“Smart people learn from their mistakes. But the real sharp ones learn from the mistakes of others.” – Brandon Mull, Fablehaven

This Week’s “Things That Make You Go Hmmm…” has the following contents:

France Fights Back Against German “Sick Man of Europe”

Hugh Hendry Throws in the Bearish Towel

Mexico Housing Hits U.S. Investors As Plan Collapses

Weapons of Last Resort: ECB Considers Extreme Crisis Measures

Greenspan Says Bitcoin a Bubble Without Intrinsic Currency Value

There Is Too Little Gold in the West

The Every-Which-Way-But-Down Market                                                                                                                                                                                                                                                                   

Kuroda $235,000 Salary Highlights Goldman Concern

George Osborne’s Recovery Is Built on Sand

CHARTS THAT MAKE YOU GO HMMM…

WORDS THAT MAKE YOU GO HMMM…

AND FINALLY THE WHOLE THING…

To make money and survive in the markets I constantly ask myself , “Are you trading the market the way it is…or the way you think it SHOULD be?” I ask myself this question to guard against making a trade before it’s TIME to make the trade…and I ask myself this question to guard against hanging onto a losing trade.

Let’s remember this…markets go up and down, in different time frames, as Market Psychology changes. As a trader I try to determine whether the market is going up or down within my timeframe. If it’s going up and I think it SHOULD be going up then I’m a buyer. If it’s going down and I think it SHOULD be going up I WAIT…I wait until the market starts to go up or until I change my mind about where I think it SHOULD be going…to do otherwise usually means I’m going to lose money and be psychologically distressed.

For instance…over the past couple of years Gold Bulls have been wrong…they believed that gold SHOULD be going up but it was going down. They got angry, they KNEW they were right and the market was wrong and they kept losing money. Market Psychology has been negative on gold, commodities and commodity currencies…those things have been “out of favor” and stocks have been “in favor.”  Since the All Time High in September 2011 gold has fallen ~36% while the S+P 500 has risen ~50%.

Is the stock market “Dangerously Overvalued…and due for a Crash?” Well, I’m pre-disposed to think it’s overvalued, and a sharp correction could start at any time, but I’m not establishing short positions because I think it SHOULD be going down. I’m waiting. I’m missing out on the “easy profits” that I would be earning if I was long the stock market…but since my thinking and the market’s actions are out-of-sync then the best thing for me to do is wait.

I’m pre-disposed to think the stock market is overvalued and at risk of a sharp correction because the current Market Psychology “feels” a lot like it did prior to some of the previous corrections or crashes I’ve lived through over the past 40 years. But just because it “feels” that way doesn’t mean that it’s TIME to get short…the stock market is going up, not down so I’ll have to wait until my “feelings” and the market action are in sync!

This advice is for traders…and may not be appropriate for others. For instance…as a trader I would never buy something just because it’s down 50% from where it used to be…but for someone looking to buy a house to live in (not to flip for a quick profit) a decline of 50% may mean that they can afford to be a buyer…that the price decline created some “value” for them.

But for traders or flippers the advice is pretty clear…buy a market that’s going up, not down…if the market’s action is out-of-sync with your analysis then wait…and if you make a trade and it turns out to be a loser then get rid of it…don’t look for a reason to hang onto a losing trade.

Trading:

EURYEN closed at a 5 year high this week. The weak Yen has been a Key support for equity markets around the world since November 2012 when Market Psychology determined that Abe was going to win the election and begin implementing policies to end two decades of deflation and deflationary expectations in Japan.  Since November 2012 EURYEN is up ~40%, the Nikkei is up ~90% and the S+P 500 is up ~33%. The weak Yen and the strong stock market are two sides of the same coin. There is a massive speculative short position in the Yen…just as there is a massive speculative long position in the stock market. If there is a change in Market Psychology the Yen could rally while the stock market falls.

EURUSD has been much stronger than I expected over the past month. I bought USD in late October and sold it for a good profit in early November when the rally struggled around 8150. I bought the USD again in late November but sold it a few days later when it refused to rally. I think the EURUSD should be headed lower but it’s not…I’ll wait.

Patrick MontesDeOca: In a recent interview with Equity Management Academy, Dr. Marc Faber and Patrick MontesDeOca outlined how he believes that central banks around the world, by printing money, are setting up the global economy for collapse.

Faber is the author and publisher of the Gloom, Boom and Doom Report,which highlights unusual investment opportunities, as well as several books on investment. He was managing director of Drexel, Burnham Lambert, and has lived in Hong Kong since 1973.

Faber believes that demand for gold will continue to be high and, if anything will increase. He said, “In Asia it has always been traditional to own gold….It was illegal to own gold in China until about ten years ago. Now the government is actually encouraging people to own gold.” Therefore, he said, demand is “very strong” and, with increasing numbers of wealthy people in Asia, “demand is rising very rapidly.” Furthermore, Faber believes that if the Chinese economy slows down, the government in China will do what governments everywhere else in the world have done, and print money. If that happens, then “gold demand from China would actually increase and not decrease.”

In the long view, Faber discussed that shift in the economic balance of power from the Old World, which is Western Europe, the United States and to some extent Japan to Asia, and especially China.  Much of the recent growth in the world economy has been in Asia. However,

Western Central Banks still own about 21% of all the gold in the world, if they still have it, which is “the big question Eric Sprott has raised on numerous occasions” in interviews with EMA and others. China has about $3 trillion in reserves, but only 2% or 3% of it is in gold. Faber argued that if China follows the pattern of other emerging economies, it will slowly increase its gold holdings, which will further increase demand.

….read page 2 – 4 HERE

Ed Note: The prolific Globe Trotting Faber has a batch of other recent other interesting Articles posted to have a look at those that interest you:

• Excess Liquidity boosted big Market cap stocks whereas smaller cap Stocks are reasonably priced
• The Return from Equities will be very muted in the..
• Bitcoins , I have No idea what they Are Worth
• The Stock Market Tends to Rise into Elections
• Faber : Oil Demand to Rise rapidly in China & Indi…
• Marc Faber: Crude Oil is probably among the most attractive Commodities because the supply of Oil could be interrupted at some point
• Money is flowing out of countries like Indonesia, …

Short version;

• No changes pending regarding CMHC client premiums
• Headlines easily mislead us

Long version;

The headline below in last weeks Globe & Mail caught more than a few of my clients attention, prompting needless stress.

Flaherty charges CMHC new risk fee on mortgages

Despite the way this headline reads there is no change to actual mortgage insurance premiums charged to CDN homebuyers now or currently pending.

Recent steps taken by Finance Minister Jim Flaherty with regard to charging CMHC a new ‘risk-fee’ premium equivalent to 3.25% of the mortgage premiums CMHC charges should NOT result in increased fees being charged to consumers.

The mathematics of this suggest, if this new 3.25% of the actual premium were charged, then the net increase to current client premiums would translate into approximately  a 0.03% increase in premiums.  Or in real money, less than $160.00 for the typical CDN home buyer (with less than 20% down payment).

Both rival insurers, Genworth and Canada Guaranty, currently pay a 2.25% ‘risk-fee’ to the Government.  Thus market competition, such as it is in this sector, should keep premiums exactly where they are.  The only potential twist being this news is one more argument against the calls to reduce current mortgage insurance premiums.

Read more about the stability and profitability of CMHC here.

The real math;

The current premium earned on a typical 95% LTV purchase transaction in Canada is $4895.00.  (using the average CMCH mortgage amount of ~$179,000.00)

The current ‘risk-fee’ remittance by CMHC is $0.00

Current ‘risk-fee’ remittance by Genworth and CG in the above example $110.14

The new Premium charged to CMHC moving forward of 3.25% adds a new cost for them to the transaction of $159.09

However market competition dictates that only 1% (or $48.95 in the above example) of this new fee is a burden for CMHC to bear.  Arguably CMHC has enjoyed the advantage of not remitting a 2.25% fee as their competition has had to do.  All three insurers price their products identically.

If CMHC wanted to pass on to homebuyers the premium it now faces, something very unlikely to occur, then the premium in the above example would rise from 2.75% (on a 95% LTV mortgage) to 2.78%

A .03% rise in mortgage insurance is unlikely to have effect whatsoever on market conditions.  Would an additional $159.09 fee which is buried within the mortgage amount, and not an up-front cash expense, slow the market in any way whatsoever?  No more than a gnat hitting a windshield slows a vehicle down.

CMHC’s formal announcement;

Re:  Government Guarantee Fee Payable by CMHC

Effective January 1, 2014, CMHC’s mortgage loan insurance activity will be subject to a risk fee payable to the Government of Canada of 3.25% of premiums written.  An additional fee of 10 basis points will be payable on new portfolio insurance written.

Since January 1, 2013, private mortgage insurers have been required to pay a fee of 2.25% of premiums as compensation for the protection provided by the Government of Canada. The fees compensate the Government for risks stemming from its guarantee of mortgage insurance.

The guarantee fee of 3.25% that has been developed for CMHC takes into account the 100% Government backing of CMHC’s liabilities as compared to the 90% guarantee of the private mortgage insurers obligations to lenders.  

These new fees are not anticipated to have an impact on the availability or cost of mortgage funding, nor the cost of buying a house. We are reviewing the impact on our low-ratio portfolio insurance product provided to lenders.

The good news should be highlighted here, it is buried deep within the body of a story with a headline which leans more towards fear-inducing for prospective home buyers;

‘CMHC said it earned $452-million in the third quarter, up 20 per cent from a year ago, thanks largely to a reduction in net claims. The total amount of insurance in force fell to $559.8-billion, compared with $566.1-billion at the end of 2012.’

This leaves one wondering why the headline would not better match the content, perhaps a separate story along the lines of;

‘Taxpayer risk to mortgage portfolio decreases by $6.3Billion’

or

‘CMHC profits rise as defaults drop, stability seen in portfolio’

Perhaps next time.  In the meantime keep digging for the good news buried within what often appear to be bad news stories.

Thank you for your time.

Dustan Woodhouse