Chuck Ponzi July 2nd, 2008

If you were reading the previous post, you know that I was helping out a reader with some advice about his home in Arizona and what to do. Tonight I’ll take on the opportunity of what to do with the funds he has available. My next article will tackle when to buy.

Keep in mind that this advice is free, and you get what you pay for. If I were in the same situation, my actions might be different from what I am currently doing simply because each person and situation (as well as timing) is different.

When we left our friend Boomer yesterday, I had advised him to sell his home in Arizona even though that wasn’t the question. There was no question that the house was overvalued based on normal valuation methods. In addition, rates have remained stubbornly high despite a strong easing campaign by the Federal Reserve Bank. To that point, just over 2 years ago, I wrote about interest rates and what that portended:

1. Why are rates going down over time?
2. Is there a savings glut?
3. Why are risk premiums (spread) so small?
4. Are we about the enter a recession like the other small spreads indicated?

To the last point, if we enter a recession, is there any chance that housing can be saved through inflation? Does this mean 70’s style stagflation, or even worse, Japanese style deflation with ZIRP?

If anyone can provide a coherent way that housing can survive in the next 2 years, please tell us now!

At this point, I think we are out of options from a monetary perspective.

1. We already have inflation. Dropping rates will make it much, much worse.
2. Economic growth is slowing despite the mad dash of construction.
3. The credit market is precariously spread and rates could make a mad dash upward if international investors get spooked and run for the exits. The only way to keep the Dollar from meltdown at this point will be to raise rates even more.
4. Housing speculators will be crushed by negative amortization and high interest rates in this event(which arguably should have already happened by now).
5. The sitting inventory will cause personal financial distress and combined with the mad dash of rates could generate a general credit system event.

Either way, we will be seeing a much more favorable buying environment for housing in 3 or more years due to the general stress and turning of investor sentiment.

The backdrop of investor sentiment is the worst that I can remember, insomuch that you have everyone talking about a financial armageddon:

Buffet Struggles

Todd Harrison is 100% Cash

and, don’t forget the fear du jour:

Oil climbs peak, economies plumb depressions and the future will not imitate the past

While I agree that the next 10 years will not look like the last, I do think that there are plenty of opportunities that can be entered into in the next 6 months.

First, I have a couple of predictions:

1. The DOW should hold somewhere between 10,000 and 10,500. If it breaks that support level, even I’ll admit I haven’t a clue where we’re headed there.

2. I do think we are headed for a U-shaped recession, but that we have entered that recession 6 months ago and that we should emerge sometime in the next 18 months.

3. Oil is a bubble, but like the housing bubble, it is unpredictable. But, whatever you do, do not listen to the experts. They are called the experts because it’s up. If it were down, they’d be called idiots like bubble bloggers were circa 2005.

So, what should Boomer do with his new tax-free windfall?

I am also not quite 50% cash now with some recent purchases, but I do have a major cash position. I won’t recommend specific stocks, but there are some areas that I will generally avoid:

1. Oil-centric energy stocks. This is really dangerous because we learned from previous energy shocks, the seeds of conservation are being planted now and will grow into the future. Oil could very easily crash.

2. Look for investments that provide a cheaper way of performing necessities, or some game-changing technology that reinvents its space in a necessity. (wouldn’t we all like to find them) while avoiding consumer-centric stocks (many of which have already been trounced)

3. Small caps that rely heavily on borrowing for operating expenses. Many of these are already having difficulty obtaining financing, or even maintaining revolving lines.

Personally, I have invested most heavily in individual biotechnology stocks that have previously crashed by have a strong pipeline. Pharmas and biotech are littered with the remains and half-eaten carcasses from failed drugs, but entering after a crash for a company with strong fundamentals can provide some cover for potential falls. Personally, I stay away from pharmas with “lifestyle” drugs such as ED treatments in favor of those with candidates for life extending treatments for cancer, heart disease, and alzheimer’s. With an aging boomer population, I believe that we can still see strong growth in these areas in an attempt to “fix” the medicare problem. The companies I look for are those that don’t just extend life, but prevent deterioration of mental and physical faculties as these will be.

Any way you look at it, even investing in CDs is going to provide a better return for the next 5 years than real estate.

Boomer, sell and find a good place to park that money. Find a few funds that you believe in, or do the research yourself. All of the easy money was made and now it’s down to the nitty gritty of investing… yield, growth, and preservation. Good luck

• Boomers , predictions , Investing
• Comments(2)

Chuck Ponzi January 16th, 2008

Last year, my predictions for 2007 Southern California Housing turned out to be of all things, too optimistic. Let’s take a quick peak back at my predictions with respect to the most recent Dataquick information.

1. The bubble will or will not burst depending on your definition:

Predictions:

Sales Price: Down 5-7% correction

Sales Volume: Down 10 to 20%

Actuals:

Sales price: Down 13.3%

Sales Volume: Down 45.3%

Comments:

I whiffed this one. I believed strongly that we could encounter a credit event at some point in 2007, but as all events are, they are hard to anticipate exactly how swift they will start or end especially a year in advance. I was way too optimistic in 2007, though not nearly as optimistic as Gary Watts who predicted a 7% increase in prices.

I think that no matter whose definition you are using, the bubble burst in 2007. Only Gary Watts can’t see it, and he’s got to be the only person in the entire world who cannot see it.

2. The Subprime Mortgage market will shrink considerably.

Volume Prediction: Down 40%

Volume Actual: It has been difficult to find a reliable source that can be quoted, as even the MBIA doesn’t have a grasp on what happened in 2007 yet, it is safe to say that subprime was likely much more than 40% off from 2006. Many of the major subprime companies went Tango Uniform this year, while those that (somewhat) survived have been castrated (Countrywide total volume was halved, subprime near nonexistence)

Comments:

This again was unpredictable due to the sheer volume and speed of failures of subprime lenders. It is very likely that subprime will contract back to its 2001 or 2000 originations volume, which is about a 95% retracement. Reversion to the mean.

3. Gary Watts will not realize how bad he is at predicting things, and he will still make a lot of money this year.

Comments:

This is a no brainer. Gary Watts is quite possibly the worst predictor of housing in Southern California. Even the most hardened and staunch supporters were asking questions at the beginning of 2007. If you were completely surprised by last year, I suggest you stop covering your ears and eyes.

Still, I’d like an opportunity to offer as many workshops as he does. He knows no more about the local real estate economy than my 4 year old, and yet he’s highly paid for his “work”. So much for reporting integrity if he’s just doing it for the money. If he really believes it, I have to wonder how he’s able to dress himself in the morning. Normally that kind of mental retardation imposes some pretty stiff limitations on your ability to care for yourself.

4. We will have asset deflation with stable (high) CPI inflation.

Lead story on Yahoo finance today was titled: “Inflation Rate is Worst in 17 Years“. Housing prices are plummetting in almost every locale.  Nuff said.

5. I will be spending more time on posts

I did… I really did. Sometimes it seems like I take long breaks between, but it’s because I hold down a regular job, run an internet business on the side, am involved in community and church affairs, and I have a wife and 2 young children.

I will be following up shortly with the belated 2008 predictions. Suffice to say, it’s not going to be positive. We won’t be seeing a bottom in 2008, much less a rebound.

• Mean Reversion , Denial , predictions
• Comments(8)