Real Estate, Stocks, Bonds, Liquidity And Magic (But Who'll Stop The Pain?)
One year ago today HSBC dropped the sub-prime bombshell - the 10.5 billion dollar write-down that torpedoed the subprime market. Of course they weren't the first but they were the first major write-down. Real estate, banking and candy manufacturing are inextricably woven together. So if they are highly related what are the indicators that point towards any sustainable change? Income was up in December 1/2% but the nation is still over-leveraged (to the hilt).
Is this a base building market? The dow is down between 15 and 20% - is this the time to start wading in and building positions? Is the subprime trickle down finished? With 42% of the dow being historically driven (according to Mark Cato) by financials are we finished with the downturn? That depends on the market. No bailout will "fix" the position. The market has a life of it's own. If we are past the 50% mark on write downs (and most real professionals agree that we are) then we're less than a year from the end.
I'm not a "real professional" but I'm a real student. In September of 2007 I predicted 16 to 18 months back to level. We'll be able to breath a collective sigh of relief when the ratings agencies have their rating methods for fixed return mortgage backed securities adjusted to the new standards and we start seeing multi-billion dollar pools of MBS's selling on the global market again. When? My guess is before August but the market will be cautious. I don't expect to see 1.08 and 1.09 secondary movement like we did in the past but lets face it - most of us will be happy with 1.025 to 1.04! So why all the bad noise still in the mainstream media?
"Journalists, who probably don't get paid enough to actually invest in the stock market, are the last to know about bear markets, which is why they tend to be great contrary indicators. Once the trend to the downside is exhausted, you'll read about the bear market in newspapers and magazines. Of course, the journalists will extrapolate the last year's action indefinitely into the future. When they should be turning bullish because values have been hammered to bargain levels, journalists are convincing the public to sell." -MarketClues
CIO/CEO El-Erian (PIMCO) said this morning on CNBC "the bigger story is not what is happening today, tomorrow and next week. The emerging economies are continuing to grow. The emerging economies are not only going to be resisting an American slowdown" but will grow in spite of it through some level of long term economic decoupling. "In the past the rest of the world would slow down faster than the US." To you and I this means hope. It also means more money available globally for domestic investments and that's good for business but not necessarily good for the future of America.
More than one year ago I said (along with others I'm sure) that as these gaps in liquidity were formed by lenders and investment trusts exiting the market we would see more international investors stepping in to acquire notes and hard assets. They have, are and will continue to do so. But it does not have to be that way ...
There is approximately 5.8 trillion dollars in retail money market funds of which approximately 3.2 trillion is not committed (CNBC report) and Deutche Bank and Bank of America have both been upgraded from hold to buy. So what does this mean? Is this a signal of a turn? Well, it could be. For anyone, regardless of experience or education to state emphatically that this is the signal that the market is going good bear would be a mistake. However, it seems that many indicators are signaling the slowing of the decline and that we could well be moving into a 1 to 2 quarter base building market.
In case you don't know the base building period is where people who position themselves properly stand to find their self in a strong wealth building period for the next several months to years. Among the recommended buys today I found several recommendations of REIT's. Those, in case you don't know, are Real Estate Investment Trusts which, in part, contributed to the crazy amount of sub-prime loans that were offered over the last few years. If these Trust managers have learned their lesson I agree this is a very smart place to invest.
So what does it take for the market (and as a result our industry) to turn around? Putting just 1/2 of that 3.2 trillion in limbo funds into the active market wouldn't hurt. It won't change the amount of funds in circulation but it will boost the value of the markets it forces. So ... INVEST!!!
Where am I investing?
In this order: Single family real estate for long term holds (massive availability of product and cheap borrowed money topped off by a long waiting list for qualified tenants), Nike (60% of sales from over-seas - $1.5 billion in soccer related sales), UnderArmor (US 15% of baseball shoes, 20% of football shoes, launching a new cross trainer for domestic US), Coca-Cola (new products are ruling the beverage world), Kelloggs (packaged foods sales are way up), MacDonald's, HP and IBM.
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