Bill Cara's Blog for Feb 28, 2011 [See Post-Close report]

Good morning.

5-7 Billion Dollar POMO Injection Today.

-------

8:30 - Personal Income/Spending
8:30 - PCE Prices
9:45 - Chicago PMI
10:00 - Pending Home Sales

------

AMZN - Amazon.com downgraded to Neutral from Buy at UBS based on concerns its Prime Video Streaming expansion will result in added costs and margin pressure. Price target lowered to $180 from $195.

NUE - Nucor initiated with a Buy at Argus. Target $57

PG - Procter & Gamble downgraded to Market Perform from Outperform at BMO Capital citing cost inflation and a stagnant growth in in developed countries. Price target lowered to $70 from $74.

POT - Potash upgraded to Buy from Neutral at Gleacher based on accelerating potash prices. Price target is $74.

------

"The function of socialism is to raise suffering to a higher level."
- Norman Mailer

"'Koch Industries, and oligarchs like them, have most recently started to manipulate the political agenda in Wisconsin,' an announcement posted to anonnews.org declared."

"'Governor Walker's union-busting budget plan contains a clause that went nearly un-noticed. This clause would allow the sale of publicly owned utility plants in Wisconsin to private parties (specifically, Koch Industries) at any price, no matter how low, without a public bidding process,' they explained. 'The Koch's have helped to fuel the unrest in Wisconsin and the drive behind the bill to eliminate the collective bargaining power of unions in a bid to gain a monopoly over the state's power supplies.'"

"They added that if one would like to withdraw their unknowing support for the brothers Koch, an array of products would need to be boycotted -- and not just by Americans, but people world-wide."

"In the US, those products were listed as Vanity Fair, Quilted Northern, Angel Soft, Sparkle, Brawney, Mardi Gras and Dixie. For Europe, they were Demak'Up, Kitten Soft, Lotus / Lotus Soft, Tenderly, Nouvelle Soft, Okay Kitchen Towels, Colhogar, Delica, Inversoft and Tutto."

"All were produced by the "Georgia-Pacific" company, and all bear the logo seen above."

http://tinyurl.com/48s8sdr

Thanks for posting. This explains the dollar action premarket. Looks like my long UUP/EUO/YCS trade will not work. If so, I'm thinking about shorting dollar if it breaks the support.

Edit: UUP stopped out. EUO is barely hanging and YCS is doing fine.

Indeed, Vad.

This BS from the Ministry of Information grows tiring.

------

"What they mean is, they want to print money until inflation hits the housing market, in order to support the bank balance sheets."

That sums it up quite well, davefairtex. Couldn't have said it better myself.

Regards,
BH

I don't usually watch but last night I was on the couch with my wife in control of TV when the Oscar for best Documetary was presented for the Inside Job, it forced me into spontaneous applause...scroll down on link and click on video and watch his first statement.
http://www.mediaite.com/tv/inside-job-best-documen...

Ilya -

You said:

"Let's not parse terms here. In effect I said that a lower interest rate on the debt of a commercial property will, all things equal, result in a higher apprasial hence a higher potential selling price for said asset." - #80553

That's true but what you originally said:

"Increased cash flow lowers the CAP rate and increases the asset value of the property." - #80531

Can't fix that statement. Increased cash flow may be the benefit of a lower interest rate but it doesn't lower the cap rate. Nor does the debt service increase or decrease the NOI which is the income to which the Cap Rate is applied. Cash flow is simply NOI less Debt Service. The cap rate is taken from the market and applied to the proforma not vice versa.

Perhaps you should pitch that Casio and step up to an HP12C. Hope that helps as you lever up into that increasing NOI but you may want to ask an employee of the company paying that NOI how things are shaken before you go to the wall with a 5-year balloon on that 15-year money. As we say in the real estate business, CASH IS KING, especially in this environment.

Cheers.

Anybody know what's happening with TLR this morning?
Heavy volumes/down 10%
Not a good way to start my Monday...

edit: never mind..

"Timberline Resources Corp announced that it has entered into agreements to sell 5,263,158 shares of common stock of the Company at USD0.95 per share...."

Timberline Announces US$5 M Offering Of Common Stk
Last update: 2/28/2011 8:45:51 AM
(MORE TO FOLLOW) Dow Jones Newswires (212-416-2400)
February 28, 2011 08:45 ET (13:45 GMT)

Agree. Dollar is sold very heavily (by the man behind the curtain) to keep US equities afloat. Tomorrow could be another melt up as it's first of month.

I covered my VXX short for quick profit, though.

Prodisc,

Thanks for the video link.

I didn't watch either, but hope Bush, Obama, Bernanke, Paulson, a whole bunch of "congressional dupes... did watch it.
Grym

lessmore - "I can not see anything about my proposed plan that would disqualify it as a pension system because the pension amount is capped and not proportionate to contributions for some."

Currently, social security appears to act like a defined contribution plan. Money out IS proportional to money in. If you put in $10k per year, you get out substantially more than if you put in $1k per year. It appears to be fair. Your changes would, for some group of people, remove this perception of fairness.

Those people might put in $50M per year, but they'll only get $50k. For them, no matter what nice label you put on it, its not a pension system at all, its just an additional tax.

This relies on the traditional popular approach to taxation: Don't tax you, don't tax me, tax that fellow behind the tree.

Again, Social Security is perceived right now as fair. After your "fix", that would no longer be the case. I claim this makes it no longer appear to be a defined contribution pension plan, but instead, is just a welfare program with an income tax attached.

by shorting BRO. I opened a small position.

Edit: sorry, I meant BNO. Usually no shares to short, but managed to find same this AM.

Martin Armstrong is out in an orange jumpsuit with his latest this morning regarding the cycle of revolutions and deep thoughts on the euro and swissy.

http://tinyurl.com/4nvg433

Cheers.

Fox1,
I do not understand how anyone (except those who expect an undeserved financial windfall directly or indirectly) can defend a no bid contract for the sale of publicly owned assets. Without competing bids for valuable public assets the prices will be bargain basement and the windfall will be stratospheric. That is the way business is done in an oligarchy. I guess bidding is an anachronistic process that was adopted before this country was transformed into an oligarchy.

Vietnam central bank also seeking ban on gold trade as the dong turns to dung ...

http://online.wsj.com/article/BT-CO-20110228-70255...

"These assets have little value now and will require a tremendous amount of investment capital going forward."

If the value is small the bids will be small. Nobody should have confidence that the asset's sale price is fair to the public when the price is negotiated surreptitiously between political cronies.

"It's difficult to tell what kind of price they could fetch, particularly because of environmental liabilities."

Koch industries has vast experience averting the consequences of environmental and other liabilities.
See, wikipedia section on Koch Industries Environmental and safety record
http://en.wikipedia.org/wiki/Koch_Industries
I have faith that all bidders would have environmental liability experience.

"Several of the old coal plants are in potential violation of the Clean Air Act because they lack modern pollution controls, Plale said."

But he neglected to mention that if the coal plants continue to be operated in their current unimproved state their current controls remain "grandfathered" and legal under the Clean Air Act and the operation of such plants are not and will not be in violation of the Clean Air Act.

I understand last week's haircut - but thought it was going to go back up with the cloud/bandwidth hype. Any idea why it's down to 37.XX ? (No positions, but looking to write puts)

sold half my position.
Earl

Greetings all -

I know we do this every so often and would like to restart the thread for anyone who's willing to participate - I primarily use Tradestation, but also use TD Ameritrade's Think or Swim module and have been thinking about consolidating/moving some assets around, therefore:

What trading platform do you use?
Why do you like it?
Why do you hate it?
What about commissions/other costs?
How about the charting?
How about the fills?
Easy to borrow (short) shares?
Can you trade all market vehicles (Stocks, FX, Options, Commodities, Futures, etc.)?
Is the company great or impossible to deal with (back office errors, etc.)?
Do you use it for daytrading (my primary interest), swing or investing?
Anything else you care to rant about...

Thank in advance to all - and, as always, good luck in your trading!

Crocodile says rainfall has impacted results???
Permits for Pine Creek not be received until 2nd quarter?
Anyone following this one?
Comments?
http://www.reuters.com/article/2011/02/28/crocodil...

Say it ain't so, Joe !.. To hell with the elephants, I'm going after the White Rhino !!!!!

Thanks for the post Vad - I took a whopping 100 share flyer @ 2.67 shortly after the close. They added another release about a licensing/production deal with LG Life Sciences at 7:30 ET. Bidding at $3.60ish now. Volume should be substantial on this one tomorrow.

http://tinyurl.com/5vrn8f7

Run away with me from a life so cramped and dull
Not worry too much about the happily-ever-after
Just keep the Caddy moving
'til we're well beyond that hill

Won't you share a common disaster?
Share with me a common disaster
A common disaster

We have all shared the same experience with the leveraged inverse ETFs. A common disaster in every sense.

A candle burning for everything I've ever wanted
A tattoo burned for everything I've ever wanted and lost
I had a long list of names that I kept in my back pocket,
But I've cut it down to one and your name's at the top

Which names top the list? I successfully traded TZA/VXX this morning. The trades weren't posted because (a) the positions were small (total net gain was $115), and (b) I would have looked like a dumb--- if they had turned into losses. In fact, had I held either one longer than a half hour, the trades would have ended up in the red.

Battles are sometimes won with the pen(mouse), Looks like the US will be getting a refund on there oil purchases, would that be something like a refund voucher?

Ilya -

I'm with you on your inflation play - but only if inflation in everything including ability of tenants to pay increased rents comes to pass. If that happens, then the best bet bar none is to lever up using cheap money, and buy those income properties which will hopefully do more than cover your payments.

With 90% leverage, a 10% annual inflation in rents will yield a 100% ROI per year, all else being equal. All you need to do is break even on the income from the property.

The key is leverage. Gold will probably move step by step up with property. If you bought a million dollars with of gold by borrowing 900,000 it would net you the same 100% ROI, except that gold won't spin off cash flow to pay off the interest on your loan.

They key point though is the bit about rent inflation. If the economy goes into the crapper and you can't get tenants, then the strategy will fail. Gold doesn't give you cash flow to pay interest on debt, but neither does it care about tenants ability to pay rent.

Dr S -

Something occurred to me regarding our discussion the other day about things priced in dollars. If you go to a foreign country and wish to buy, lets say gold, the gold is not priced in dollars, it's priced in the local currency based on the exchange rate. In Thailand, for instance, they paint the gold price in the window of the gold shops every morning - in Thai Baht - and that's the price you pay. You don't need dollars to buy the gold, you need baht.

If gold were priced internationally in euros, in mexican pesos, or in zimbabwe dollars, within each country you will still pay in local currency. Nobody has to hold dollars to buy gold. How then would it matter if gold is suddenly priced in euros? Would it affect the Thais? Not one bit. Nobody in Thailand will hold any more (or fewer) dollars based on the currency in which it is priced.

The decision to hold dollars is made independently of how commodities are priced. I think national central banks deciding to hold fewer dollars as currency reserves will have a real impact on both the currency and inflation, and it won't be positive for the US. But commodity pricing doesn't matter, as long as currency exchange remains free.

Of course, if THAT changes - if there is no more free flow of currency, or if currencies are fixed in order to control inflation - then all bets are off...thinking about that possibility, currency controls and the like, makes my head spin. Perhaps the oil producing countries will want oil trades settled in gold at that point.

Checking in, bought 200 and will most likely add same at 15+change. I like the current reported balance sheet. Any thoughts?
Regards
Earl

Earl - Don't know if any currencies are tied to anything tangible.

In some sense, tangible doesn't matter, all that matters is maintaining the artificial scarcity of the currency in a scrupulous way. However making a currency convertible into gold increases confidence that scarcity is being maintained, since if you have doubts, you can always convert.

Dr S's original contention was that if oil was priced in something other than dollars, it would dramatically affect the US dollar. I'm still struggling with why that is, in a world where you can swap one currency for another with minimal effort.

So rents have not gone down in 26 years.... you are truly blessed if you have owned in that location for those years as a landlord. My experience in the late 89/91 era was that house prices and rents in central texas area decreased by about half and I am sure owners in Fla, Az and other states have been going thru the same type haircut for the past few years. In such times leverage will truly destroy your net worth...I went from plus mid six figures to minus hi five figures within 3 years during the late 80/90 period so I speak from experience. I have no debt this time around and I sleep better although my silent patner/mafiaso type (local govt) does take a little more $$ each year and is up to over 25% of my gross rents now.....I do love RE and wish you the best, toby PS thanks to bill for this site and to BAZ22 for BCON which was truly a pleasant surprise when I got home last nitee from staining floors

Ross -

Just wanted to clarify as you seem to have a handle on the fundamentals but got a little screwy on way it comes out in the wash. The proforma on a commercial property works in this order:

Gross Revenues
Vacancy & Collection Loss
Effective Gross Revenues
Operating Expenses
taxes
insurance
maintenance
utilities
management/admin
replace reserves
Net Operating Income
Debt Service
Cash Flow

Cap Rate applies to the NOI and is a market driven metric. Regarding the net, net, net lease, that just means a pass through of the operating expenses to the tenant so that in theory the nnn lease base rate is lower than the gross lease because of the pass through by the amount of that pass through.

Your strategy to lock in debt and then pay off as inflation hits is a good one but with high risk. If the strategy goes underwater with runaway expenses and defaulting or vacating tenants as you attempt to raise rents to cover this inflation will put you underwater in a highly ILLIQUID asset. I think Bill pontificated on this in the last WIR. Great fortunes have been made but more easily and with far less risk when buying up said commercial real estate at the peak of a hyperinflationary event. Cash is king! Patience is a virtue.

Unlike the hyper trade of equities, commercial real estate can commonly transend generations. For example, Queen Elizabeth II inherited vast areas of downtown London after her ancestors established 100 year ground leases that were developed with trophy buildings by the tenant. As those century old leases expired, she took control of those prime improvements on her land and the next generation of royalty preserves wealth. Think of the best commercial real estate as an investment in your family's future generations and you can understand the logic of its true value.

Stay thirsty, my friend.