Sell Australian Dollar and buy Japanese Yen – tick

Put options on Westfield Group – [screech!]

According to Richard F on the Money Morning blog, he has a much better idea than the Westfield trade:

“How about shorting RP Data – (ASX: RPX).”

Now that would be just spiteful wouldn’t it! It’s a thought though. They are super leveraged to the housing market. When that falls over you wouldn’t think there would be too many punters coughing up for their research.

Although let’s be fair about it. An even better trade would have been to have bought RP Data stock last year when it was trading for less than 10 cents per share:

Now it’s trading at just below 50 cents. We can only hope Mr. Joye and his mates took the opportunity to tuck in at what was clearly a bargain price.

The only problem with short selling RP Data is the lack of liquidity. If you look at the one-month chart below you can see it rarely trades:

You’d need bravery the size of basketballs to risk getting yourself in on a short position there. With such low liquidity it wouldn’t take much for someone to push the share price higher and suddenly you’d find yourself in a margin call and having to sell your house to cover the losses!

So, as a short selling proposition, I’d stay clear of RP Data.

Why not buy Japanese stocks?

There are a couple of other alternatives, but before I get on to those, a quick note on the Sell AUD, Buy JPY contrarian trade.

First, you can read Slipstream Trader editor Murray Dawes’ take on the Aussie dollar in the companion article.

But buying the Yen is potentially just the first step. Rather than paying to hold Yen – because you’re forfeiting interest payments on Aussie dollars – you could go one step further and follow the advice of The Daily Reckoning’s Bill Bonner.

Bill thinks the trade not just for 2010 but for the entire next decade is to buy Japanese stocks. Aside from the obvious – Sony, Toyota, Honda – your editor couldn’t tell you a single thing about which Japanese stocks to buy.

But if you like the idea – and again, this isn’t advice, just information – the easiest and probably lowest cost approach is to buy the iShares MSCI Japan exchange traded fund. It trades on the ASX with the ticker IJP.

You can buy and sell it just as you do any other share traded on the market. I’m not saying you should go for it but… ah, why not, I like the Japan trade idea. Look at the chart below to see the twelve month performance:

If you go for it, just be careful when placing orders as it’s also reasonably illiquid – yesterday less than five thousand shares changed hands.

Anyway, back to the bearish property strategy…

Other suggestions have been that Westfield isn’t a great idea due to its exposure to the US and UK markets. Something more local would be a better bet.

We had another look at all the commercial property trusts and not surprisingly the best time to short sell them would have been eighteen months ago. Many of them are still in the red by 80% or 90%.

Short selling them now is certainly possible, but there’s probably better options.

Commercial property trusts still well down

Something like the SPDR S&P/ASX 200 Listed Property Fund [ASX: SLF]. As the name suggests it’s a listed fund made up of a number of individual trusts which are also listed on the ASX.

In fact, we had recommended it as a buy to Australian Small Cap Investigator subscribers earlier last year as a way to get exposure to the potential bounce in the property sector. That happened to some degree, however we only picked up just over a 20% gain before advising subscribers to cash out in November.

But the most obvious idea is one we overlooked. If you’re bearish on Australian residential property then surely you’d look to sell the company with the biggest exposure to it.

It’s a proverbial no brainer.

And with the share price of the company in question back to pre-crash levels, thinking about doing something soon isn’t such a bad idea. Here’s the chart:

It’s Commonwealth Bank of Australia [ASX: CBA] of course.

Go for the biggest when selling short

As the company proudly admits, it’s the safest of the four major banks because it has the largest exposure to Australian residential mortgages [gulp!].

Of course, short selling something just because it’s high isn’t always the best strategy. Especially if the price goes even higher. So for this one I’m happy to defer to our resident Slipstream Trader and technical analyst Murray Dawes.

I asked him this morning what he thought of the idea. The upshot is that it’s not a trade Murray would make right now, and it’s not a trade he’d recommend to Slipstream Trader members just yet.

However, he does think there’s an opportunity for a quick swipe at it on the short side, providing you’ve got your stop order placed close behind in case it swings the other way.

But in terms of a Contrarian Investment Idea for 2010, getting in to a short position on CBA looks premature. We’re not thinking of short term trading ideas, we’re thinking about longer term progressive downward movements in the share price.

Plus you want to protect yourself against potential losses as well.

One way to do that is with what the guys at City Index call a ‘guaranteed stop loss’ order. I won’t give you all the details here because I don’t have the space. All I will say is that it’s a good way of knowing exactly what your maximum loss will be before you make the trade.

That’s got to be worth something.

It’s certainly a good idea if you want to trade on the short side but are worried about getting ‘caught short’ and losing a bunch of cash.

Anyway, I think that pretty much settles our 3 Contrarian Investment Ideas for 2010:

• Buy gold
• Sell Aussie dollar, and buy Japanese yen
• Short sell CBA – but not just yet!

But as I wrote earlier in the week, if you’ve got any other ideas or you think our contrarian ideas are rubbish, feel free to make comments when on the Money Morning website when this article is posted later today.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 was down yesterday to 4,868.10, lower by 31 points. The positive lead in from the US has seen the index open up nearly 20 points higher this morning.

The Australian Bureau of Statistics will release their figures on the labour market today, and these will include the unemployment rate.

The Dow Jones Industrial Average closed at a 15 month yesterday. The Dow ended the day at 10,680.77, up by 53 points. However Bruce Bittles, a chief investment strategist at Robert W. Baird, is worried that expectations are a too high and the market is “suffering from a little too much optimism”. Read more about the US market here.

Overnight in the UK, the FTSE dropped 0.46% to close at 5,473.48.

The Nikkei closed at 10,735.03, lower by 1.32%

Gold continues to dominate the news this week after another short rally last night. Spot gold gained about USD $9 overnight, based on speculation that the Fed will keep rates at these unnatural lows for an extended period.

The price of spot gold in Australian dollars is trading at $1,232.66 while in US Dollars it is trading at $1,138.11. The price of silver in Aussie dollars is $20.18 and in US Dollars it is $18.63.

The Aussie dollar versus the US dollar is trading at USD$0.9236, and against the Japanese Yen JPY84.37

Crude Oil closed at USD$79.67

For the biggest movers on the market yesterday click here…

“Maybe Chris and his mob have had him arrested for daring to challenge their idiocy?”

…We haven’t been arrested. Although as you’ll see below the property spruikers and cheerleaders aren’t happy with us.

But before we revisit our property issues from Monday and Wednesday, a quote. It’s from the 1841 classic by Charles Mackay, “Extraordinary Popular Delusions and the Madness of Crowds.”

We started reading the book last night, and before too long we picked out this wonderful passage:

“With a weakness most culpable, he [John Law] lent his aid in inundating the country with paper money, which, based upon no solid foundation, was sure to fall, sooner or later. The extraordinary present fortune dazzled his eyes, and prevented him from seeing the evil day that would burst over his head…”

Which fits in nicely with the “Shoppers open wallets in retail boost” headline from News Ltd. And then there was this from the preface:

“Money, again, has often been a cause of the delusion of multitudes. Sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper… Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

We’ll have more on ‘madness of crowds’ next week. And nowhere does this madness apply more than the property market. We’ll show you a fine example that was sent to us by a Money Morning reader from property spruikers The Investors Club.

But that’s next week. Today…

We notice the property spruikers and the mainstream press are doing what they do best – joining forces to keep pumping up the property bubble. How dare anyone question the authority and the knowledge of the mainstream press and four PhDs?

On Wednesday, Rismark International head honcho – and spruiker-in-chief – Christopher Joye wrote an article for his blog stating:

“Sayce makes at least four highly misleading and deceptive statements, which is legal jargon for outright lies, regarding the November RP Data-Rismark Index results. And I would not be surprised if his claims attract a legal response from RP Data.”

Where we come from it’s called asking questions and having an opinion. But never mind.

But Peter Martin at The Age didn’t like our take on his article either. In his blog he states:

“He [Kris Sayce] has written a rant about RP Data and also The Age that I’ve reprinted in full below. Clearing things up for him gives me an [sic] provides [sic] an opportunity to set out clearly what RP Data actually does.”

Thanks, but we didn’t think it was the role of newsmen to do some part-time PR for the property spruikers.

But then again, this is from the same journo who wrote last year: “It’s official: Rory wins” and “House prices surge for 8th consecutive month – Steve Keen to walk to Kosciusko!”

On top of that, in the blog version of his The Age article he ran with the headline: “You should have bought that Melbourne house a year ago.”

But back to Peter’s response to our article and the defence of his, he writes:

“The $580,000 figure does not relate to the 17 per cent figure. RP Data does two quite different things, one of them simple and one of them hard. The simple one is to access the Land Titles or Valuer Generals’ figures (depending on the state) and report the median price of the properties that happened to change hands that month. In November it was $580,000. But it bounces around depending on what’s sold that month. Some months a lot of inherently high-value properties are sold, some months a lot of inherently low-value properties.”

But here’s the punchline:

“It [the $580,000 figure] tells you nothing about movements in the price of actual properties.”

Hang on a minute, back to the original The Age article:

“The latest RP Data index, compiled from Valuer-General’s figures, indicates the Melbourne median house price hit a new record of about $580,000 in November.”

So in other words, even though it tells you “nothing” about the price of actual properties, Peter thought he’d run with the big figure anyway.

All the better to suck the first home buyers in with.

Anyway, back to Joye. He tries to claim that we’ve misrepresented the facts but then goes on to claim how the Hedonic Index is much more reliable than dodgy old “Median” prices because medians can be much more volatile and don’t take into account home improvements, blah, blah, blah…

Yeah, yeah, we’ve got that. But it still makes you wonder why RP Data didn’t use the super special Hedonic Index in its latest press release. Instead it chose to use median prices, which are, erm, volatile and unreliable.

But all this is diversionary tactics. The major point remains why RP Data dropped the Hedonic Index from the press release, even though Joye claims RP Data have done no such thing. Here’s his clarification of it. He writes:

“The final mistake Sayce makes is that he claims that because the RP Data press release referenced ‘median prices’, RP Data is no longer publishing its hedonic index. As before, this statement is categorically incorrect… For the avoidance of doubt, here is one quote from the release: ‘The RP Data-Rismark Hedonic Indices benefit from exclusive access to the most comprehensive property database in Australian and NZ, which is owned by RP Data Limited (ASX: RPX). RP Data spends over $9 million annually collecting new property information and has amassed a database comprising over 130 million property data records.’”

Well that doesn’t count. That’s not clarifying anything. It’s just further praise from themselves about their own index. It hardly removes the “doubt” about the further use of the Hedonic Index.

As you know, we’re always keen to make sure we give you a proper analysis of things. And if we’re wrong or we make a mistake we’ll admit to it. We don’t like being wrong – few people do – but we’ll swallow humble pie and admit it when we are.

Like we did with our median slip-up and our claim that Lord Monckton couldn’t produce the draft Copenhagen treaty – which he could.

But as we re-read the Rismark-RP Data figures and the responses from Peter Martin and Christopher Joye the picture becomes cloudier not clearer.

We won’t give a line by line rebuttal otherwise we’ll be going back and forth all day. But for starters Joye states, “the first mistake he [Kris Sayce] makes is the claim that the 17% capital growth observed in Melbourne in 2009 is wrong… the 17% capital growth rate has nothing to do with ‘median prices.’”

Doesn’t it? How about this snapshot from the RP Data report:

Is this the non-median 17% Joye is referring to? Looks like it says ‘median’ to us.

Isn’t that the 17% The Age was referring to, or is there a 17% somewhere else in the report? We can’t tell if it’s to do with the Hedonic Index because that wasn’t published in the press release.

Other than that Joye has a belt at our ‘median’ snafu again [yawn]. And then offers up another quote from RP Data explaining how great the Hedonic Index is. The same index which isn’t quite good enough to make it to the press release.

I don’t know about you, but we always thought press releases were supposed to highlight your best points not hide them. Anyway, each to their own.

But let’s not forget the mainstream complicity in this either. Although to be fair, we’ll give Peter Martin the benefit of the doubt for the howler of an omission I’ll take you through now.

Because our guess is that Peter Martin of The Age needs to grab hold of his editor and give him or her a quick box around the ears. Take a look at these two snapshots of essentially the same article.

The first is the opening paragraphs from the article as it appeared in The Age:

Got that? OK, now take a look at the article as it appeared on Peter’s blog on the same day:

The type is a bit smaller but the key inclusion is in the third paragraph, “RP Data warns that median monthly prices are volatile and says a better guide is to examine median prices over a number of months.”

You’d think that ‘disclaimer’ about the inaccuracy of the $580,000 figure would be important enough to make it past the editor’s desk. Apparently not.

Why do that when you can claim that the average Melbourne house is now worth $580,000. And even better if you can rub it in by telling your readers that “You should have bought that Melbourne house a year ago.”

Which is an odd thing to claim seeing as Peter also states in his blog “a typical Melbourne house that sold for $443,900 at the start of the year fetched between $440,300 and $580,000 toward year’s end.” That’s a fairly wide range, and worthy of making it into the version in The Age you’d think. But again, no.

But if we’re being accused of being misleading, how does it figure that The Age would use the 17% increase when that should be attributed to the Hedonic Index, even though the RP Data press release states it should be used against the median price for the first eleven months, not for the monthly figure?

Even though Joye claims the 17% has “nothing to do with ‘median prices.’” And Peter Martin claims “The $580,000 figure does not relate to the 17 per cent figure.”

But take another look at the opening paragraphs from The Age article again:

“MELBOURNE house prices soared by 17 per cent in the first 11 months of 2009, outstripping growth in all other capital cities, new figures show. The latest RP Data index, compiled from Valuer-General’s figures, indicates the Melbourne median house price hit a new record of about $580,000 in November.”

Is it so unreasonable based on that reporting to think the “17 per cent” and “$580,000″ are related?

But maybe the Hedonic Index also increased by 17%. But we don’t know do we, because RP Data didn’t think it important enough to put the world famous Hedonic Index in its press release.

Yep, confusion reigns again.

Based on their comments they believe they were trying to ‘clarify’ the issue. But it seems to us that they’ve muddied it even more.

Look, you can read all the comments for yourself and make your own mind up. You can work out who’s misleading whom. You can work out whether anything that’s this complicated can really be relied on for anything.

But what this really tells you is that you can use means, medians, modes or even Hedonic Indexes to come up with a number, but it means absolutely nothing.

In simple terms what all their efforts come down to is an attempt to reduce human behaviour into a mathematical formula. They fall into the same trap as all mainstream economists.

They believe they can use formulas to minutely predict the behaviour and actions of human beings. Despite this impossible task they continue to believe it can be done. And this delusion makes them strive even harder to become the first to do it.

But it’s impossible, and it’s ridiculous for anyone to believe they can do it.

And it’s equally impossible to create an accurate and scientific formula to calculate the price of housing – as attempted by the Hedonic Index. Sorry to burst this bubble, but any hedonic index will have flaws.

In fact, any index, Hedonic or not, will have flaws.

In a 254-page paper for the OECD – “Handbook on Hedonic Indexes and Quality Adjustments in Price Indexes: Special Application to Information Technology Products” – Jack Triplett quotes Ho, Rao, and Tang from their publication.

They said:

“It [the hedonic technique] has been criticised for lack of theoretical foundation, especially for its functional forms, lack of transparency, and its subjectiveness in selecting the quantities of characteristics.”

Triplett responds to criticisms of a Hedonic Index by saying:

“When pressed to be more specific, the speaker responds that he has reservations, but not (in effect) objections, that he cannot give specifics, he has rather “unease” (a frequently used word) about the method, or that it is others who express “unease” without providing specifics.”

It’s a typical response. The “unease” is plain, the index requires subjective inputs. You don’t need to be any more specific than that.

If an index is based around subjective inputs then it is only as accurate as the inputs provided. Applying this argument to a Hedonic Index based on the property market you would be naive for not asking about the quality of the data being input by a company that benefits from rising property prices.

The very fact that RP Data chose to omit the Hedonic Index from its press release and instead revert to a [scoff] “simple median” simply raises more questions about the quality of the data.

Data that’s used by property spruikers and cheerleaders as evidence of a never-ending rise in house prices.

Which all goes to confirm what I wrote on Wednesday, that “House price statistics can’t be trusted.”

Cheers.
Kris.