Buy Recommendation on Proshares Ultrashort Financials

     I am recommending speculating on shares of Proshares Ultrashort Financials (symbol SKF).  Key word is “speculating”.  This is not an investment but a short-term educated guess on the financials losing value.  SKF is an ETF that uses leverage to short shares in Financial companies.    If you hold these shares past March 2012 you more than likely will be taking a loss.  They currently are selling for $71.28 per share.

     My thesis is that the European debt crisis is nowhere near over, China is starting to fall over from their own asset bubble, and the US is extremely weak.   The external pressures for the US are building.  Our number one trading partner, Canada, is in the early stages of a property bubble bursting- which typically forces economies into a severe recession, possibly a depression given the extreme debt loads of the average Canadian.  The EU block is most likely going impact US exports.    It is my thought that the changes in the EU, Canada, and China will push the US back into a shallow recession with an anemic recovery. Normally I would say that the US consumer would ignore the rest of the world and keep on spending especially since we are slowly exiting a recession.    This time I do not think it will be the case because the US consumer is still deleveraging.  The only growth in leverage is in long-term consumer goods (i.e. autos) that wear out and young people with very little current debt taking on college loans.  The heavy spenders (i.e. baby boomers) are still too tapped out to spend in mas.    This is made obvious by the paying down of the boomers weapon of choice, credit cards.  

     The boomers that have not done so are still defaulting on their underwater mortgages, albeit at a slower rate.  The banks have still not worked themselves free of this devastating blow to their balance sheets.  Now the threat of large losses from derivatives tied to the coming sovereign and municipal defaults threatens to be the knockout punch for a number of large money center banks.  Even if they can escape default their capital base will be way too shaky to write new loans, thus their revenue and profits are destined to shrink and hence my recommendation to purchase SKF.

Projection

     I am projecting that SKF will go above recent highs and test $95 per share before the end of the calendar year.  This will be followed by a quick jump to between $125 and $150 per share (possibly more).  

 

Full Disclosure

I own shares in SKF.  As of November 28^th I own or control approximately 250 shares.  I plan on starting to sell them when they exceed $95 per share.    More than likely my exit points will be in 25% chunks at $95, $120, $150, finally holding the last patch for over $200.

The Time Bomb is ticking on the Canada Real Estate Market

     It is only a matter of time before the Canadian real estate market winds up crashing down like the US real estate market.  The statistics on key Canadian markets are worse than Florida, Arizona, or Las Vegas before those markets crashed and burned starting in 2005.

     Canadians used to be a very conservative lot.  They were always seen as our prudent neighbors to the north.  That changed in the 2000’s with the boom in natural resources and the stupidly low interest rates brought on since the 2008 financial market collapse.   

 

	Vancouver 2011 C$	Las Vegas 2005 US$
Average Income (2009 number for LV)	$63,100	$54,327
Average price of house sold (May 2005 LV October 2011 Van)	$602,000	$301,000
Average Price per Income	9.5	5.5
National savings rate	4.1%	-0.5%
National Average Credit Card Debt	$3,539	$7,782
Percentage of Income used to cover the cost of a home (10% down)	52%	36%
Average price of house sold today in Las vegas		$129,000
Percent decline		-57%
If Vancouver follows similar pattern	$258,000

   

    I am showing Vancouver because that market is the extreme market of the Canadian market, just like Las Vegas was in 2005 for the US market.   It does not mean the problem in confined to the west coast of Canada.  There are equally bad signs in Alberta, Calgary, and Toronto.  Now does this mean that the markets in Canada will see declines like they did in the US?   

    I think there is a good chance for markets like Vancouver and the resource led areas like Calgary, will see some large declines.  I think Toronto will experience more of a decline like New York City where they had declines of around 20% and a stagnant market for a number of years.  This is simply because Toronto is a world class city with a diverse economic base.    Toronto was an expensive market before the boom and will be one after the bust.   There is such a demand because of population growth and built up wealth that there is only a smaller amount of a decline before the market finds a bottom after a bust.   I would not be a buyer in Toronto right now.  Let it decline for 18 to 24 months and it might make sense then.

Full Disclosure

I do not own real estate in Canada nor do I plan to in the foreseeable future.  I am just an observer that is interested in identifying market based opportunities.

Is Now a Good Time to Buy Investment Real Estate?

     I am biased on this subject.   I love investment real estate that puts off cashflow.  Cashflow from real estate is a great way to build a solid retirement.  I live in Florida and that market has been hammered since 2006.  Values have come down 70% in a lot of markets while rents have only declined about 30%.    If you had bought at the peak of the market in 2005 more than likely smaller properties would have had negative cashflow (i.e. you would need to put money into it every month).  Those same properties today are returning unlevered (i.e. without debt) 12% to 20% returns based on cashflow.  If you finance these properties today the returns are incredible, that is if you can find a bank that will loan you money on an investment property in Florida.

     There are quality 3 bedroom/ 2 bath houses that sold at the peak for up to $240K that are now going for as little as $50K.  There are even some going for around $25K but they tend to be in rougher neighborhoods and need extensive renovation to make them inhabitable, unless you really want to be a slumlord.   

Large Properties Smaller Returns

     While single family and small multiunit properties (2-4 units) have become very attractive in their yields, large apartment building returns have improved only a few percentage points.  At one time during the boom the large apartment buildings were commanding a premium because large investors would buy the properties and convert them to condos.  They were able to make more money flipping the properties on the condo market than taking in rents, thus they artificially drove up the price of these apartment buildings.  These condo flippers were caught out in the great bust because they tended to use a lot of debt to finance their condo conversions.  They were over exposed and quickly failed in the market debacle that started in 2006.  Banks took back a number of these properties and put them on the market for a fraction of the price they sold for only a few years early.  The new buyers are mostly professional investors that demanded a solid cashflow based return.

         These sophisticated investors have concentrated mainly on the larger properties because it is easier to manage 1 property with 50 units than 50 individual single family homes.  This has taken a lot of the big money out of the small property market.  Normally smaller properties return less than larger properties, because there is more competition and less economies of scale.  The exact opposite is happening today in a number of markets in Florida.    A lot of the lower end middle class properties only have investors bidding on them and not potential homeowners.  The potential homeowners have difficulty with getting financing because of the poor economic conditions that permeate the Florida market.  There are also a lot of potential homeowners that are shunning real estate all together because fear from the destruction in home values that they witnessed over the last few years.  

Conclusion

     You can try and wait for the market to start showing signs of value stabilization, but you might miss the incredible cashflow opportunities that are happening today.  Eventually the market will wake up to the value that is out there.  I rather have the market woken up after I had already purchased a handful for myself.    

Full Disclosure

I own only 3 investment properties today, all office space.  I am planning to purchase some investment real estate (i.e. single family homes or duplexes) once I have enough down payment money in the coming months.