Where is the Market Going?
August 23, 2007

For a while, the US market was going up. The stock portion of my portfolio was too. Then on July 17 it started to slide. The newspapers were saying it was driven by financial stocks and "a crisis in the sub prime lending sector and the CDO and the BS markets."

I got out of the overvalued residential US real estate market before it peaked. But I didn't realize my stocks would suffer from it because I didn't realize how many companies had big positions in residential real estate.

They are down to where they were at the beginning of the year. The question everybody is asking is will they keep going down or will they act like they did in 1998, when they dropped sharply and then recovered strongly towards the end of the year?

It's impossible to predict the future, but there are times when you have to try. Now is one of those times.

I'm betting that they will continue to decline - maybe another 30%. My reasoning is simple: real estate prices haven't nearly bottomed yet - that's for sure. If stocks continue to trail real estate, then it seems more likely they'll drop that much than settle where they are now or go up again.

I'm hearing real estate stories every day. And almost none of them are good. Most of the time they are stories about people bailing out of investments, leaving banks and developers with property that won't sell even if they were given away at cost.

In Florida especially the situation is dire because of the increases in property tax, mortgage rates and flood insurance. Those three factors alone are more than most homeowners can tolerate. People are hanging on, but they are losing their grip.

DR, for example, came to me with a four-bedroom house that he bought for "investment purposes" six months ago. It was built cheaply and his cost is only $150 a square foot - a cost you couldn't touch a year ago. Since he's sunk $134,000 into it already, he'd like to hang on to it and wait for the market to turn around. But he'd have to go negative on cash flow at almost $2000 a month to do that. He can't afford that kind of cash outlay.

I looked at the deal, hoping I could help him out. But it didn't work for me - even if I were willing to take 5% on my cash, which I could get with much less risk from a bank. So DR is going to take a $13,000 hit. And the developer will take an even bigger one if he wants to sell it. That will mean that two people will be spending that much less on other products this year - cars, golf clubs, and roast beef sandwiches. There are hundreds of thousands of people in DR's position right now all over America. That means billions and billions of dollars that will not be supporting thousands and thousands of businesses.

When I talk to investors they tell me that they don't want to trade in their stocks for cash because they don't want to miss out on an upside swing. I think that's understandable, but what if the market drops another 30 or 40 percent?

Personally, I would feel pretty bad about that. That's why I'm converting my stock money into cash. I will continue to invest in real estate because there still are some great stories out there, including a recent private placement offered by Justin Ford that returned a 90% ROI in a single year.

Justin is smart. He's investing in the right local markets. I might take some of my stock money and put it there. Or buy some gold. Or invest in China.

I'm not sure what I'll do, but I'm sure I won't stick with the stock portfolios I have now. I'll look to the investment experts at ETR and see what they have to say.

posted by M. Masterson @ 3:08 PM,

2 Comments:

At 10:31 AM, Blogger T.C. said...

You guys and your "buy gold" mantra! Do you not recall what FDR did? Do you think it impossible for another president to make private ownership illegal again? THE HARVEST IS RIPE! So, think precious gems.

I will say this, though... You all are dead nuts right on with advice supposing INFLATION will be a fixture in the financial landscape for the foreseeable future. Because the mantra of our modern-day, securities-based credit system is "INFLATE OR DIE."

Were it not for "increases in property tax, mortgage rates and flood insurance" (all the pitfalls of real-estate investing ... particularly TAXES), I might suggest DR raise his/her equity stake.

Because in the end real-estate values probably will continue to rise as long as "INFLATE OR DIE" remains our "Financial System GONE WILD" mantra.

Who Else Wants a FREE Way to Expand Their Monthly Income Tapping Into a Multi-Billion Dollar Market?

 
At 10:42 AM, Blogger T.C. said...

I should like to augment your readers' consideration about circumstances surrounding U.S. stock market investing.

First, let's consider the BIG PICTURE:

The Life and Death of Long-Term Investing

Next, let's ponder WHY the stocks of good companies sometimes fall harder than "fundamentals" might otherwise deem reasonable:

The Credit Market Blow-out & The 90% Rule

Finally, let me add to Mr. Masterson's well-advised caution:

Fallout From the 2007 Credit Market Debacle: Echoes of 1929 on Wall Street

 

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