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S&P: We expect non-QM market to double, or even triple, in size in 2018

Last week, structured finance analysts at Wells Fargo released this outlook report for private and agency mortgage-backed securities. The entire outlook can also be downloaded by following that link.

As with 2017, the Wells Fargo analysts see central bankers continuing to dominate mortgage bonds for another year.

Now S&P Global Ratings is releasing its forecast and explains that, despite misrepresentations in the media, they say, the non-QM loans of today are not simply a reincarnation of non-prime or even subprime products which proliferated before the Great Recession.

In fact, the ability of these mortgages to reach homeowners otherwise unable to obtain home financing through conventional channels means the market potential is huge. 

In order to draw this conclusion, S&P collected data from 6 rated non-QM deals and extracted average values of collateral and loan characteristics to understand how non-QM loans differ from pre-crisis subprime, Alternative-A (Alt-A), and prime jumbo loans.

As a result, confidence in non-QM performance will continue to grow: “We expect the non-QM market to double, or even triple, in size in 2018.  We also think that as it continues to evolve and become more liquid, securitization will become more efficient and spreads should tighten,” S&P said in an email.

According to the report, the ability-to-repay (ATR) and qualified mortgage (QM) rules aim to curtail risky lending by helping lenders assess a home buyer’s ability to repay a mortgage loan and by prescribing specific loan attributes that clarify how originators can stay within the guidelines.

“While non-QM loans still need to satisfy the ATR rule, they deviate in one or more ways from the Consumer Financial Protection Bureau‘s QM guidelines, making the risk of legal liability more uncertain than with QM lending,” said global structured finance research senior director Tom Schopflocher.

“One of the important features of non-QM that distinguishes it from the historical loan types, including subprime and Alt-A, is the absence of risk layering,” Schopflocher said. 

Here’s the meat of their prediction:

Given improved underwriting, ostensible off-setting risk factors, and wide spreads, it appears as though non-QM lending should give rise to a healthy new market that provides funding for would-be borrowers who have been on the sidelines for years, having been unable to qualify for a conventional loan. 

Industry Voice: Deutsche Asset Management – A private banking revolution

The business model of private banking is undergoing a subtle but profound shift. Historically, the industry provided its wealthy clients with services such as investment advice for “free”, while recouping these costs through commissions from products sold and trades executed. Slowly, but surely, the industry is moving towards charging clients explicitly for investment advice.

This Market Isn’t Topping, It’s Climbing Higher!

Calling stock market tops is a fool’s errand. The simple fact is that people will continue to try to do it in order to shake some weak hands free of the stocks they hold. Don’t get me wrong, I love taking gains, but right now is not the time to do so. The prudent investors have a game plan for what is to come and I want to share my plan with you. It is based on a lot of empirical evidence that supports higher stock prices, but we have to remain disciplined!

The basic idea here is that we have to be accepting of more market risk. This seems contrary to public opinion as you undoubtedly have heard many calls about valuation, accelerating risks and of course the market making a top. All of these are just plain wrong, and it only takes a glance at a long term chart to tell you why.

The market has continued to move higher, crushing the shorts and making you wish you were fully invested already! Just look at a five year or ten year or even a twenty year chart! There have been some setbacks, but we are moving higher unless there is a giant bearish catalyst lurking out there that few if any see.

Data On Our Side

One of the key reasons I think we continue to move higher is because we have some excellent data behind us. This data isn’t the only reason stocks move higher, but it shows us that we are not alone in thinking that we are in some good times, and that more good times are ahead.

Continued . . .

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The first data point is probably the most important. The employment picture is a good one right now, with the economy continuing to add more jobs as more people rejoin the workforce. It used to be said that 3.5% – 4% unemployment would be considered full employment, but we are much more entrepreneurial now so we could probably bump that range up to 4.5% – 5%. Right now, we are at 4.1% unemployment.

The next data point is almost as important and is really the foundation of my bullish stance. The CB Consumer Confidence reading that was reported on November 28 topped expectations again and it shows that consumers will continue to do what they do best … CONSUME! This data point gives me confidence that this bull market will continue to roll higher.

Finally, as far as data points go, I want to speak about home sales. The general trend has been higher, and that goes for new home sales as much as existing home sales. Generally speaking, most of these sales are going for ever higher prices. And due to the fact that they are often the largest investments people tend to make, there is going to be excess capital available for investment. When sale prices start to materially fall, that could be a time to pull in the reins.

How To Be Positioned

Now that we are on the same page about where the market is headed, let’s adjust our risk/reward ratio. The market will reward those investors that take an appropriate amount of risk… and the more sensible the risk, the greater the reward.

This is not to say you can take out a shotgun and fire away at whatever moves and expect to bag dinner. You have to learn to point it at the right “herd” of stocks. Right now, I would be pointing my weapon of choice at a herd of low-priced stocks. Low-priced stocks come with inherently more risk, but in a risk-on market they offer outsized potential returns.

For the foreseeable future, low-priced stocks will offer much greater rewards for similarly priced risk. This means this segment of the market could drive outsized gains for your portfolio. The problem is, which low-priced stocks do you look for?

“Risk On” Markets Love Growth

The instant a company is showing big growth, it is on my radar screen. I love growth stocks because I am a firm believer that expenses have to head to ‘zero’ if there is no revenue growth. That isn’t a reasonable scenario, so if you are not growing on top, don’t expect to be on my hit list.

The fastest way to higher earnings is by selling more goods or services. If one holds margins constant, then an increase on top will flow directly to the bottom line and then you have growth on top and on bottom.

That same growth is what the risk-on market craves. My experience tells me that low-priced stocks that are seeing growth on top are much better picks than the ones that are “bottoming out.” I try to avoid those turnaround stories, I want to see progress in the form of topline growth in my turnarounds.

Narrowing It To Just A Few

We have already come a long way. We have come to the realization that this top is just like tops before it and it too will be topped by an even toppier looking top. The data is on our side for more growth and higher asset prices and almost as importantly the consumer has our back.

We know that the best place to be is in the land of low-priced stocks as they offer the best risk/reward ratio in a market that is clearly Risk-On. More than that, the Risk-On market loves stocks that are showing growth. So what is the final piece to the puzzle?

Given that you adhere to the above, the thing that sets a select few apart from the others is earnings growth. It seems obvious, but there is a preferred method to employing this idea. Go for the earnings growth that is there before the report, which is another way of saying pay close attention to the earnings estimate revisions.

The easiest way to select the best low-priced stocks is to follow the Zacks Rank. It helps you select the ones with the right level of positive earnings estimate revisions.

Want To See the Low Priced Stocks I’m Targeting Now?

I’m following several promising stocks with irresistible entry points in my Zacks Stocks Under $10 portfolio.

Stocks Under $10 focuses on companies on the verge of big upward moves. We get in when the Zacks Ranks and other proven indicators point to success ahead, and prepare for potential gains up to 2X or more. In fact, as of today, three of our holdings are up more than +145% each – and it looks like they have plenty of room to run.

In addition to checking out our long-term picks, you are invited to download our Special Report, Invest Like Warren Buffett. Yours free, it reveals the celebrated investor’s 3 secrets for picking amazing value investments. Even better, it provides 5 stocks to buy today that Mr. Buffett might well have bought if he were still in the process of accumulating his billions.

But a word of caution: Your chance to download this report for free ends at midnight Sunday, December 3.

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Best,

Brian

Brian Bolan is our Aggressive Growth expert and the editor of the Zacks Stocks Under $10 portfolio.

Brewin Dolphin tests low-cost advice service WealthPilot

Wealth manager Brewin Dolphin has announced it has begun testing a “needs-based” wealth planning and investment advice service, called WealthPilot, to engage a wider market segment with simpler needs.

Quilter Cheviot launches AIM portfolio service

Quilter Cheviot has launched a discretionary-managed AIM strategy for high-net-worth investors.

Airlines for America boss: EU unity on Brexit could change nearer deadline

The EU’s current unity in Brexit negotiations is likely to split the nearer it comes to deal-making time.

Sharelines


“In the EU, a lot of airports can’t handle the 140 flights [per day]. They’re too full… and the slots aren’t there.”


That was the view of Airlines for America president and chief executive Nicholas Calio, speaking at the AOA conference. He said one of the EU’s great strengths has been the fact that the other 27 members have spoken as one in dealing with the UK.

However, he believes that as the Brexit deadline approaches, countries will break ranks as they increasingly realise the deal being struck might not be best for them.

He said one example of this would be Spain, where any threat to UK aviation would be hugely unwelcome as the country receives 12 million British visitors each year.

Calio said: “One of the advantages the EU has is the EU 27 have remained remarkably unified. I think that will look different the closer you get to the break.”

He added that some EU countries are already believed to be secretly trying to use Brexit to further their own interests and attempt to replace the UK as Europe’s biggest US market.

Calio said: “The problem is now US carriers have a huge investment in infrastructure in the UK and we’ll fly where demand dictates, and much of that demand is in the UK.

“In the EU, a lot of airports can’t handle the 140 flights [per day, which the UK does]. They’re too full… and the slots aren’t there.”

Fishburners CEO Murray Hurps has quit

Coworking

Murray Hurps

Startup community facilitator Fishburners has appointed Annie Parker as interim chief executive to replace Murray Hurps, who will vacate the role on Monday.

Just one week ago, Fishburners celebrated the end of a three-year search for a new home in Sydney, securing space at the downtown Sydney Startup Hub as an anchor tenant.

“Having grown the Fishburners community to 845 startups and secured our new hubs in Brisbane, Shanghai and Sydney, I am confident I have left Fishburners in a position to remain the leading community for scalable tech startups in the region,” said Hurps.

On social media, Hurps noted he came into the position in 2014 originally as “interim CEO”, and made the decision to step down after signing the landmark Sydney Startup Hub deal.

“In this moment, I feel like the future of Fishburners is secure, my role of ‘interim CEO’ is complete, and I’ve decided to move on,” he wrote.

“We’ve grown the Fishburners team from one incredible person [Pandora Shelley] to 13 incredible people, and I’ve had the honour of working with the best chair any CEO could hope for, Katherine Woodthorpe.”

Ironically, Muru-D co-founder Parker was, until May, leading the Lighthouse accelerator, which was set to take up three floors to anchor a massive new Barangaroo startup hub. That site was later ditched after it was overshadowed by the NSW government’s $35 million investment into the Sydney Startup Hub, due to open in November.

“I look forward to continuing the great work that has already been undertaken and maximising the opportunity provided by the new premises in the Sydney Startup Hub,” Parker said of her new role at Fishburners.

“Fishburners has nurtured some amazing startups in the last few years and the ongoing interest from new startups in being part of the program it runs speaks to the successes it has created.”

The 17,000 square metre York St facility, across the street from busy Wynyard railway station, will double the size of the co-working office Fishburners currently runs in Ultimo, allowing it to host 610 desks.

“We anticipate we’ll be very likely full, or very close to full, almost immediately upon the Sydney Startup Hub opening,” said Parker.

“The new space in the Hub allows us to not only focus on early stage startups, but gives a home to them as grow and mature without losing the DNA that the Fishburners’ community provides.”

Hurps, who is also the co-founder of startup community survey Startup Muster and the entrepreneur behind several software and hardware startups, said he enjoyed his time leading Fishburners because of his love for the startup community, care for the future of Australia and the professional growth opportunities.

“I’m [now] looking for positions that could be similarly rewarding, and would welcome any referrals… I will also be putting more time into the Startup Muster 2017 survey.”

Fishburners, established in 2011, was one of the first co-working space providers for Australian startups, operating 390 desks currently in Sydney, Brisbane and Shanghai. Parker is a director at Code Club Australia and founded Telstra’s Muru-D accelerator in 2013.

Steph Curry did it. How do you lose money in the Bay Area real-estate market?

The answer: Buy high, and buy in a less-than-prime location

Golden State Warriors star Steph Curry is seemingly incapable of losing.

Off the court, not so much.

Somehow, Curry and his wife Ayesha have reportedly managed to lose money in the one of the hottest real-estate markets on the planet right now. While scores of Bay Area home sellers are getting multiple all-cash offers over their asking price, the Currys have learned that scoring big-time with real estate isn’t always a slam dunk. After paying $3.2 million for their 7,520-square-foot Walnut Creek mansion in late 2015, and putting in nearly a half-million dollars to fix it up, the couple has sold the place for $3.195 million after dropping the price last month from $3.395 million. And that price had been dropped from the $3.7 million they were asking back in October of last year. The more recent sale went pending July 5.

Wha?

The answer to how to lose money on Bay Area real estate seems to be a combination of buying high, and ignoring the first three commandments of home purchasing: location, location, location.

“Since homes valued at more than $2 million make up only a small percentage of properties in Contra Costa County, it’s a very niche market,” says Steve Mohseni, a real-estate agent with RE/MAX in Pleasanton. “So there’s limited demand for this type of home.”

Mohseni checked sales in the past year of homes listed in the city of Walnut Creek for $2 million or more, the definition of high end. He found that out of the 494 homes sold, only eight were in that category. Of those eight, four sold under the asking price, three sold at asking and one sold for $30,000 above the listed price. And, says Mohseni, “none of those were over $3 million, until now. So Steph had the most expensive house sold in the city.”

Anything can happen, of course. A recent survey by the real-estate powerhouse Pacific Union showed that in some parts of the region the high-end market is doing gangbusters. The report shows that home sales activity in the Bay Area increased by 3 percent year over year in June and 2 percent for the first half of 2017, with Alameda and San Francisco counties posting the largest pickups in the first half of 2017, thanks to more sales of higher-priced homes. In June, said the survey, 40 percent more homes priced between $2 million and $3 million sold in the Bay Area year over year. And sales of homes priced higher than $3 million were particularly hot in Santa Clara County last month, with transactions jumping 50 percent from last June.

Unfortunately for the Currys, the Santa Clara market is about 50 miles south of their home on Sugarloaf Court. And as Mohseni reminds us, real estate is all about location. The Curry home sits on a nondescript cul-de-sac south of downtown Walnut Creek, just a few blocks off an Interstate 680 exit and with its backyard sloping down to a major thoroughfare.

“The place is kind of remote and there’s no prestige, no view of the Golden Gate Bridge,” he says. Combine that lack of pizzazz with the home’s placement on the lonely nose-bleed section of real estate and you’ve got, well, you’ve got out less money than you put into it.

“It’s the mainstream that’s hot, not necessarily the high end,” says Mohseni. “And in many areas even the high end is not as hot compared to four years ago when we saw a lot of Chinese buyers paying all cash and over the asking price. That, as a rule, has slowed down.”

Commercial real estate could be in better shape than expected

Are commercial real estate people feeling edgier about the office leasing market than they say?

A few weeks ago, we wrote that several high-profile dealmakers were uneasy about future Manhattan space absorption despite today’s current strong market.

They asked not to be named for reasons that will be clear in a moment. So we kept their comments anonymous.

One big-league broker cited a “lack of depth” to the market beyond a handful of major negotiations going on.

A different broker pointed out that most large-scale transactions that — it is hoped — will be completed in the next 12 months will actually add to availability, because companies will leave behind more space than they’re moving into.

The modest qualms shared privately with us by certain major players apparently got under some skins, even though the column was far from doom and gloom.

Data we cited reflected a still-healthy leasing scene despite a first-quarter availability uptick to 11.7 percent from 10.6 percent in the same quarter of 2016, according to CBRE.

We also noted many ongoing negotiations for huge blocks of space. A few hadn’t even been previously reported, including a possible 600,000-square-foot blockbuster for Pfizer at Brookfield’s Manhattan West and 200,000 feet for Shiseido Cosmetics at L&L’s 390 Madison Ave.

However, our moles said that some landlords were worried about a lower but crucial market rung — deals of 100,000 square feet and under.

That prompted this retort in a July 5 mid-year market outlook report from Colliers International:

“Despite recent consternation among some real estate commentators [italics ours] that the market is weakening,” Colliers said, “especially for lower-profile deals less than 100,000 square feet,” leases from 25,000 to 99,999 square feet totaled 5.29 million square feet in the first half, “on par with 5.31 million in the first half of 2016 and ahead of 4.85 million feet in the same period two years ago.”

Colliers also noted strength in the investment-sale market, where the average office building price was up 7.5 percent over the same time last year.

Another report from Newmark Knight Frank noted strong activity in the under-100,000-square-foot field, which accounted for 60 percent of all the leases signed in the first half of 2017.

Both reports were politely called to our attention by no less than developer Bill Rudin, CEO of Rudin Management Co. and the incoming chairman of the Real Estate Board of New York. He cited strong recent leasing energy at his own properties as well as at those of others.

But to be clear, folks: The source who warned of “not that many deals as landlords would like” below 100,000 square feet was talking not about the past, but about the future — a story yet to be told.

Microsoft Moves 100 Staff To New Co-Working Space In Manchester City Centre

Tech giant Microsoft shall soon begin to relocate 100 of their existing staff members into a new co-working space at the former Bank House building found on the corner of Portland Street and Charlotte Street in Manchester city centre.

Scheduled to move in this month, Microsoft is said to be occupying a workspace on the seventh floor of the newly-launched Neo building, a site that reopened in March following an £8-million overhaul that is described as “Bruntwood’s most evolved workspace to date”.

The 12-storey building features an on-site gym, a large open-air terrace, spacious meeting rooms and multiple open-plan working spaces. Phil Kemp, Chief Commercial Officer of Bruntwood said: “Manchester was of course the birthplace of modern computing in the late 1940s and 1950s so to welcome a true world leader in 21st century technology to our city is not only a perfect fit, but it’s a proud moment for us too”.

Microsoft Moves 100 Staff To New Co-Working Space In Manchester City Centre