets, yields on Treasuries have tumbled even as the overall size of the market ballooned to $13.4 trillion. For the 10-year note, yields hit a record 1.318 percent this month. They were 1.57 percent today. Before the crisis erupted, investors demanded more than 4 percent.

Net Issuance of U.S. Treasuries, Fiscal-Year Basis

One reason the U.S. may ultimately have to boost borrowing is paltry revenue growth, said Jim Vogel, FTN’s head of interest-rate strategy.

With the economy forecast to grow only about 2 percent a year for the foreseeable future as Americans save more and spend less, there just won’t enough tax revenue to cover the burgeoning costs of programs for the elderly and poor. Those funding issues will ultimately supersede worries about Fed policy, regardless of who ends up in the White House come January.

As a percentage of the gross domestic product, revenue will remain flat in the coming decade as spending rises, CBO forecasts show. That will increase the deficit from 2.9 percent this fiscal year to almost 5 percent by 2026.

“As the Fed recedes a little bit into the background, all of these other questions need to start coming back into the foreground,” Vogel said.

The potential for a glut in Treasuries is emerging as some measures show buyers aren’t giving themselves any margin of safety. A valuation tool called the term premium stands at minus 0.56 percentage point for 10-year notes. As the name implies, the term premium should normally be positive and has been for almost all of the past 50 years. But in 2016, it’s turned into a discount.

Some of the highest-profile players are already sounding the alarm. Jeffrey Gundlach, who oversees more than $100 billion at DoubleLine Capital, warned of a “mass psychosis” among investors piling into debt securities with ultra-low yields. Bill Gross of Janus Capital Group Inc. compared the sky-high prices in the global bond market to a “supernova that will explode one day.”

Despite the increase in supply, things like the gloomy outlook for global growth, an aging U.S. society and more than $9 trillion of negative-yielding bonds will conspire to keep Treasuries in demand, says Jeffrey Rosenberg, BlackRock Inc.’s chief investment strategist for fixed income.

What’s more, the Treasury is likely to fund much of the deficit in the immediate future by boosting sales of T-bills, which mature in a year or less, rather than longer-term debt like notes or bonds.

“We don’t have any other choice — if we’re going to increase the budget deficits, they have to be funded” with more debt, Rosenberg said. But, “in today’s environment, you’re seeing the potential for higher supply in an environment that is profoundly lacking supply of risk-free assets.”

Deutsche Bank AG also says the long-term fiscal outlook hinges more on who controls Congress. And if the Republicans, who hold both the House and Senate, retain control in November, it’s more likely future deficits will come in lower than forecast, based on the firm’s historical analysis.

FED HOLDINGS OF TREASURIES COMING DUE

2016 ────────────── $216 BILLION

2017 ────────────── $197 BILLION

2018 ────────────── $410 BILLION

2019 ────────────── $338 BILLION

However things turn out this election year, what the Fed does with its $2.46 trillion of Treasuries may ultimately prove to be most important of all for investors. Since the Fed ended quantitative easing in 2014, the central bank has maintained its holdings by reinvesting the money from maturing debt into Treasuries. The Fed will plow back about $216 billion this year and reinvest $197 billion in the next, based on current policy.

While the Fed has said it will look to reduce its holdings eventually by scaling back re-investments when bonds come due, it hasn’t announced any timetable for doing so.

“It’s the elephant in the room,” said Dov Zigler, a financial markets economist at Bank of Nova Scotia. “What will the Fed’s role be and how large will its participation be in the Treasury market next year and the year after?”

by Liz McCormick & Susanne Barton | Bloomberg

Homes Are Selling Fast This Summer

Homes are selling an average of a week faster than they did a year ago, meaning home shoppers should be prepared to move quickly in a competitive housing market, according to the June Zillow Real Estate Market Report.

Tight inventory continues to be a major factor for home shoppers. The supply of homes for sale is nearly 5 percent lower than it was a year ago, and 38 percent lower than its peak level in 2011. With fewer available options, home shoppers are moving quickly to buy homes, with the average U.S. home closing after 78 days on the market.

The 78-day average includes the time it takes to close, which is usually one or two months after the home goes under contract. This means that homes are pending within about a month of being listed.

The length of time homes stay on the market before selling has been steadily decreasing since 2010, when homes took an average of five months to sell. The average time home buyers had in Pittsburgh, Philadelphia and Charlotte, N.C. dropped by at least two weeks, the biggest change among the largest U.S. metros.

The low inventory and quick-moving market combine to create a competitive home shopping market, especially for potential buyers looking for less expensive homes. The most expensive third of the market has experienced the smallest drop in available inventory compared to the rest of the market.

“Homes are selling faster than ever as the home shopping season hits its peak,” said Zillow Chief Economist Dr. Svenja Gudell. “If you’re looking for a home, be prepared to move quickly. Adding to this difficult buying environment is low inventory—there simply aren’t many homes to choose from. And while this looks like a good time to be a seller, potential move-up buyers may hesitate to list their homes and become buyers. Until the supply increases, it will remain a tough market to find a home.”

by National Mortgage Professional

Leak Reveals Secret Tax Crackdown On Foreign-Money Real Estate Deals In Vancouver

Confidential briefing for CRA auditors outlines strategy to tackle suspected tax cheats who do not report global income or who ‘flip’ homes – but reveals that last year, there was only one successful audit of global income for all of British Columbia

A backhoe destroys a C$6 million mansion in Vancouver’s Shaughnessy neighbourhood this year. The destruction of the well-kept home prompted community outrage and was cited in a briefing for Canadian tax auditors looking into Vancouver real estate transactions. Photo: Twitter / @DeborahAMG

A secret strategy briefing for Canada Revenue Agency auditors has revealed plans to crack down on real estate tax cheats in Vancouver, with 50 auditors being assigned to investigate purchases funded by unreported foreign income.

Presentation notes for the seminar, delivered to auditors on June 2 and leaked to the South China Morning Post, show that only one successful audit of worldwide income was conducted in British Columbia in the past year, in spite of Vancouver’s reputation as a hotspot for immigrant “astronaut families” whose breadwinners often work in mainland China and Hong Kong.

The plans, which come amid a furore over the role of Chinese money in Vancouver’s runaway housing market, were provided by a Canada Revenue Agency employee who attended the June 2 briefing. The briefing is identified as a “protected B” confidential document on the cover.

The cover for a confidential CRA briefing for auditors. Photo: SCMP Pictures

But the employee feared the sweep would prove inadequate. “Sure, they’ve upped the numbers because it’s hitting the papers,” they said. But on average, they estimated, each redeployed income auditor would only be able to conduct 10 to 12 audits per year – about 500 or 600 in total. “This is nothing,” compared to the likely scale of the cheating, they said.

Confidential briefing notes for CRA auditors reveal how the Canadian tax agency is targeting unreported global income and other issues related to real estate sales in the Vancouver region. Photo: SCMP Pictures

That estimate is in keeping with the briefing text which says the crackdown will “review the top 500 highest risk files within our region”.

In Vancouver, house owners made more sitting on their assets than entire population did by actually working last year

The briefing lists four areas being targeted for audit under the CRA’s “real estate projects”, launched in response to “significant media attention”: unreported worldwide income, property “flipping”, under-reporting of capital gains from home sales, and under-reporting of Goods and Services Tax (GST) on sales of new homes.

‘High-end homes, minimal income’

The time-consuming global income audits will tackle “individuals living in high-valued areas in BC who are reporting minimal income not supporting their lifestyle”, as well as those who buy “high-end homes with minimal income being reported.”

The supposed case of a C$5.8 million home bought by someone who claimed a tax break intended for the poor is cited in the CRA briefing. Photo: SCMP Pictures

The presentation includes a photo of a luxury home supposedly bought for C$5.8million whose owner claimed the “working income tax benefit” for low earners. It also lists the tuition fees of Vancouver private schools.

Confidential briefing notes for CRA auditors show that 50 income tax auditors are being redeployed to tackle real estate cheats in BC. Photo: SCMP Pictures

Property flippers who swiftly resell homes for profit will meanwhile be audited to see if their properties truly qualify for exemption from capital gains tax, granted to people selling their principal residence.

The briefing describes various excuses given by owners who moved out of newly purchased homes, including a negative feng shui report, the “bad omen” of tripping over a crack in the sidewalk, and a painter dying in the home.

Immigration mega-fraud: the rich Chinese immigrants to Canada who don’t really want to live there

It cites the highly publicized case of a well-kept 20-year-old, C$6million mansion that was simply torn down after being bought, prompting community outrage.

Yes, we are getting a response now, but the government has known about this issue for a few years. They held back

CRA employee

The briefing does not say the owners of this home, or the $5.8 million home, are tax cheats and nor does the SCMP suggest so.

The CRA employee said the briefing, which was streamed online, was delivered by CRA’s Pacific region business intelligence director, Mal Gill.

The CRA briefing lists various excuses given by people who moved out of new homes, apparently claimed as principal residences. Photo: SCMP Pictures

Gill declined to discuss the briefing. “I cannot confirm anything to you,” he said, referring the SCMP to a CRA communications manager.

The case of a well-kept C$6million Vancouver home that was simply demolished after purchase is cited in leaked notes for Canadian tax auditors. Photo: SCMP Pictures

A spokeswoman said: “The CRA cannot comment or release information related to risk assessment or non-compliance strategies.”

However, she said real estate transactions in Toronto have been the subject of greater scrutiny, for some years. “More recently, the CRA has been actively monitoring and auditing real estate transactions in British Columbia,” she said.

“For the year ending March 31, 2016, the CRA completed 2,203 files [in BC and Ontario] related to real estate,” she said.

In addition to the 50 redeployed income auditors, the leaked briefing says CRA is assigning 20 GST auditors and 15 other staff to the real estate project in BC.

Children of rich Chinese home alone in Canada face challenges

The CRA source said they leaked the material because, “like many people, I’m pretty disgusted by what’s happening here [in the Vancouver real estate market], and a lack of enforcement has been a part of the problem. Yes, we are getting a response now, but the government has known about this issue for a few years. They held back.”

The CRA briefing reveals that there was just one successful audit conducted on unreported global income in BC last fiscal year. Photo: SCMP Pictures

The employee said they were surprised to discover that only one successful audit of global income had been conducted in BC in the year to March 31. “That’s the ludicrousness of this. I was shocked when I saw this, and they only got C$27,000 in tax revenue out of it,” they said.

Asked whether this might show a widespread problem with undeclared worldwide income did not exist in BC, the source said: “No, what it shows is that inadequate people and resources have been put to the task. These [tax cheats] are highly sophisticated individuals, with good representation from their lawyers and accountants, and we are sending out our least experienced people to catch them. That’s the problem.”

Source cites CRA’s ‘racism fear’

Census data from 2011 has previously shown that 25,000 households in the City of Vancouver spent more on their housing costs than their entire declared income, with these representing 9.5 per cent of all households.

But far from being impoverished, such households were concentrated in some of the city’s most expensive neighborhoods, where homes sell for multi-million-dollar prices.

In Bizarro Vancouver, 25,000 households declare less income than they spend on housing alone

The source suggested CRA bureaucrats previously feared being labelled racist if they targeted low-income declarers buying real estate “because the vast majority of these cases, involving high real estate values, involve mainland Chinese”.

The crackdown was not intended for public knowledge, and instead was to satisfy “people from high up” in the CRA and government who wanted to know “what are you guys doing about this…there’s stuff hitting the papers every day”, the source said. Yet the briefing says the crackdown “will not address the major concerns about affordability of real estate”.

“The vast majority of these [undeclared global income] cases, involving high real estate values, involve mainland Chinese”

CRA employee

The source said there had previously been little done to check whether taxpayers were secretly living and working abroad while supporting a family in Vancouver. “There’s virtually no liaising done with immigration. The common auditor would never check when people are actually coming and going, to check whether they might be going back to China or wherever to work. You can be lied to, to your face: ‘Oh no, I live here [in Canada] full-time’.”

The leaked documents show that in in addition to the single audit on global income in the last fiscal year, CRA in BC conducted 93 successful audits on property flips, 20 on capital gains tax and 225 on under-reported GST. The audits yielded C$14.4 million in new tax, of which C$10million was GST. There was C$1.3 million in fines.

As of April 29, there were 40 audits of global income under way, 205 related to flipping, 34 related to capital gains and 428 related to GST.

The average Vancouver house price now sits around C$1.75million for the metropolitan region, while the Real Estate Board of Greater Vancouver’s “benchmark” price for all residential properties is C$889,100, a 30 per cent increase over the past year. However, incomes remain among the lowest in Canada, making Vancouver one of the world’s most un-affordable cities .

The CRA responds here. No corrections have been made to this story as a result.

Read the secret CRA briefing notes via this link, or see below

Cra Webinar June 2 2016 by Ian Young on Scribd

https://www.scribd.com/embeds/318208073/content?start_page=1&view_mode=scroll&access_key=key-DoXM0nepRUdQPD1XDWJt&show_recommendations=true&show_upsell=true

http://www.scmp.com/news/world/united-states-canada/article/1989586/leak-reveals-secret-tax-crackdown-foreign-money-real

The Hongcouver blog is devoted to the hybrid culture of its namesake cities: Hong Kong and Vancouver. All story ideas and comments are welcome. Connect with me by email ian.young@scmp.com or on Twitter, @ianjamesyoung70

This article appeared in the South China Morning Post print edition as:

CRACKDOWN ON VANCOUVER CHEATS

USA Today Reports Existing Home Sales Hit 9-Year High In June

Bolstered by first-time home buyers, existing-home sales rose for the fourth straight month in June, reaching a nine-year high.

Sales of existing single-family homes, townhomes, condominiums and co-ops increased 1.1% to a seasonally adjusted annual rate of 5.57 million, up from May’s downwardly revised 5.51 million, the National Association of Realtors said Thursday. The June pace was the strongest since 2007.

First-time buyers made up 33% of those transactions, the biggest share in four years. That eased concerns that a shortage of affordable houses has been pushing entry-level buyers out of the market.

The median existing-home price also reached a new high as it surged 4.8% to $247,700 from a year ago, above the former peak of $238,900 in May.

June’s sales exceeded the highest forecast of economists polled by Bloomberg, 5.56 million.

Healthy job gains, record-high stock prices and near-record low mortgage rates stoked June’s positive showings, said Lawrence Yun, chief economist at the National Association of Realtors.

“The modest bump in June sales to first-time buyers can be attributed to mortgage rates near all-time lows and perhaps a hopeful indication that more affordable, lower-priced homes are beginning to make their way onto the market,” he said. “The odds of closing on a home are definitely higher right now for first-time buyers living in metro areas with tamer price growth and greater entry-level supply — particularly areas in the Midwest and parts of the South.”

The Midwest has the lowest median existing-home price among all regions, $199,900, followed by the South, at $217,400. The median price in the West climbed 7.2% from a year ago to $350,800.

Total available existing homes for sale dipped 0.9% to 2.12 million, now 5.8% below a year ago.

“Seasonally adjusted, the month’s supply of homes in June 2016 was the lowest since June 2005, indicating that inventory problems still plague home buyers,” said Ralph McLaughlin, Trulia’s chief economist.

by Athena Cao | USA Today

London Housing Bubble Melts Down

But don’t just blame Brexit.

In Central London – the 30 most central postal codes and one of the most ludicrously expensive housing markets in the world – eager home sellers are slashing their asking prices to unload their properties. But even that isn’t working.

In the 12 days after the Brexit vote, cuts to asking prices have soared by 163% compared to the 12 days before the vote, according to the Financial Times. Yet sales have plunged 18% from before the Brexit vote. Sales had already taken a big beating before then and are now down a mind-boggling 43% from where they’d been a year ago!

So Brexit did it?

Um, well, sort of. But it’s more than Brexit. Home prices on a £-per-square-foot basis had peaked in Q2 2014, according to real-estate data provider LonRes. Since then, the market in Central London has been hissing hot air. By Q1 2016, prices for homes above £5 million had dropped 8% from their 2014 peak, and prices for homes from £2 million to £5 million had plunged 10%.

Back in December 2015, we reported that luxury housing in London was getting mauled, based on the LonRes report for the third quarter, released at the time. It pointed the finger at folks who, once “awash with cash, don’t have as much to spend” [read… It Gets Ugly in the Toniest Parts of London].

Then, in its spring review, LonRes called the prime London housing market “challenging.”

It wasn’t just the Brexit referendum and the new stamp duty – In 2014, a change in the stamp duty made buying high-end homes more costly; and in April this year, an additional duty was imposed on purchases beyond a primary residence. Now there’s a third reason, and it originates deep from the bowels of the UK economy. LonRes:

A third is now making itself known to us as it is not something that the chancellor can bury any more. This is the balance of payments which ran at 5.2% of GDP last year and was the largest annual deficit since records began in 1948.

If measures are not taken to bring this under control, then the mini experiment to deflate the London property bubble will seem small change compared to the £32.7bn deficit that exists.

The London residential market has undoubtedly slowed, and this is impacting prices. No one will disagree that London’s prime market needed the steam to be released from it. My guess is that this slower market will be here for some time.

And not just in London…

Last week, the Royal Institution of Chartered Surveyors was spreading gloom with its residential market survey of the UK, conducted after the Brexit vote, that found, as the Telegraph put it, “The number of people wanting to buy a house has fallen to the lowest level since mid-2008 amid post-referendum uncertainty.”

Lucian Cook, head of residential research at Savills, told the Telegraph:

“The current month’s figures suggest countrywide impact on sentiment which is to be expected. However previous months’ results would indicate that a slowdown in London has been on the cards for some time. It looks like the Brexit vote may be the trigger for this to materialize.”

Now all hopes are once again centered on foreigners and their money to bail out the housing bubble before it completely implodes. But this time, it’s different, as they say at the worst possible moment: it’s not the Russians or the Chinese, but people whose investments and incomes are in currencies linked to the US dollar. Over the last 12 months, the pound has lost about 14% against the dollar, most of it since the Brexit vote, which would give these folks an additional discount on UK real estate.

The Financial Times expressed those industry hopes, and its new saviors, citing Anthony Payne, managing director at LonRes:

“We have heard that quite a number of Middle Eastern buyers have been coming back into the market. A lot of them are converting from dollars, and together with any discount they get [plunging prices], the saving in the actual price is quite substantial,” said Mr. Payne. “Some people are concerned by Brexit – others see it as an opportunity.”

London isn’t the only ludicrously overpriced housing market, where prices, once helped along by foreign money, are skidding. And now the industry is hoping for more foreign money to wash ashore, just when the Chinese, by far the largest group of investors in the US housing market, are getting cold feet.

by Wolf Richter | Wolf Street

The “Mystery” Of Who Is Pushing Stocks To All Time Highs Has Been Solved

One conundrum stumping investors in recent months has been how, with investors pulling money out of equity funds (at last check for 17 consecutive weeks) at a pace that suggests a full-on flight to safety, as can be seen in the chart below which shows record fund outflows in the first half of the year – the fastest pace of withdrawals for any first half on record…

… are these same markets trading at all time highs? We now have the answer.

Recall at the end of January when global markets were keeling over, that Citi’s Matt King showed that despite aggressive attempts by the ECB and BOJ to inject constant central bank liquidity into the gunfible global markets, it was the EM drain via reserve liquidations, that was causing a shock to the system, as net liquidity was being withdrawn, and in the process stocks were sliding.

Fast forward six months when Matt King reports that “many clients have been asking for an update of our usual central bank liquidity metrics.”

What the update reveals is “a surge in net global central bank asset purchases to their highest since 2013.”

And just like that the mystery of who has been buying stocks as everyone else has been selling has been revealed.

But wait, there’s more because as King suggests “credit and equities should rally even more strongly than they have done already.”

More observations from King:

The underlying drivers are an acceleration in the pace of ECB and BoJ purchases, coupled with a reversal in the previous decline of EMFX reserves. Other indicators also point to the potential for a further squeeze in global risk assets: a broadening out of mutual fund inflows from IG to HY, EM and equities; the second lowest level of positions in our credit survey (after February) since 2008; and prospects of further stimulus from the BoE and perhaps the BoJ.

His conclusion:

While we remain deeply skeptical of the durability of such a policy-induced rally, unless there is a follow-through in terms of fundamentals, and in credit had already started to emphasize relative value over absolute, we suspect those with bearish longer-term inclinations may nevertheless feel now is not the time to position for them.

And some words of consolation for those who find themselves once again fighting not just the Fed but all central banks:

The problems investors face are those we have referred to many times: markets being driven more by momentum than by value, and most negatives being extremely long-term in nature (the need for deleveraging; political trends towards deglobalization; a steady erosion of confidence in central banks). Against these, the combination of UK political fudge (and perhaps Italian tiramisu), a lack of near-term catalysts, and overwhelming central bank liquidity risks proving overwhelming – albeit only temporarily.

Why have central banks now completely turned their backs on the long-run just to provide some further near-term comfort? Simple: as Keynes said, in the long-run we are all dead.

Source: ZeroHedge

31 Year Old Hedge Funder Trashes $20 Million Hamptons Mansion In Wild Midget-Tossing Party, Is Fired

In another reminder why most of the population is increasingly furious at the “elites”, over the holiday weekend a 31-year-old portfolio manager for Moore Capital, Brett Barna, threw a wild “Wolf of Wall Street”-style Hamptons party, complete with Champagne, scores of bikini-clad women and costumed gun-toting midgets, and in the process trashed a $20 million mansion.

According to Page Six, Barna, “a portfolio manager at Louis Bacon’s Moore Capital Management, hosted the all-day “#Sprayathon” pool party on Sunday, where 1,000 people doused themselves in bubbly as rapper Ace Hood performed.”

Making things more complicated is that Barna is not the owner of the 9-bedroom, 8 acre Hamptons mansion which “comes with tennis court, gym, outdoor pool & jacuzzi” where he celebrated US Independence Day in decadent style, and instead rented it from “Tommy” for $29,000 on AirBNB, a fee he is now disputing.

And now Tommy is angry: “the furious owner of the 14-bedroom estate in Bridgehampton plans to sue Barna, 31, for $1 million, saying the Wall Street hot shot had claimed the party would be a fundraiser for an animal charity for a mere 50 guests.”

The owner, who asked to not be named, told Page Six that , “Brett came to me dropping Louis Bacon’s name and saying he was a big deal with the Robin Hood Foundation. He said there would be 50 people at the event and it was for animal rescue. But the only animals there were the people, a thousand of them. They drowned themselves in Champagne, they had midgets they threw in the pool, they broke into the house, trashed the furniture, art was stolen, we found used condoms. So many people were there that the concrete around the pool crumbled and fell into the water. It was like ‘Jersey Shore’ meets a frat party. We are preparing a massive lawsuit . . . We’re waiting to serve him.”

“Brett was last seen on Sunday chugging Champagne with two midgets.”

Wild social media posts show party goers dousing themselves in booze and dancing wildly.

The videos and photos below, capturing the festivities, will surely be Exhibit A-X in the upcoming lawsuit.

Party video link

Party pictures link

According to the publication, this is an annual bacchanal: Last year #Sprayathon revelers started a brush fire at a Hamptons manse owned by “Hercules” actor Kevin Sorbo.

Page Six adds that a rep for the embarrassed hedge fund didn’t comment, but a source said Moore raised $100,000 for Last Chance Animal Rescue, and they hired cleaners and left the house in good condition.

As CNBC adds this morning, Moore Capital said it has fired Barna. “Mr. [Brett] Barna’s personal judgment was inconsistent with the firm’s values,” the company told CNBC in a statement.

“He is no longer employed by Moore Capital Management.”

Source: ZeroHedge

How 2 US Senators Profited From America’s Mortgage Crisis

Bob Corker and Mark Warner speaking in an interview with Zillow about mortgage-finance reform

“The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people. They think you didn’t just come out fine because it was luck. They think you guys just really gamed this thing real well.”

So said then-Senator Edward E. Kaufman, a Democrat from Delaware, at the Congressional hearing in the spring of 2010 where assorted members of Congress lambasted Goldman Sachs’ activity in the run-up to the financial crisis.

But it turns out two members of Congress actually made money from that crisis, according to publicly available documents. During the crisis years, two now-senators, Mark Warner (D-Va.) who was the governor of Virginia until his Senate term began in 2009, and Bob Corker (R-Tenn.), who took office in 2007, were invested in a fund that appears to have made sizable profits from Goldman products that were designed to bet against the real estate market.

There’s no evidence either Senator was aware of the specific strategy, although both have reported millions of dollars of income from the fund. A little bit of ancient history: Back in the spring of 2010, the SEC charged Goldman Sachs with fraud over a deal called Abacus 2007-AC1. Abacus 2007-AC1 was a so-called CDO, which in essence requires investors to wager against each other. One set of investors was betting that homeowners would continue to pay their mortgages. Others, who were short, were betting there would be massive defaults.

In this particular deal, Goldman allowed a hedge fund client, Paulson Capital Management, to take the short position and help choose which securities would go into it. The SEC alleged that Goldman hadn’t told the long investors that Paulson’s team essentially had designed the CDO to fail. According to a report done by the US Senate Permanent Subcommittee on Investigations, three long investors together lost about $1 billion from their Abacus investments, while the Paulson hedge fund profited by about the same amount.

Goldman paid $550 million to settle the SEC’s charges in the summer of 2010. A young vice president who had worked on the deal, Fabrice Tourre, was eventually found liable in a civil suit brought by the SEC, making him one of the few to face any repercussions from the crisis era.

Senate Foreign Relations Committee Chairman Sen. Bob Corker, R-Tenn., listens on Capitol Hill in Washington

But Abacus 2007-AC1 wasn’t unique. In fact, it was merely the last in a series of Abacus CDOs. According to the Senate report, these were “pioneered by Goldman to provide customized CDOs for clients interested in assuming a specific type and amount of investment risk” and “enabled investors to short a selected group” of securities. Many of the Abacus deals were tied in part to the performance of subprime residential mortgage-backed securities, but some were also tied to the performance of commercial mortgage-backed securities.

Because AIG provided insurance on at least some of the Abacus deals, the Abacus deals were also part of the collateral calls that Goldman made to AIG, and part of the reason that taxpayers ended up bailing out AIG. Plenty of well-known hedge funds availed themselves of Goldman’s Abacus deals, according to a document Goldman provided the Financial Crisis Inquiry Commission. The list of those who were short various Abacus deals includes Moore Capital Management, run by billionaire Louis Bacon; Magnetar, an Illinois-based fund run by Alec Litowitz; Brevan Howard, a European hedge fund management company; and FrontPoint Partners (which shows up in the movie “The Big Short”).

There are also some lesser known names in the document, including Pointer Management, a Tennessee-based fund which was founded in 1990 by Joseph Davenport, a Chattanooga area businessman and former Coca-Cola executive, and Thorpe McKenzie, also from Chattanooga, according to the Campaign for Accountability.

Specifically, Pointer took short positions in an Abacus deal called ABAC07-18, as did FrontPoint Partners and several others. According to several sources, this Abacus deal was based entirely on securities tied to commercial real estate, rather than residential real estate. While few people have heard about this particular Abacus deal, it too resulted in Goldman making a collateral call on AIG. According to a document Goldman submitted to the FCIC, it looks as if by late 2008, AIG had posted a total of $308 million in collateral to Goldman in connection with Abacus 2007-18.

U.S. Senator Mark Warner (D-VA) speaks at a news conference in the U.S. Capitol in Washington

And it too was controversial — so controversial that at a meeting of the Financial Crisis Inquiry Commission on October 12, 2010, the commissioners voted to refer the matter to the Department of Justice, citing “potential fraud by Goldman Sachs in connection with Abacus 2007-18 CDO.”

In its write-up, the FCIC quoted Steve Eisman, the FrontPoint trader whose character figures prominently in “The Big Short.” According to his interview with the FCIC, Eisman seemed to feel that Goldman might have gamed the rating agencies, and might have brought in outside investors so that the firm could justify marking the deal down immediately, meaning long investors would suffer and short sellers would make money.

According to Eisman’s testimony, he said to the Goldman traders, “So you put this stuff together and you went to the agencies to get a rating and the biggest issue with the rating is the correlation of loss, and you presented a correlation analysis that was lower than you actually thought it was but the rating agencies were stupid, so they’d buy it anyway. So assuming your correlation analysis was correct, you took the short side, sold it to the client, and then [did the deal with me to get a mark].” One of the Goldman traders responded, according to Eisman’s testimony, “Well, I wouldn’t put it in those terms exactly.”

Eisman went on to say he believed Goldman “wanted another party in the transaction so if we have to mark the thing down, we’re not just marking it to our book.” He added that, “Goldman was short, and we [FrontPoint] were short. So when they go to a client and say we’re marking it down, they can say well it wasn’t just our mark.”

The FCIC noted that if Goldman did agree with Eisman’s characterization, this could raise legal issues for Goldman as to whether the firm deliberately misled the rating agencies, thereby leading to a material omission in the offering documents for Abacus 2007-18 and violating securities laws. The FCIC also noted that if Goldman indeed knew it was expecting to lower the value of the security as the firm was creating it, and brought in other investors only to make that look more genuine, that could be another potential violation of securities laws. Anyway. Nothing came of this, just as nothing came of any of the FCIC’s other referrals to the Justice Department.

According to a document Goldman submitted to the FCIC, the short investors did very well: Pointer appears to have been paid $120 million in “termination payments” in 2008 and 2009. (Although commercial real estate held up fairly well in the end, prices also collapsed in the crisis.) The documents don’t make it clear what, if any, upfront investment was required; the monthly coupon rate was small.

“This amount of money that’s going into AIG, there is no upside now,” Corker told Politico in early 2009 about the taxpayer bailout of the company. “This is all just like gone money.”

Gone where? Well, what is clear is that Corker especially, but also Warner, made money from their overall investments in Pointer. According to his disclosure forms, Corker’s investment in Pointer first shows up in 2006. He put the value of his investment between $5 million and $25 million. In July 2007, several months before the effective dates for Pointer’s Abacus deals, he put an additional $1 million to $5 million into Pointer. From 2006 to 2014, he reported total income from Pointer of between $3.9 million at the low end and $35.5 million at the high end (including funds from the sale of part of his stake in the fund in 2012.) He sold the rest of his stake in 2014 and reported a cash receivable from Pointer of between $5 million and $25 million that year.

According to Warner’s disclosure forms, he first invested in Pointer in 2007. He assigned his stake the same value range as Corker did his: between $5 million to $25 million. Warner, who sold his entire position in 2012, reported total income from Pointer of between $1.5 million and $10 million. There’s no evidence that either senator knew that a fund in which they had invested was shorting the real estate market.

A letter from Pointer’s chief compliance officer says that Corker “can neither exercise control nor have the ability to exercise control over the financial interest held by Pointer.” Nonetheless, Corker and the principals of Pointer have known each other for a long time. According to the Campaign for Accountability, in 2004, Corker named Joseph Davenport among his co-chairs of his campaign committee ahead of his 2006 election; Pointer employees and their spouses have contributed $76,840 to Corker’s campaigns and $55,000 to his Rock City PAC, says CfA. And several business entities tied to Corker list the same address as Pointer. There aren’t any obvious ties between Warner and Pointer.

Pointer did not return a call for comment. A spokesperson for Warner declined to comment. Corker’s spokesperson says, “This is yet another ridiculous narrative being peddled by a politically-motivated special interest group that refuses to disclose its donors. This dark money entity has an abysmal track record for accuracy, and just like the other unfounded claims they have leveled against Senator Corker, this too is completely baseless.” (They are apparently referring to the Campaign for Accountability, although this story was sourced from publicly available documents.)

It’s also a little ironic that Corker and Warner were the co-sponsors of the Corker Warner bill, which set out to reform the housing finance system. Let’s give them some credit. Since they already benefited from the last crisis, maybe they’re trying to protect us from the next one?

by Bethany McLean | Yahoo Finance

As International Billionaires Get Nervous, Sales In L.A.’s Ultra-Luxury Housing Market Slow

Billionaire Steve Wynn finally found a buyer for his Bel-Air home when he dropped the asking price to $15.95 million, or $300,000 less than what he bought it for in 2014. (Redfin)

A cooling market for the most expensive homes is costing hotel and casino magnate Steve Wynn some money.

Two years ago, Wynn paid $16.25 million for an 11,000-square-foot mansion perched on nearly an acre above the Bel-Air Country Club. Less than a year later, he sought to unload the home with a paneled library and staff bedroom for $20 million.

No luck. Then he tried $17.45 million. No luck again.

In May, Wynn dropped his price to $15.95 million, $300,000 less than what he paid for the property in 2014. The home went into escrow “very close” to that price last month, said Coldwell Banker agent Mary Swanson, who confirmed Wynn would be taking a loss.

It’s not just Wynn who isn’t getting as much money as he hoped.

Even before Britain’s vote last week to leave the European Union jolted investors worldwide, there were reports of a slowdown in the ultra-luxury housing market.

In Los Angeles, agents were seeing more price cuts. Condo sales on New York’s Billionaires’ Row were slowing. Luxury developers shelved projects in Miami. And prices at the tip-top end of the London market were on their way down.

Blame it on the global economy, which has displayed weakness in the past year, choking off the spigot of international millionaires and billionaires seeking a pied-à-terre, or two, in glamorous locales.

So far, in Los Angeles, Wynn’s experience aside, the effect has been minimal, given the nature of Southern California ultra-luxury development – which largely consists of one dramatic hillside estate at a time, rather than a condo tower with multiple units.

But a spate of new construction is on the horizon. By one estimate, there are about 30 new hillside homes priced above $30 million that could hit the market in the next year and a half.

The so-called Brexit vote may not help matters. It has sown economic uncertainty on a global scale and caused the dollar to strengthen against major currencies – potentially leading international buyers to trim their purchases in the United States.

“The price of real estate here in California and the U.S. has gotten more expensive,” said Jordan Levine, an economist with the California Assn. of Realtors.

In Manhattan, the slowdown has taken a sharp toll. The number of previously owned homes that sold in the first quarter for $10 million or more fell 40% from a year earlier to 15, according to appraisal firm Miller Samuel.

One builder, Extell Development Co., trimmed $162 million in projected revenue from its One57 condo-and-hotel project, a 1,000-foot tower on Manhattan’s 57th Street originally slated to bring in $2.73 billion, according to a March regulatory filing.

It features more than 90 units, with several reportedly selling for more than $40 million and one bought by an investment group for about $90 million.

“More has been constructed in New York,” said Stephen Kotler, chief revenue officer of real estate brokerage Douglas Elliman. “You have some sellers [in Los Angeles] getting more realistic, but in New York you are seeing more.”

In Los Angeles County, by comparison, $10-million plus sales ticked up by one to 17 in the first quarter compared with a year earlier, according to the California Assn. of Realtors, whose data largely covers resale transactions.

But over a longer timeline, it appears the market has begun to stall. The number of sales of $10 million or more in L.A. County has dipped in three of the last five quarters for which data is available, even as inventory has steadily grown, according to the Realtors group.

And, brokers say, the slowdown is more pronounced the higher the price.

As of mid-June, nine homes in the county had sold this year for $20 million or more, compared with 18 during the same period last year, according to Loren Goldman a vice president with First American Title Co.

Michael Nourmand, president of L.A. luxury brokerage Nourmand & Associates Realtors, said the slowdown will probably bleed into the rest of the market eventually, but that’s not likely to happen “any time soon.”

Like elsewhere, local agents put much of the blame on a pullback by international buyers who had flooded Los Angeles in recent years. Turmoil in their economies, along with a strong dollar, have many from Russia, the Middle East and China second-guessing a purchase here.

“It used to be, if they like it they buy it, or more like, if they like it they buy two,” said Cindy Ambuehl, director of residential estates for the Agency. “Now they are keeping their hands in their pockets and they are waiting.”

Nourmand has seen that first-hand.

A client from the Middle East recently hoped to pull the trigger on a nearly $40-million estate in Bel Air – one set behind gates with a driveway that took “one to two minutes” to walk from street to front door.

But the buyer got cold feet in February and backed out, Nourmand said, explaining that her family’s businesses had taken a beating along with the price of oil, which plunged last year.

“You have a shrinking buyer pool for the really expensive stuff,” he said.

Daren Metropoulos plans to reconnect the Playboy Mansion, above, to his estate next door, creating a 7.3-acre compound. (Jim Bartsch)

Unlike other brokers, Adam Rosenfeld, founding partner of brokerage Mercer Vine, said he thinks the market is still strong and pointed to some recent mega-deals that went into escrow, including the Playboy Mansion, which is being purchased by the son of a billionaire food magnate for $105 million – a record for L.A. County.

(Though that’s half the asking price of $200 million, agents who know the market say they didn’t expect the mansion to sell for that astronomical, headline-grabbing figure.)

But even Rosenfeld said it was unclear how well the upcoming flood of high-end homes will sell.

“There are only so many buyers that can afford a $30-million plus house,” he said. “The [developers] that do them the best probably will make a killing. Guys who don’t … some of those people might lose their shirts.”

Levine, of the Realtors association, said that one dynamic has yet to play out – whether the strong dollar deters international investors from entering the U.S. real estate market, or as their own home country currencies weaken, they come to increasingly view it as a haven.

“It’s not necessarily clear which one of those two is going to win out,” he said.

by Andrew Khouri | Los Angeles Times

This Will Devolve Into A No Brexit, Brexit

Summary

The UK voters have been conned, the costs of Brexit are prohibitive.
They will either have to vote again (either in a new referendum or a general election) or there will be a ‘Brexit light’.
The latter option will make a mockery of the promises to Brexit voters, but it will limit the economic dangers.
Still, the saga has increased the risks in the world economy, especially in the EU.

We sold everything on the Friday after Brexit, as we saw little upside, and many festering risks in the world economy. Risks which Brexit would clearly increase, most notably the risks of an economic slowdown in the EU, causing further political turmoil.

But these are by no means the only pressure points in the world economy, as we described in the previous article.

But markets rallied back (we didn’t expect an immediate crash as a result of Brexit), and it slowly dawned upon us that the most logical explanation is that there will be no Brexit.

Why? In essence, it’s fairly simple. The price of the promises made by the Brexit camp, most notably to control immigration, to pay much less to Brussels and to ‘take back control’ cannot really be achieved at anywhere near acceptable cost.

Let’s start with immigration. The UK wasn’t part of Schengen (which abolished internal border controls), but it was bound by the four freedoms of the internal market, most notably the freedom for EU citizens to live anywhere in the EU.

In order to escape that (the UK is a popular destination for East Europeans, most notably Polish) the UK would really have to get out of the single market. But this opens up a Pandora’s box of problems.

First, since the EU is the UK’s most important market, it would have to negotiate access to the single market, and do that within the two years given by Article 50 (the EU has made it clear no negotiations will start before Article 50 is triggered).

Not only that, it would have to deal with negotiating multiple other trade deals, perhaps as many as 50, basically with much of the rest of the world.

The UK isn’t equipped to do that (trade has been an EU prerogative), let alone in any amount of acceptable time. The resulting uncertainty isn’t exactly good for business. This will affect inward investment, location decisions, job creation, etc.

That alone is already too high a price to pay. But there are other implications, like (Bloomberg):

Britain has voted to exit the EU and Xi’s being forced to reassess his strategy for the 28-member bloc, China’s second-biggest trading partner, according to data compiled by Bloomberg. The U.K. has been a key advocate for China in Europe, from building trade-and-financial links to supporting initiatives such as the Asian Infrastructure Investment Bank. Beijing’s leaders were counting on the U.K’s backing later this year when the bloc decides whether to grant China market-economy status. “One major reason why China attaches great importance to its relations with the U.K. is to leverage EU policy via the U.K.,” said Xie Tao, a professor of political science at Beijing Foreign Studies University. London’s value as a “bridgehead” to Europe has been lost with Brexit, Xie said, leaving China to turn its focus to Germany.

Perhaps even more important is London’s status as a financial center. From Business Insider:

First, international banks are likely to move staff out of London and do less business in the UK. Long before the vote, rival financial centers like Paris began campaigns to woo those bankers. JPMorgan chief Jamie Dimon told an audience of bank employees in Bournemouth, one of many regional financial centers in the UK, that as many as 4,000 jobs may be affected by a Brexit before the vote… It isn’t just a question of whether staff move from London to another financial center, either. New jobs are less likely to be created in London. M&G Investments, the fund arm of insurer Prudential, is looking at expanding its operations in Dublin, according to Reuters. The proposed merger between the London Stock Exchange and Deutsche Borse, which would have seen the combined group based in London, now looks to be on shaky ground. Germany’s financial regulator has also said that London will no longer be the center of euro-denominated trading.

There are myriad other costs and awkward consequences, but this suffices to highlight the fact that it’s not a good idea to actually leave.

Ergo, powers will awake to prevent this and keep the UK in the single market. We can’t see the UK’s economic, financial and political elite shoot themselves in the foot without regrouping and giving this a mighty fight.

It’s fortunate that there is a cooling off period, in which calmer heads can prevail. First the governing Conservative Party has to choose a new leader.

Then they will have to work out a plan and trigger (or not) Article 50, the formal request to leave the EU.

Two outcomes seem likely, either things stay as they are, or the UK opts for membership of the EEA, which guarantees access to the single market. Perhaps they manage some symbolic concessions.

Both of these options amount to betraying the Brexit voters, one could even say they have been conned. It’s obvious if the referendum is simply ignored by Parliament, after all there already is a Parliamentary majority of 350 for remaining in the EU.

But EEA membership, like Norway, would also betray the Brexit voters and we doubt it’s any more attractive than simply remain in the EU. The UK would continue to have access to the single market, but not be a part of setting its rules.

The UK would continue to be bound by the freedom for people to live and work anywhere within the EU, making a mockery of the promise to control immigration.

Even the budgetary consequences aren’t really that much better (Yahoo):

But the fees in Norway, the nearest analog to the UK, are almost as high as what the UK pays to the EU now, and Norway has no say at all in EU decisions.

So either there will be no Brexit (a new referendum or new elections, with the winning side clearly having a mandate for remaining in the EU will be necessary), or it will be a Brexit light (EEA membership), making a mockery of the promises to the Brexit voters.

The economic consequences of the latter are much less damaging, so did we sell in vain? Not necessarily. The whole Brexit saga is still increasing the risks in the world economy, of which there are many, especially in the eurozone.

Stocks are still expensive (especially on a GAAP basis), we see limited upside, and might very well go short when stocks start approaching their all-time highs again. It’s more of a trader’s market, in our opinion.

by Shareholders Unite | Seeking Alpha

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