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  • Tidal Report – Market Sentiment at Extremes : third wave group
    take notice One of our favourite technical firms Elliott Wave International describes recent readings of investor sentiment as stunning and compelling in their latest note to subscribers and we agree The stock market rally heads into the final weeks of the year severely overbought and deeply overbelieved One such measure is the latest survey from the American Association of Individual Investors AAII which with a reading of 53 per cent bulls shows just how confident investors are of a continuing rally in stock markets Not only is this an unusually high reading in itself being one standard deviation beyond the long term average but it is also an incredibly rare 14th consecutive week that bullish sentiment has been above its historical long term average of 39 per cent The significance of this level of bullishness can also be considered by looking at the 10 week moving average of the percentage of bulls This tends to smooth outliers giving a clearer indication of trend The 10 week moving average is now at a six year extreme and has far surpassed the bullish levels seen at previous market peaks Because it is not possible to look at data in too many ways the spread between bullish and bearish sentiment readings known as the bull bear spread is also closely watched Research firm Birinyi Associates has back tested this measure and found that whenever the bull bear spread exceeds 30 points the S P 500 has tended to fall over the next six months this week s survey shows the bull bear spread at 30 5 percentage points To give this reading perspective fewer than 15 per cent of all bull bear spreads throughout the survey s history have been greater It is not just the AAII survey indicating extreme bullishness various sentiment measures calculated by Sentiment Trader are at relatively rare levels too To get a sense of the overall picture Sentiment Trader calculate an indicator called Indicators at Extremes which looks at the total number of indicators in their portfolio and determines those that are bullish versus those that are bearish The latest reading has 2 per cent of their indicators showing market pessimism therefore bullish and 45 per cent of their indicators showing optimism bearish This is only the third time since 2000 that this degree of divergence between optimism and pessimism has occurred Sentiment Trader also produce the Smart Money Dumb Money Confidence Indices which have also reached rather interesting levels These indices are made up of a number of individual measures but in general terms smart money denotes what the commercial professional trader is doing and dumb money the retail trader smart money is more often right dumb money is more often wrong and is most wrong when most confident These Confidence Indices rarely get below 30 per cent or above 70 per cent and usually stay between 40 and 60 per cent Additionally a difference of more than 25 per cent between the Smart Money and Dumb

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-market-sentiment-at-extremes/ (2013-02-03)
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  • Tidal Report – Irish Lessons : third wave group
    When the Global Financial Crisis hit Ireland experienced a fully fledged banking crisis leading to the government guaranteeing the liabilities of the major banks a guarantee that is is still in place The property market collapsed According to the Economic and Social Research Institute of Ireland 40 per cent of homeowners have negative equity in their homes as a result of the more than 50 per cent fall in property values over the past two years On top of that 36 000 homeowners are six months or more in arrears on their mortgage payments Ah a property bubble Ireland is effectively toast but can Australia learn anything from the Irish experience The Unconventional Economist thinks we can and in an excellent post explores the rise and bust of Ireland s property bubble and the lessons their predicament can provide for Australia As is the case with all housing bubbles Ireland s was fuelled by two inter related culprits easy credit and speculation A recent article by Saul Eslake provides a nice explanation of how low interest rates and easy credit fuelled Ireland s housing bubble In order to explain the second cause investor speculation I have borrowed heavily from the Ireland Central Bank s ICB 2007 Financial Stability Report Like in Australia lending restrictions on investor mortgages were relaxed in the mid 1990s which enabled property investors to borrow at the same interest rate and on similar terms to owner occupiers This led to a surge of property investment as shown by the below ICB chart In fact as at June 2007 investors accounted for around 27 of total mortgage lending slightly below Australian investor s share of 30 of total mortgage lending And like in Australia the sharp rise in property prices prior to the global financial crisis GFC forced rental yields down As such recent investors were cash flow negative in 2007 since rental income nowhere near covered holding costs So just as property investors in Australia rely predominantly on capital appreciation to make ends meet investors in Ireland were doing the same However once property prices began to fall Ireland s over geared investors rushed for the exits thus helping to force house prices down The risk of investors fleeing the property market en masse was acknowledged by the ICB in 2007 just prior to the crash buy to let landlords acting as dispassionate investors rather than emotionally involved owner occupiers might decide more quickly than owner occupiers to dispose of properties in the event of a house price fall and this could potentially destabilise the wider housing market The concern is a mass exodus of investors at the same time would put additional pressure on an already fragile market causing a quicker downward spiral than would have otherwise been the case Still in true central bank fashion the ICB rejected the notion that Ireland would experience a sharp housing correction instead predicting a soft landing due to strong underlying fundamentals Regarding future house price developments factors

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-irish-lessons/ (2013-02-03)
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  • Tidal Report – Will renting be the new black? : third wave group
    median priced home versus paying median house rent as shown in the graph below If mortgage rates were to get as low as 4 under these conditions most critically a 10 deposit the fortnightly expense of buying is still 136 to 150 of the expense of renting in all Aussie capital cities with the exception of Darwin so it costs one third to one half more And that is at a mortgage rate that I do not think is achievable given the cost of foreign credit let alone sustainable For those interested in having a detailed look at his scenario assumptions and calculations they can be found on his website The numbers quoted are a little out of date however the conclusions are still valid If anything the gap has worsened In Australia whilst the property bubble appears to be in the early stages of rolling over property owner psychology is no where near seeing renting as an acceptable alternative This is in large part due to the enduring belief in perpetually rising property prices and the stigma attached to renting but also complete ignorance of the premium paid for ownership Interestingly in the US where the property market collapse is more mature a change in mind set is taking place It appears that renting is becoming the new symbol of wealth and status Patrick Lee went from homeowner to home renter this year It may sound like a downgrade but the New Yorker didn t make the switch because he couldn t keep up with payments or because he lost his job Instead Lee was nervous about the state of the housing market So in March he sold the Manhattan apartment he bought in 2008 for about the same price he paid and moved along with his wife and child a few steps away into a luxury two bedroom rental unit in a brand new building Lee wouldn t disclose what he s paying but similar two bedroom apartments in the building usually rent for 11 000 a month I wanted to protect ourselves from prices going down says Lee who is a managing director at a major bank I didn t want to be an owner anymore Lee has company Demand for luxury rental units has increased as wealthier individuals who can afford to buy are deciding not to according to brokers and real estate analysts in affluent areas of the country such as New York City Chicago and San Francisco More affluent Americans are opting to rent as oppose to buy says Jack McCabe an independent real estate analyst and CEO of McCabe Research and Consulting in Deerfield Beach Fla Within the last year so many people have seen their family and friends get burned in real estate They don t see it as being a risk free investment as they used to And they re paying top dollar to rent In Manhattan the demand for high end rentals has never been hotter In the third quarter

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-will-renting-be-the-new-black/ (2013-02-03)
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  • Tidal Report – The Elephant in the Room : third wave group
    seems to have been comprehensively ignored The comforting words from a spokesperson for the Treasurer Wayne Swan in response Of course we expect our officials to test and debate policy within the department it is an important and normal process of government However it is the considered position of the Treasurer and the Treasury that our housing market reflects the fundamentals of supply and demand and not a bubble specifically that Australia is simply not building enough new houses This is quite simply a lie So why would the government be at pains to have the housing market seen as unremarkable For the same reason the Commonwealth Bank fudged its housing data for the same reason the Reserve Bank never publicly acknowledges house prices are too high for the same reason the government obfuscates confidence The problem for the government however is that the jawboning confidence game is no longer working Investor psychology has changed buyers are now becoming cautious and sellers becoming fearful and even desperate Ironically the continual denial of a housing bubble by the government is actually starting to cause investors to wonder whether the government knows what it is talking about Anyone at all exposed to the property market can see the significant softening that is underway and government denial is not a good look Housing in south east Queensland is so clearly showing signs of trouble that it is making it into mainstream media Newspapers that used to be full of real estate spruiker articles are now sounding a little sombre As an example the Courier Mail recently highlighted the exceptionally low auction clearance rates and asked LJ Hooker New Farm agent Brett Greensill why he thought this was so The main reason I think is because sellers are continuing to live in hope and the four week auction campaign is often not enough time for the seller to come to the realisation of the difference between what they were hoping to achieve and what they can actually achieve It some cases the difference could be 20 to 30 per cent Real estate is at its most uncertain ever Now this is a real estate agent talking to say that the market is down 30 per cent and sellers need to wise up is not the usual real estate fluffery and suggests things are pretty tough out there Ploys to inflate the recorded selling value of a property are becoming more common also a clear sign that it is a buyers market and that sellers are more urgently trying to hold up the value of their properties This is particularly seen in new developments where a developer has many similar properties to sell and wants to give the appearance of robust high value recent sales A simple technique commonly used involves the real estate agent offering to decrease their sales commission by 30 to 50 per cent in order to get a reluctant buyer over the line This effectively decreases the price the buyer pays

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-the-elephant-in-the-room/ (2013-02-03)
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  • Tidal Report – Arguing over the deck chairs : third wave group
    had made progress in coming to agreement on how to address global imbalances Australian Prime Minister Julia Gillard said some work still needed to be done on bridging divides over currency valuations And his response Some work needs to be done Really That s like planning a trip to Mars drawing a picture of a rocket ship with a crayon and proudly announcing some work needs to be done Moreover Gillard s statement looks nonsensical in light of positions taken by China Brazil and Germany Gillard s performance on the world stage has been heavily criticised in the Australian media Greg Sheridan s piece today in The Weekend Australian has been a typical reaction First we got the declaration that she had no real interest in foreign affairs Foreign affairs are an absolutely core part of the job If you re not interested in it you shouldn t be prime minister Then we had a truly baleful tour of Southeast Asia which established that the Prime Minister s main agenda for Southeast Asia was her regional asylum seeker centre in East Timor a centre that has no corporeal existence no regional support no prospect of doing what was claimed for it and indeed almost no prospect of ever coming into being Prime ministers overseas need more than their domestic talking points no matter how great the prime ministerial desire to prosecute them domestically Now Gillard has delivered a speech and off the cuff remarks bagging Australia s banks because they charge interest rates not approved by the government At the same time Gillard is espousing the benefits of free trade and private enterprise It all feeds into the image of a desperately provincial prime minister who simply cannot master a message for an overseas encounter that goes anywhere beyond the scripted lines and even the scripted lines are half the time rubbish Surely an Australian prime minister can do better than this Admittedly banks are the current domestic political football but it hardly seems appropriate for the prime minister to tell international audiences what a bunch of bastards the Australian banks are Talking of bastard banks their perfect storm continues to rage The Commonwealth Bank was not alone for long in raising interest rates All four major banks have now raised their variable interest rates with delightfully strategic timing and basis point differences Standard variable mortgage rates are now getting close to 8 per cent with very little real difference between the banks The interest rate rises are unsurprisingly having a significant impact on housing markets Auction clearance rates are falling values are falling properties on the market are rising and buyer confidence is fragile Perth and South east Queensland are being particularly affected This is certainly something Australia s heavily exposed banks do not need right now An illuminating illustration of this exposure came across my desk this week The illustration analyses Australian banks offshore borrowings which have been directed to the unproductive inflation of house prices The author

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-arguing-over-the-deck-chairs/ (2013-02-03)
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  • Tidal Report – The perfect storm : third wave group
    As one would expect this industry behaviour led to an exploding property market The rapidly decreasing LVR requirement meant people were able to bid higher and higher prices In The last one standing we explored the dramatic effect a minor change of 5 per cent in LVR can have on the price a person can pay for a property imagine the effect of a 30 to 40 per cent change in LVR As Professor Steve Keen puts it if you have a 50 000 deposit and you can get a 95 per cent loan you are able to bid on a property worth 1 million but if the LVR is cut to 90 per cent your 50 000 deposit is only equivalent to 10 per cent deposit on a 500 000 property so the amount you can spend is halved Westpac s recent reduction from a maximum LVR of 92 per cent to 87 per cent means that buyers with a 50 000 deposit will see the maximum that they can afford to pay for a property slashed from 625 000 to 384 615 Somebody with a 20 000 deposit would see the amount that they could spend reduced from 250 000 to 153 846 The difference is extraordinary and represents a dramatic decrease in the purchasing power of potential home buyers It also clearly shows how leverage can bid up asset prices at a phenomenal rate but how tightening credit can be equally dramatic This does not bode well for continuing upward pressure on house prices So in essence increased competition led to decreased lending standards increased leverage and dramatic increases in property values as purchasers were able to bid more and more The ever increasing property values convinced everybody that property was a sure thing investment property values never go down TV was chock full of renovation shows dinner party conversations were all about property values those that didn t own a property or three felt like they were missing out and property investment seminars were de rigueur Competition produced a good old fashioned investment mania It is the hangover from this competition party that is causing the banks angst At the height of the mortgage boom banks were unable to fund the demand for mortgages from domestic sources so had to get the vast bulk of their funding from the international credit market The following chart courtesy of The Unconventional Economist shows the dramatic increase in the amount of offshore funding that has occurred over the last 20 or so years This has made the banks extremely vulnerable to any international shocks But the more immediate problem for the banks is the extraordinarily high proportion of short term funding i e borrowings maturing in less than 12 months Since the Global Financial Crisis international credit markets have become more risk averse and as a result interest rates are higher So now every time the banks have to roll over debt it is more expensive the high level

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-the-perfect-storm/ (2013-02-03)
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  • Tidal Report – 30 Oct 2010 – Will Ben do it again? : third wave group
    and risk have changed There are some commentators such as Mike Shedlock of SitkaPacific Capital Management who understand the importance of this mass shift in attitude and realise that the actions of the Federal Reserve are futile Regardless of what Bernanke or the Fed does the demographic pendulum is in motion There is no going back That the Fed cannot change attitudes is at the very heart of the deflation argument Japan certainly tried and failed Bernanke will fail as well Essentially mass psychology is moving from optimistic risk taking to risk averse pessimism which has led people to hoard resources and pay down debt not borrow There is a generational change occurring that is moving mass attitudes to a place last seen during the Great Depression Mike refers to this shift as a secular change in attitude and it is this change in attitude that is making the Federal Reserve essentially impotent There is a secular attitude change happening right now Boomers close to retirement are now finally scared to death as the equity in their houses has been vaporized School age children are seeing homes foreclosed and families destroyed over debt The American consumer who nearly everyone thinks will be back as soon as the economy picks up are mistaken Secular shifts like these come once in a lifetime Sadly it s too late for many cash strapped boomers counting on equity in their houses for retirement The lessons of their great grandfathers who lived in the great depression era were forgotten Over time everyone learned to ignore the dangers of debt risk and leverage Belief in the Fed and the government to bail out any problem are ingrained Bank failures are distant memories Anyone and everyone who wanted credit got it and on the easiest of terms subprime pay option arms reckless leverage and covenant lite debt and toggle bonds that allowed debt to be paid back with more debt That s what it takes to hit a peak Peak credit has been reached That final wave of consumer recklessness created the exact conditions required for its own destruction The housing bubble orgy was the last hurrah It is not coming back and there will be no bigger bubble to replace it Consumers and banks have both been burnt and attitudes have changed It took nearly 80 years for people to get as reckless as they did in 1929 80 years Few are still alive that went through the great depression No one listened to them That is the nature of the game The odds of a significant bout of inflation now are about the same as they were in 1929 Next to none Children whose parents are being destroyed by debt now will keep those memories for a long time It appears that the summit has been reached and we are now on the downslide from peak consumption and peak credit but it is still early days Ben Bernanke has underestimated the time it is going

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-30-oct-2010-will-ben-do-it-again/ (2013-02-03)
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  • Tidal Report – 23 Oct 2010 – The true state of Australia’s banks : third wave group
    important and interdependent points we need some history Banks are privileged businesses like no other Their role as mediators of savings and credit give them a virtual license to print money Yet this position is also central to the smooth running of every dimension of an economy There is always therefore a balance to be struck between the banks profit and its duty of care Since the 1997 Wallis Inquiry the monitoring of that duty of care has been split in two Deposit taking banks were governed by the Australian Prudential Regulatory Authority APRA and its rules that banks keep certain levels of capital in reserve in case of losses and that they do not over leverage Non banks also mediate credit but they take savings from investors which they pass onto borrowers via market based bonds called Residential Mortgage Backed Securities RMBS After Wallis they were left unregulated because investors and the market in which they operated were deemed sophisticated and efficient enough to handle themselves Listed firms fell under the purview of ASIC like any other company What happened next was that the two sides of Australian financial services went to war over customers The battle lasted ten years and by its conclusion both halves had borrowed enormous amounts of money offshore and poured it into housing mortgages Then when the GFC arrived both sides of the regulatory structure failed Non banks were found to rely heavily on cheap short term funding from investors for the long term loans they provided customers As the GFC gathered pace this short term funding suddenly became very expensive and the interest rate spread that underpinned the non banks business model collapsed Most were absorbed for a pittance by the banks When the crisis reached fever pitch after Lehman Brothers hurtled off a cliff the banks were found to have a similar problem They had borrowed a huge amount of money offshore and much of it was also of the cheap short term variety As global markets froze neither APRA nor the RBA had the firepower to contain the bank s bleeding A government guarantee of 157 billion in offshore borrowings was needed to stave off probable insolvency for all major banks and a calamity for Australia So neither APRA s regulations nor the market s discipline sufficed to hold banks and non banks within the social compact outlined by Wallis That brings us to Hockey s second point Since the GFC markets have recovered enough that they will now lend Australian banks money at reasonable rates But those rates are generally still higher than they were pre GFC As well APRA has pushed banks to refinance cheap short term offshore borrowings to more expensive longer term loans The banks are not kidding that their cost of funds has gone up As each pre GFC offshore loan becomes due it must be refinanced at a higher rate The rise in costs is unlikely to have plateaued because APRA is not finished restructuring

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-23-october-2010-the-true-state-of-australias-banks/ (2013-02-03)
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