Thursday, October 30, 2008

San Francisco: 2nd best place to invest

If you're a homeowner seeing property values plummet, look to the commercial real estate market for solace. It might tell you which areas will recover fastest--and which will likely remain weak.

The Urban Land Institute recently asked 700 real estate professionals to name the best (and worst) places to invest in commercial real estate in the coming year. Those surveyed included private developers, Realtors and Real Estate Investment Trust executives. Their answers also apply to the residential market, since the single-family-home sector typically follows the economy. As wages go up and there are more jobs, more people can buy homes, pushing prices up.

The best cities in which to invest are those that are considered gateways to international investment, have vital downtowns where people can forgo cars, and don't have a glut of condos or office space.

These traits landed Seattle the No. 1 spot on the list. No city scored above a 6.15 on a scale of one to nine (one being an abysmal place to invest and nine being excellent).

Seattle is "a diversified market, has a good base of business and is becoming a 24-hour city," says Stephen Blank, senior resident fellow, finance, of the Urban Land Institute. "It's going to be in a good position to come back."

San Francisco comes in second with a 6.12. The City by the Bay learned from the tech crash of 2001 not to overbuild. There is a reasonable supply of office and apartment space, which should limit vacancies. San Francisco's port is also expected to help the city during the downturn as Americans continue to rely on Asian imports.

Monday, October 27, 2008

Question -- When is a house a bargain?

Answer -- The formula I've always used is that when you buy a house it costs you 10% a year of the price to carry that house -- which includes mortgage payment and loss of income, insurance, taxes,, repairs, etc. A house is a bargain when you can buy a house and rent it out and cover all expenses with your rent. In other words, your rent income per year should be 10% of the cost of your house.

That's the way it worked during the Great Depression. My dad, who was a top real estate man and I would go over hundreds of "breakdowns" and in those days there were any number of deals where you could buy a house in NYC that was only half rented out, and you could make money on that house. The problem was that everyone was scared to part with their money, and nobody wanted to "do deals."

There was one large hotel in Manhattan that my father wanted to buy. The hotel bar alone was covering the cost of buying the hotel. My father went to many financiers trying to borrow the money to buy that hotel. Nobody was willing to put up the money on that fabulous deal. Confidence in the future was zero. If you had any money, you hung on to it like grim death.

Are houses today anywhere near the bargain prices that existed during the Great Depression. I'm afraid the answer is "no, not by a long shot." Can housing decline that far? The answer is in human emotions and confidence, how low will it go? In this market nothing will surprise me.

What is the VIX.

The VIX (often called the "fear index") closed Friday over 70. What is the VIX? It is a measure of volatility and a sentiment indicator.

What is volatility? Some define it as the possible rate and magnitude of change in price. When prices are calm and tend to have an upward bias, volatility is low and traders feel bullish.

Conversely, when the market sells off strongly, anxiety among investors tends to rise. Traders rush to buy puts, which in turn pushes the price of these options higher. The increased amount investors are willing to pay for put options shows up in higher readings on the VIX. High readings typically represent a fearful marketplace. Paradoxically, an oversold market that is filled with fear is apt to turn and head higher.

From: DowTheory

Tuesday, October 07, 2008

90% down day in stocks: 2 days in a row

Almost behond belief, today was a second day in a row in which a 90% down-day was produced. The stock market appears to be in full panic mode.

The market, bigger than Putin -- Bloomberg -- Russia halted stock trading for the second day after a record 19% rout, with its exchanges at their lowest level in three years. European stocks and US index futures advanced while Asian shares pared declines today after Australia's bigger-than-expected 1% interest-rate reduction ignited speculation other central banks will also cut borrowing costs to cushion their economies. Russell Comment -- I expect a half percent cut in Fed Funds from the Fed and soon.

Yesterday was another 90% down day, which produced the mind-blowing number of 1973 new lows on the NYSE. In other words, an incredible 59% of all the stocks traded on the NYSE yesterday broke to new lows. This was by far the worst performance I've ever seen on the NYSE. Because 90% down-days are usually followed by 2 to 7 days of "bounce" (rallies), we might expect such action for the rest of the week. But a rally here would not mean that much, it would be just be typical action following a 90% downside day.

Fear and panic is starting to spread across Wall Street, Main Street and the world. Most investors have never seen market action like what we're seeing now. This is real bear market action such as we've not seen since 1973-74. I expect this downtrend to end with an all-out panic-type crash. That would clear the air and serve to reduce the huge inventory of stock for sale. When the store of "stock for sale" is emptied out, we will be close to the time when the institutional bargain hunters are ready to re-enter the market. That action will be characterized by a 90% up-day.

Unfortunately, all the current action is taking place below the halfway level of the 2002 to 2007 advance. Thus, the 50% Principle has been activated, and it's conceivable that the Dow will decline close to or at the level of the 2002 low (which was 7286). What I'm saying is that it's been my experience these big bear market declines tend to go further on the downside than most people are prepared for, just as the great bull market of 2002-2007 climbed further than most people thought possible. The 50% Principle is in no way part of classic Dow Theory, but I follow it because it has proved useful -- George Schaefer used it with great success during the 1950s.

I've suggested over and over that subscribers move to cash (T-bills and T-notes) and gold bullion. As for gold, I prefer one-ounce gold coins held in your possession in your bank vault. I prefer the actual possession of gold to a piece of paper stating that you own a certain number of ounces of gold. I do not expect the US government (as per 1933) to call in all privately-held gold, but it would not surprise me to see the US government halt all trading in gold.

Why would the government do that? Gold is the enemy of fiat paper, and the Fed is going to print one hell of a lot of Federal Reserve Notes. The coming deficits will be staggering, and ultimately our overseas creditors may insist on partaking of our gold hoard (as did DeGaulle) rather than accepting an endless amount of fiat paper, which can be created "out of thin air" by the Federal Reserve. I see a coming battle of fiat paper vs. gold in the future, and gold (real Constitutional money) will be the winner.

I can tell you that it's going to take a series of trillion-dollar budget deficits plus enormous government spending programs as the Fed attempts to turn the contracting US economy around. Mr. Bernanke fears potential deflation like the plague -- the Fed can halt inflation in its tracks (remember Volcker?), but once deflation takes over, deflation is extremely difficult to reverse. Russell suggestion -- We must start a huge rebuilding program (as per the Depression) to repair the crumbling infrastructure of the US -- highways, bridges, buildings, city streets, with a strict overseeing board to rout out corruption.

Currently, the US government attacks its citizens via two phenomena -- taxes and inflation. We must get rid of the Fed, the engine of inflation.

You doubt that deflation has crept into the US economy? Then please study the chart below -- this is the CRB Commodity Index, and it's currently plunging.