Saturday, August 20, 2005

October Blues

Primer on my investment outlook

The stocks markets, for whatever reason tend to perform badly around the September/October timeframe. Its coming up soon.
Personally, I do think that next year will come with strong headwinds. The US housing market will cool, and with high (relative) interest rates, the US consumer may finally pullback spending.
As another warning on playing the short side, I do have net gains in my entire portfolio due to my energy/materials holdings. However, all my capital allocated to shorting the US markets have been wiped out..
When the markets do start going down, my predictions will turn out right, but due to my timing, I will not gain anything..

Wednesday, August 17, 2005

Thoughts on Housing

Primer on my investment outlook

Over the past few months, I have been thinking of the financial markets. In a nutshell, the world economy is dominated by the Eurozone, American, Japan and China. At the moment, the Eurozone and Japan are in a recession. America is growing strongly, but purely driven by the Consumer. Wage and Job growth over the past few years has been anaemic and Savings are at 0%. Consumer spending has occured due to huge gains in housing prices and usage of home equity as an ATM. Also, credit card debt has ballooned.
China is in an investment bubble formed due to the need of the Communists to employ the millions that are being laid off from State owned companies. Chinese banks lend money to anyone who wants it. The borrowers build factories and sell widgets at minimal profits or even at a loss. The banks pretend that they will get paid back. These widgets are sold to the US consumer.
The Eurozone as well as Japan depend on trade with the US and, to a lesser extent China. The rest of the world, Asia, Australia, Canada depend on either China (as a source of demand for raw materials) or the USA (a source of demand for finished goods) for their economies.
In this remarkable world, there live 6 billion humans, whose wellbeing depends on the continuation of an investment bubble in China and a credit bubble in the US. Ultimately this game depends on the US consumer who has shopped despite snow, rain or sun. At some point in time, the rate of increase in US housing prices will slow or even stall. Note that I am not even talking of a crash, simply a moderation to inflation rates (3-4% increases each year). Thats all it needs to cause consumption in the US to slow. Once consumption slows, a direct effect will be a slowdown of the investment bubble in China. Once this bubble slows, there is a double whammy. A slowdown in growth in China as well as in the USA.
6 billion humans depend on their wellbeing on the spending of 300 million American consumers who depend on credit from a housing bubble engineered by the Fed Chief, Alan Greenspan, who is now trying to slow or bust the bubble.. A remarkable world indeed !!

Wednesday, August 10, 2005

Readers questions

Primer on my investment outlook

> OK both stocks dont pay dividends. But how do you
> find out leverage and debt
> figures? Financial statements I suppose?

Financial statements. Also the Yahoo Finance or Morningstar page on the stock. Look for Debt (Short Term + Long Term) and look for Retained Equity or just Equity.

> I also read the part on housing bubble. 2 questions
> when you have time...
> - In my case, I bought my house in Wilmington before
> the bubble. From a
> couple of perspectives the investment makes sense.
> Income (rent) is >> than
> expense (mortgage, taxes, insurance etc.). And the
> rents are rising. They
> have risen more than 20% in last 2 years. The price
> to rent ratio (with the
> price I paid) and other factors cited in several
> real estate publications
> also look good. Another 6-7 years of rentals and my
> investment is paid for.
> So it makes sense to keep it.
> Antithesis to that is.. I am up a good 20-30% on the
> price (which is not the
> investment... investment is only what I have paid so
> far, by that standard I
> am up almost 70-80%) and thats not counting the fact
> that I lived in the
> place for 3 years + rented 1-2 rooms most of the
> time, so count that income
> in as well. Also the fact that for the next 1.5
> years this capital gains
> upto $250K are tax free so makes sense to sell. And
> the risk is that the
> beach towns in the Atlantic are hurricane prone so I
> am 1 hurricane away
> from losing just about all my gains (Insurance
> covers my house structure
> cost well).

I am negative on Housing, but at the moment there is momentum going for it. Also, you are cash flow positive so it makes sense to keep it. Perhaps you could keep the end of the tax-free period as an outer limit to keeping the house. If any of these events happens before the 1.5 yr period
a. Yield Curve Inversion - The yield on the 10 yr bond is lower than the yield on the 2 yr bond.
b. Higher 30 yr rates - The yield on the 30 yr bond goes above 7% and stays there for about a month.

These are just crude techniques to game the housing market, try to discover the top of the market and exit. Read about yield curve inversion and the correlation between mortgage rates with 30 yr bond rates.
Realistically, we are about 2 months away from a. or b. occuring.

> - Now the city I am living in now. An argument can
> be made on buying a small
> house because I am sending money down the drain for
> rent which is guaranteed
> a 'zero' return, except I have a place to live. If I
> am to buy a smaller
> house say, I more than breakeven on the rent vs.
> (interest-tax deduction)
> part. If I am able to rent out a room (at much below
> the market rate) I more
> than make up for most other expenses. The real
> estate has boomed here as
> well but not as much compared to say DC or Chicago
> or other large metros. So
> there is a small probability ... maybe even a very
> small one that I will
> make good on my investment when the bubble bursts.
> If I am to move out of
> this city and rent the whole place tomorrow I can
> get my expenses back in
> rents... even using the most conservative numbers.
> Again about 10 years of
> living (rental or me) I get everything back. Should
> I buy?

:-) There was an argument made to buy Amazon at 400$ a share and a number of dot coms in 2005. In Japan, prices in Tokyo are DOWN 70% over a period of 15 years... Can you afford that happening ? You have made a great investment. Think about exiting when you have it good.
Many investors did not exit when the stock market crashed in 2000 and saw their gains wiped out..
Housing may not crash like the stock market, but prices can moderate and fall..
On the hand, if you have a secure job, buying a smaller house makes sense..Perhaps after you take out tax free gains on your previous house..And be wary of buying condos..

Interesting articles on Housing/Saudis