Spruiker extraordinaire Christopher Joye has written a blog for Business Spectator criticising our comments on property. You can read it here. However, in typical spruiker fashion it completely ignores our questions and instead trots out the same tired claims.

We’ve got plenty more to write on property over the next few weeks. But until then, how about they answer the simple questions we’ve put to them:

• Proof that there is a housing shortage.
• Proof that the Australian property market didn’t crash because 64% of the Australian population lives in a handful of cities.
• Proof that property prices double every 7-10 years.
• Proof that rising immigration causes house prices to rise.
• A genuine worked example of the Hedonic Index.

Property spruikers can leave answers to these questions on the Money Morning website under this article (when it’s posted) or any of the recent articles.

If the spruikers are that certain over their claims they shouldn’t have any trouble providing the evidence. Saying that, four months after we first asked, we’ve still not received an answer to point four.

Anyway, enough of the property malarkey for today. Back to our…

It’s harder to be a contrarian investor than you’d think. At first glance, you’d think being a contrarian just involves doing the opposite to everyone else.

It’s a nice idea, unfortunately it’s also a quick way to the poor house.

As any swimmer will tell you, it’s tough to swim against a rip. Rather than swim against it you should swim across it until you’re back in calmer water.

That’s almost the idea with contrarian investing. You don’t try to resist the hoards that are following the crowd, instead you calmly and carefully work your way into a position so that you’re ready to go in the opposite direction when the time is right.

Depending on the investment, the idea is to set yourself up for the turning point. So it’s not so much that you’re constantly betting against everyone else, but rather that you’re one of the leaders as the market turns.

For instance, if you had started to bet against the stock market in mid 2006 as the index fell by 10%, you may have picked up some short term gains, but in little over a year later you’d have racked up over a 30% loss.

Unless you had enough capital to keep your position open you could have missed out by the time your bet would have started to pay dividends.

That said, there is one contrarian investment where you don’t have to sit back and wait. You know the one I’m referring to – Gold.

Yes that’s right, despite what the mainstream press are telling you, gold is still a contrarian investment.

Sure, the price of gold has skyrocketed over the last year or so, and sure the price of gold could be in a mini bubble, but the fact remains that the investment buyers of gold are still in the extreme minority.

The mainstream press thinks that gold is in a price bubble because of gold parties and because of the gold merchants opening up stalls in shopping malls.

The only problem is they’ve got their bubbles in a twist. All this proves is that people are selling gold, not buying it.

And you only have to look at those stories again to see that’s what makes it a ‘buyers market.’ Because sellers are dumping valuable gold in exchange for devalued cash at well below market prices.

I would agree that gold is in a bubble if these merchants were paying market or above market prices. I would agree gold is in a bubble if these merchants were falling over themselves to pay the best rate on the market, bidding the gold price higher and higher.

But they’re not. It’s hardly a bubble when punters are selling below market price.

That’s because the fact is very few average punters know the real value of gold. They are happy to sell gold when it is at AUD$1,200 per ounce, fearful that it could fall to AUD$900 per ounce.

They then use their AUD$1,200 to buy a plasma television, or a new piece of furniture, or spend it on a holiday, all of which will have either no value or almost no value in five years time. Compared with gold which has retained its value over thousands of years and will do so for another five years and even better than that, for thousands more years.

Go to an average investment adviser and you’ll get less than average advice on gold. They’ll probably tell you not to touch it because “you can’t eat it and you can’t wear it, so it’s not worth anything.”

We love that argument from the gold bears. We simply respond with, “So I take it you’re fond of eating and wearing $50 notes are you?”

It soon has them blubbering, searching for a sensible reply.

Anyway, I’ve got no idea what the price of gold will be in six months or one year’s time. But what I do know, is that as an unleveraged ‘wealth insurance’ policy there’s little around that beats it.

The important point is not to necessarily look at gold as a method of getting rich. Although you can certainly do that if you consistently buy at the right price. The way I prefer to look at it is as a wealth protector.

Buying up small amounts at regular intervals. Swapping out of devalued paper money in exchange for an asset with real value makes a lot of sense to me. And because it’s unleveraged and because you’re using surplus funds you shouldn’t feel the pressure to sell if the price does take a dip.

Now, let’s take a look at our second contrarian investment idea for 2010. In some ways this is another wealth protector rather than a wealth generator. It’s to sell the Australian dollar.

As you can see from the AUD/USD chart below, the Australian dollar has put in a tremendous run during the past year:

And just as there was talk of the Aussie dollar reaching parity with the US dollar in 2008, so the same claims are being made now.

Will that happen? We can’t know for sure, but we can guess that if enough big FX players have enough interest in making it happen in the short term then there’s certainly a chance it could happen.

But to my mind, there’s much more profit on the downside than there is for profit on the upside.

The trouble is, if you’re selling the Australian dollar what are you going to buy? After all, a currency trade has two sides. If you’re selling out of Australian dollars you have to buy another currency.

And do you really want to put your cash into US dollars? For a start you’re not getting a yield (or not much of one anyway), so it will actually cost you to buy US dollars – simply because you’re giving up the opportunity of earning interest on Aussie dollars.

Also, there is an argument that because the US is still a dominant world economy, should the worst happen and the global economy melts down again, investors will naturally flow towards economies that are perceived as being lower risk.

Despite the mountain of debt the US is weighed down by, there is still a perception among investors that the US is a safe haven investment.

But perhaps a better option is to look at an economy that while it isn’t perfect, would seem to hold less risk than a US dollar investment – Japan.

So your second contrarian investment idea for 2010 is to sell Australian dollars and buy Japanese Yen.

When you look at the five-year chart above it goes without saying there’s plenty of risk to this idea. The Aussie dollar has gained by 50% during 2009, but it is still about another 20% from the high reached in late 2007.

The Aussie dollar could go either way against the Yen. It could in fact reach the ¥100 level from 2007.

So for this contrarian idea you’ve got two options. If you’re convinced the Aussie dollar is over-valued and that it will eventually retreat well below this level then you could tuck in now. However, if you’re using leverage then you should be prepared to take some pain if the Aussie dollar strengthens further.

Or you could take the cautious approach and look for a breakdown in the trend. As I mentioned above, being contrarian isn’t just about taking the opposite bet to everyone else.

To be a successful contrarian you need to watch your timing. So although selling the Aussie dollar and buying the Japanese Yen is a contrarian idea for 2010, as of today it’s a super high risk trade.

If you don’t have the stomach for that kind of risk then you should stay clear for now and bide your time.

The third contrarian investment idea for 2010 would be to short sell the Australian property market. Although I’ll admit this isn’t easy.

The best way would be to short sell an index or to buy put options on an index. That way you can spread your exposure across a number of stocks and property types.

An alternative to that is to pick a property related ASX stock that can be short sold. Here you’ve got two choices. Either you plump for an actual property stock or you go for the banks.

Either way you’re getting as close as you’re going to get to an exposure to the property market.

But again, this isn’t a risk free trade. We’ve seen how much effort the property industry, financial services sector and the government have put in to propping up the housing market. And we know that betting against property is not in the psyche of most Australians.

But we know the bubble can’t last, it’s just a question of when it pops, not if. But if you’re relying on our advice for timing, just remember we thought the Aussie housing market would collapse in a heap last year! But it hasn’t happened yet.

This is most definitely a punters trade. And it’s definitely one that you don’t want to be betting against the combined might of the banks and the property industry. So the timing is important here.

So rather than short selling, a less risky way but which involves a higher upfront cost is to look at longer dated put options on the banks and property stocks – such as Westfield Group [ASX: WDC].

The advantage with put options is that your downside risk is known up front. If the trade moves against you then the most you can possibly lose is the premium you’ve paid.

But the longer away the expiry date and the closer the exercise price is to the current price, the more you’ll pay for the premium.

In that case – as an example, and just remember this isn’t personal advice – you could look at taking out a long dated put option with a strike price of $10 on a stock like Westfield Group. Westfield is currently trading at $12.63 so you’d need it to fall a fair way to be assured of making any money. But as an out and out longer term punt it’s not a bad idea.

The theoretical price of the option is 31 cents per share – or $310 for one contract, but the actual price is likely to be a bit higher than that. You should check with your broker to be sure.

As I said, you shouldn’t take this as personal financial advice. But it certainly fits in with our big picture view of what could happen to the Australian market and economy over the next twelve months.

But as I mentioned above, for the Aussie dollar and property trade it’s all about timing.

Whereas for gold, it’s an investment you could make almost any day of the week without having to worry.

Anyway, that’s our three contrarian ideas for 2010. If you’ve any better ideas then just wait for this article to be posted to the Money Morning website later on this afternoon and then you can let other readers know how you’d play it as a contrarian in 2010.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 ended the trading day up by 12 points to close at 4,912.10. The Australian market has opened up higher this morning. Keep an eye out this week for the November lending finance data from the Australian Bureau of Statistics. The report is due out on Wednesday.

The Dow Jones Industrial Average finished the day higher, up by 11 points to close at 10,618.19.

The American jobless report was released on Friday morning their time. The report noted that 85,000 jobs were cut in December, but the jobless rate has remained steady at 10%. Read more from the report here.

Overnight in the UK, the FTSE was up by 7 points, closing at 5,534.24

The Nikkei hit a 15 month high on Friday. The index closed at 10,798.32, higher by 1.09%. Overall for the week the Nikkei had gained 2.4%.

Gold was up as a result of the weak jobless data coming from the US. Read more here.

The price of spot gold in Australian dollars is trading at $1,231.05 while in US Dollars it is trading at $1,138.30. The price of silver in Aussie dollars is $19.94 and in US Dollars it is $18.44.

The Aussie dollar versus the US dollar is trading at USD$0.9284, and against the Japanese Yen JPY86.02

Crude Oil was up slightly, closing at USD$82.75

For the biggest movers on the market yesterday click here…

Ouch!

On top of that Dubai kindly let everyone know that it’s in a spot of bother. You can imagine the conversation:

“Er, you know all that cash we borrowed to build those fancy pants buildings, well, there’s a glitch, ha, ha, ha. Any chance of extending the repayment deadline? We’re still good for it Guv, honest!”

And the Aussie market is taking a pasting this morning too. All I can say is I’m glad we recently recommended to Australian Small Cap Investigator and Australian Wealth Gameplan subscribers that they start using trailing stop orders.

Of course the market could still bounce from here if investors put their rose tinted glasses back on again, but it’s all about managing risk and being comfortable with the risk you’re taking.

Anyway, there’s not much more commentary we can add to the stock market today, so we won’t even try.

In fact, it’s not even the stock market we should be looking at – not directly anyway. It’s the banking sector and by extension, the property market that’s the real key to this.

Look, we’re no expert on Dubai. And we’re not an expert on Dubai property.

Actually, we’re not even an expert on the Australian property market either. But we do know a massive real estate debt bubble when we see one.

In fact, one thing we can see from the Dubai debt meltdown is a parallel with the Australian property market. Not that the property spruikers here will see any parallel. They’ll continue to claim the Australian property market is different.

And that Australian property prices will keep going up and double every 7-10 years.

Well, we’ll let them carry on with that argument while we laugh from the sidelines.

But let’s take a look at the basics of what’s happened with Dubai…

In a nutshell they had all these projects they wanted to build. You’ve probably seen the photos of all the lovely shiny high-rise buildings and especially the Dubai World project that had apparently attracted rich and famous buyers from Hollywood.

Trouble is, these building projects don’t ask for all the cash up front from buyers. When the rich and famous buy the $5 million property in Dubai World they’re naturally not going to hand over the cash up front.

They’ll hand it over in stages or at the end of construction, just like they do here.

So the builders have to get financing from somewhere in order to build and finish the project and then pay back the financing once the rich and famous hand over the cash.

That financing is of course debt. It’s bonds issued by the company to investors with the promise to repay the debt in the future.

Well, how do you think the Australian property market is funded?

Now, the property spruikers will trumpet the tired line that Australia hasn’t had the massive overbuild of properties that they’ve had in Dubai and the United States.

Because here we have a “property shortage.”

Clearly the property spruikers haven’t paid a visit to the Gold Coast or Melbourne’s Docklands and Southbank recently.

If they had they’ll have noticed the glut of high rise apartment buildings.

Anyway, we thought we’d do some snap research on Melbourne’s Docklands and Southbank suburbs. The research revealed some quite interesting stats. Make of them what you will.

But to me it hardly points towards a safe and sustainable property market. Anyway, make your own mind up.

According to the 2006 Census there were a total of 2,671 properties being rented in Southbank and 1,413 in Docklands.

For Docklands that represented 64.5% of all residential properties in the suburb, and 54.8% of all properties in Southbank.

That probably doesn’t sound too disturbing, but let’s take a closer look.

A quick search on the property website www.domain.com.au reveals there are 209 available rentals for Southbank and 90 available for Docklands. In other words, it puts to bed the claim about a tight rental market.

Supposedly the rental vacancy rate is only about 2%, well according to these numbers it’s 7.8% for Southbank and 6.3% for Docklands.

That’s hardly what you’d call a rental crisis.

But that’s not the half of it. And this is where we return to the matter of debt, and how the Australian market is inextricably linked to it.

In these two hotbeds of leveraged rental properties, in Docklands only 5.6% of the dwellings are fully owned owner occupied. 11.9% are being purchased with a mortgage and we dare say the vast majority of the 64.5% rental homes are also funded by debt.

As for Southbank the numbers are only slightly better, with 12% fully owned, but still there are 16.3% with mortgages and of course the majority of the 54.8% of rental properties would be hocked to the eyeballs.

Again it puts to bed the lie that only 30% of households have a mortgage. Funnily enough they always conveniently forget the mortgages held against super leveraged investment properties.

In the case of these two suburbs it’s more like 60-70% of homes that are mortgaged.

All that debt has to be funded from somewhere, and it sure isn’t from the suckers who put their hard earned cash into ’savings’ accounts thinking that the bank will take care of it for them.

Because don’t forget that Australian banks’ exposure to residential mortgages is around 50% of their ‘assets.’ And much of the funding for those mortgages (the liabilities on a bank balance sheet) comes from issuing bonds to overseas investors.

The disaster for the banking sector would be if those funds started to dry up. After the hit investors have taken on US and European property, and now middle eastern property, can we really expect investors to risk getting bitten a third time?

Think about it, if you’re an investor in a shiny office in Frankfurt, Los Angeles or Madrid, would you really be keen to throw a whole bunch of money towards a property market that is at its peak?

Will they heck as like!

At the very least they’ll want the government to guarantee those bonds, so expect the taxpayer to be put on the hook again as the leveraged debt binge ramps up even further.

But even that can’t last forever.

We’ve warned for some time that the global economy and the Australian economy aren’t as rosy as the pollies and central bankers and mainstream commentators would have you believe.

The side effects of the burgeoning debt around the world were always going to blow the top off many economies at some time.

Is this the moment? Who knows, we don’t that for sure. So all you can do is take educated guesses and make sure you’re prepared for the worst.

Or you can just forget about it and follow the advice of Michael Pascoe and Peter Switzer and leverage yourself up to the ‘miracle’ Australian economy.

Good luck with that!

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 finished the day lower by 13 point to 4,708.60 despite the strong in the morning. Around the world last night saw big falls on the international markets due to the Dubai Debt story. As a result the Aussie market has dropped dramatically this morning.

The US market was closed yesterday due to the American Thanksgiving holiday.

In the UK, the FTSE100 took the Dubai news badly, losing a massive 170 points or 3.25%, closing to 5,194.13. The London Stock Exchange had to suspend trading mid morning due to technical problems.

The Nikkei ended in the red, closing to 9,383.24, down by 58 points.

The price of spot gold in Australian dollars is trading at $1,306.20, while in US Dollars it is trading at $1,192.28.

The price of silver in Aussie dollars is $20.44 and in US Dollars it is $18.66.

The Aussie dollar versus the US dollar is trading at USD$0.9135, and against the Japanese Yen JPY79.08

Crude oil closed at USD$76.23

For the biggest movers on the market yesterday click here…

We all celebrated when copper rose above $US2 a pound but now it is 20% higher. Oil has almost doubled from its lows, and so on. Remember, it was only last March when the ASX 200 almost touched 3100 – a fall of more than 50% on the peak of November 2007. Now it is trading more than 30% above that low.

Todays update  for the share market

The Australian share market rose more than 1 per cent today, driven by a strong performance of the resources and financial sectors.

At the close, the S&P/ASX 200 was 45.9 points higher, or 1.1 per cent, at 4309.3, while the broader All Ordinaries rose 43.4 points, or 1 per cent, to 4313.9.

Among the sectors, materials jumped 2 per cent, financial stocks rose 1.7 per cent and energy gained 0.7 per cent.

Stockbrokers are now contacting their clients suggesting stocks to buy, and real estate agents are over the moon. Australian companies have raised about $90 billion over the past year or about 15% of the world total. Our leading companies are in good shape.

What the market is telling us is that we are headed for a “V” shaped recovery, which will be rapid and that the doomsayers are simply wrong.

- Asian stocks climb to 11-month high
- The dollar rose above 84 US cents on robust data
- Oil hovers above $US71 on demand optimism
- Gold holds above $US955 but appetite wanes
- Dow futures are 32 points lower at 9216.

Not just because he thinks you may want a place to live, but because you’ll be doing your bit for your country.

He explains the role, “tax benefits for negative gearing plays in easing the current housing shortage and how it can help ordinary Australians build wealth for a safe and secure retirement.”

You see, when you build a house you’re actually helping to fix the “chronic” housing shortage. And you thought it was just so you had a nice place to live.

The housing bulls are feeling as strong as ever. Michael Pascoe wrote in The Age recently “House prices NOT tipped to slide.”

But what’s the other side to the rosy picture on property? Could there really be news stories such as the following within the next twelve months:

“Banks have launched action to take 707 properties, worth more than $200 million, in the past three months.”

“Homeowners are being served with repossession orders in some cases when they are only $2000 or just a few weeks behind in repayments.”

“HALF of all claims involved owners who had their homes for less than two years, and two out of 10 involved borrowers who had owned their home for less than 12 months.”

“BORROWERS who don’t pay on time are being charged penalty interest, double the original rate. Some are being charged 20 per cent on loans and default rates of up to 40 per cent.”

“The average loan being called in was $244,000, on which repayments have risen by $460 a month…”

“A loan of this size, taken out at today’s average rate of 8.95 per cent, would cost an extra $138,000 in interest over 25 years…”

“Homeowners have told of repayments rising above their income and financial stress leading to ruined relationships.”

“Former Croydon homeowner Rodney said he was just $3000 behind on his mortgage when he found the locks had been changed by his bank.”

Is it really that far-fetched to picture mortgage interest rates climbing to nearly 9% compared with the 5.5% or so today? Maybe it won’t be next year, maybe it will be the year after, or the year after that.

Well, the quotes above are taken from Melbourne’s Herald Sun in February 2008. That of course was near the end of the Reserve Bank of Australia’s period of increasing interest rates.

When interest rates were at the previous record low, mortgage rates were a similar level to today’s rates. Then from mid 2002 until September last year interest rates climbed until reaching a peak of 7.25%.

But even between mid 2002 and the end of 2003, interest rates climbed by 0.75%.

Can it be guaranteed that interest rates won’t follow a similar path by the end of next year? No, of course it can’t. And if you look at how the bond market is trying to push rates higher even as the RBA is keeping them artificially low, it is obvious that mortgage rates are set to rise.

I’ve printed the Aussie yield curve again below. Even in the last week, rates at the short end (3 months) have increased by 0.05%.

But look again at the average loan size quoted in the Herald Sun article – $244,000. That’s significantly below the average loan commitment being made by first home buyers now. According to the recent Australian Bureau of Statistics (ABS) numbers “the average loan size for first home buyers fell $2,500 [from the previous period] to $283,400.”

Still, that’s over 15% higher than the average loan default during 2007/2008.

There can be no doubt at all that current actions in the Australian housing market are helping to prop up house prices. The danger at the moment is to think that either the propping-up has ended or that the worst is over.

Both assumptions are wrong.

We’ve even put our reputation on it by tipping a real estate investment trust in Australian Small Cap Investigator on the assumption that misplaced bullish sentiment on property will last at least through to the end of this year.

And don’t forget, not only has the Federal government extended the first home buyers grant, but State governments have raised the bets too. First home buyers in regional Victoria will qualify for $36,000 to put towards buying a home between July and September.

And now second home buyers in New South Wales will get a stamp duty reduction until the end of this year.

Eventually, as with all bubbles, the inflow of funds cannot be maintained, and the crash occurs – usually when investors think the worst is over!

To put it in context, a $283,400 home loan today at 5.74% means a monthly repayment of $1,782. Should the rates increase to 8.95% the repayments go up to $2,369 per month, or nearly $600 extra per month.

That’s about an extra $850 per month of before tax income, or not surprisingly, $10,200 per year of before tax income, which will eat up an extra 17% of an average Australian’s salary – assuming they are in a single earning household.

So, even if we believe that people will do all they can to keep hold of their home rather than allow it to be repossessed, rising interest rates will clearly have an impact on the economy.

Hence your editor’s concern in Tuesday’s Money Morning about businesses being encouraged to spend up on capital goods now when chances are in twelve to eighteen months time the investment in capital goods will have been wasted as the consumer is unable to purchase the goods being produced.

What does that tell you about the outlook for the economy going into next year?

Other Stuff on the Markets

The S&P/ASX200 0.24% yesterday, while on Wall Street with the Dow Jones Industrial Average slipped 23 points. In Europe the FTSE100 and CAC40 gained 1.18% and 2.18% respectively.

The price of gold in Australian dollars is trading at $1,168.38, while in US Dollars it trading at $931.30.

The Aussie dollar steadied versus the US dollar and Japanese Yen, trading at USD$0.7963, and JPY76.23.

Crude oil closed at USD$68.27.

For the biggest movers on the market yesterday click here…

And today on the economic calendar we have in the US, GDP, initial jobless claims and personal consumption numbers.

Cheers.
Kris.