There are several things I think merit consideration for the next installment for this space. Each matters to investors and I think all show the breadth of what we should be looking at for how they can affect the markets and our portfolios.
The first and most obvious place to start is the condition of the housing market in the U.S. While there is no shortage of people willing to assure us that the problems being seen now are being caused by a small segment of the market, the sub prime borrowers, there is ample reason to think that this is not a small thing that will be cleansed out of the economy with little impact to the overall prospects for economic stability and growth.
Those of you reading this from your homes in the Detroit area know full well by now that what is supposed to be a small problem is looking like something far larger, and far worse than some want you to think it is. A recent article in the New York Times told of a weekend sale of about 300 houses by a Texas-based auction firm where houses sold for as little as $1,300, and what had been a $525,000 home in Bloomfield Hills was sold for $130,000.
If these prices represent the new market clearing price for homes there, what can be said about the equity in homes not for sale? What might that suggest regarding the so-called â€˜wealth effectâ€™ that encouraged so much consumer spending in the past few years?
Another article in the same newspaper told of a similar situation now in the suburbs of Cleveland, Ohio. In Cuyahoga County, including Cleveland and 58 suburbs, there were 15,000 foreclosures last year, up from 2,500 in 1995. The story quoted Shaker Heights Mayor Judith Rawson, who said â€œItâ€™s a tragedy and itâ€™s just beginning. All those shaky loans are out there, and the foreclosures are coming. Managing the damage to our communities will take years.â€
Short note to investors; it is conditions like these that smart investors wait for and capitalize on. When good homes are begging for buyers, those buyers will do a lot better than when buying amid the frenzy seen a couple of short years ago.
In a somewhat similar way, I was asked recently why I would invest in a place like Thailand, given the political turmoil seen there over the past few months. Why would I choose to invest in a place where there was so much uncertainty about the future? Wouldnâ€™t it be better to wait until things settle out before risking precious capital there?
To me, much like what weâ€™re seeing in the real estate market now, arenâ€™t investors looking to buy in a distressed environment where buyers are hard to find going to buy at much better prices than did buyers who stood in line to buy at whatever price it took to outbid others just a couple of years back?
I also cite the example of the Russian stock market and how shaky things looked back in 1998, when that country defaulted on its international loans. The government was in shambles and that stock market stood at about the 100 mark. Today that market is closing in on 1,900. Of course, itâ€™s a lot easier to find buyers now, based on recent performance and the perception that things are going well there.
Much the same thing could have been said about Brazil in 2002 when President Lula took over. The vast majority of advisors and promoters in the financial media were quick to warn investors away from a market and an economy about to be run by socialists, and that was one of the nicest things they said about investing in Brazilian stocks then. That stock market fell to about the 10,000 mark and there were few takers at those prices.
In 2006, investors here plowed record amounts of money into emerging markets, and Brazil was one of the largest beneficiaries of that money flow. That, of course, after that market had soared much higher, to well over 40,000.
Take it from me. The best investment opportunities are those that few others will go near. If it doesnâ€™t have â€˜a little stink on itâ€™, then buying in at a great price will not be an option. The most comfortable and popular investments are sold at premium prices and there will be precious little profit made on them.
Another economic consideration now is the heated debate going on about global warming, or are we supposed to refer to that as â€˜climate changeâ€™? Maybe itâ€™s just me, but it seems only logical that 500 million cars and trucks running the roads around the world should have some environmental impact. And that doesnâ€™t include the noxious gases spewed into the air by electric utilities.
But one side of that debate argues strenuously that man-made machines and emissions are not necessarily to blame for rising levels of carbon dioxide in the atmosphere. Hey, Iâ€™m no scientist, so as far as I know that argument may have some merit. What I do know a little bit about is how our political system works. And what doesnâ€™t work is how much money is given to politicians for campaign expenses from large donors, often corporate interests. Wouldnâ€™t public funding of political campaigns feel a lot cleaner?
So when I hear two of the most vocal opponents of possible fixes for the most commonly accepted causes of global warming, and theyâ€™re no scientists either, I look for reasons why they stand in such strenuous objection to the environmental movement. I am talking about Senator James Inhofe of Oklahoma and Congressman Joe Barton of Texas.
And with the help of the web site, www.opensecrets.org I was able to see that both members of Congress accepted large donations in the last election cycle from the two largest polluters, the oil and gas industry, and the electric utility industry. And phone calls to their offices yielded little in terms of what they knew that Senator John McCain does not know about this, and Mr. McCain recently said that â€œthe debate is over when it comes to global warming.â€
I was told to contact Mr. McCainâ€™s office on that one. And I asked what those large political donors expected in return for all that donated money. Again, I would have to call and ask the donors, the aides to our Congress people wouldnâ€™t hazard a guess there. I also asked why the environmentalist would have reason to lie about their position on the causes of global warming. Who stood to profit from this â€œhoax,â€ and who had reason to lie? Again, no substantive answers were offered. Of course, there would be great costs incurred by those industries if tougher environmental laws were passed, and thatâ€™s a bad thing for the economy, and you donâ€™t want that now, do you?
Oh, but of course not. But if those polluters are forced to spend millions to clean up their operations, wouldnâ€™t another industry stand to benefit? What one industry had to spend would be received by someone selling cleaner equipment. So what would be the overall effect on the economy? And didnâ€™t we enact laws in the 1970â€™s to clean up the air and water, and did that tank the economy then?
Lastly, I hope some of you were able to see the video of Jim Cramer that was posted on the internet. In it, Cramer explained how hedge funds, including the one he ran in the 1990â€™s, would manipulate the price of stocks he had an interest in, either on the long or short side.
Cramer basically explained how he or another large investor would sell short shares in whatever company he thought he could make a fast profit in, like maybe Research in Motion (RIMM). He would then call his broker and tell the broker he wanted to buy a large amount of put options in that stock since he had heard some bad news that wasnâ€™t out there yet.
That might be enough to move the shares lower in the pre-market trading before the opening of trading at 9:30. He or someone else would be sure to place a call to someone they knew at CNBC, alerting them that there was big news due soon and that of course, they would want to be the first to break that news, right?
â€œItâ€™s really important to get the Pisanis (Bob Pisani of CNBC) of the world and people talking about it as if there is something wrong with RIMM, then you call the Journal and you get the bozo reporter on RIMM and you would feed that Palmâ€™s got a killer (product) that itâ€™s going to give awayâ€¦â€
Just in case any of you still viewed that network or read any other large financial media outlet thinking you were getting valuable information, keep that nugget in mind.
Investing can be, and is often a dirty business, and there are too many ethically-challenged players like Cramer out there, or those two congressmen. But if you buy for the right prices, like those nice homes in Detroit selling at fire-sale prices, or in markets that most others fear to go near, like Thailand, you may not only survive, but do very well over time.
The hard part is thinking for yourselves and going in the opposite direction from the crowd. When everyone is making easy money in tech stocks or real estate, go looking for bargains elsewhere. And when someone who is not a scientist tells you that legions of people who are scientists are wrong about something as obvious as global warming, look for why they might have reason to lie, and the economic impact that follows the time when they just canâ€™t keep the lies going any longer.
This all fits into your overall game plan for investing.
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.