Profiting from Bubbles: 'Grab Marshmallows'

What's an Investor to Do?

[But] as long as the music is playing, you've got to get up and dance.

--Former Citigroup CEO Chuck Prince

Perplexed by a stock market that (inexplicably?) is once again on the rise -- along with all manner of commodities (oil, gold, silver, etc.)?

That, despite at best conflicting economic signals (continuing weak employment numbers, constricted lending, soft housing, etc.).

You shouldn't be.

Behind the scenes, the Federal Reserve has signalled its ongoing commitment to print money as a way to stimulate the economy, via a mechanism euphemistically labelled "quantitative easing."

"Grabbing Marshmallows"

So how should investors play such an environment?

If you have the stomach, take Barry Ritholtz's advice (my paraphrase):

When the Fed adds even more gasoline to the conflagration, [investors] should grab some some marshmallows and sticks and head over to the boy scout jamboree campfire.

--Barry Ritholtz, "Do You Wanna Be Right, or Do You Wanna Make Money?"

Note to the intrepid: the trick is not waiting around for the embers.

All Eyes on 10 a.m. (EST)

July Housing Stats

[Update. 10:30 am (CST): the official number is down 27.2%. Meanwhile, the market is up just a bit from where it opened, down 100. The takeaway? Nobody's shocked.]

The big number today is the imminent release of July housing sales (about a minute away).

Judging by the stock market's first 30 minutes today -- in fact, the week-long slide -- no one's anticipating that the number's going to be good.

You'll know if the number is better or worse than expected by the market's immediate reaction.

20-20 Investing

NOW They Tell Us

Getting caught up on the various financial publications I try to at least skim regularly (The Wall Street Journal, Barron's, Investor's Business Daily, etc.), I've been struck by how many money managers claim they were nervous about the market this Spring, and re-positioned their funds to raise cash (and sell equities).

With the broad averages down 15% since then, they (and their investors) are sitting pretty.

Funny, I don't remember any of these sages saying that back then.

If anything, the consensus on the same financial pages two months ago was that the recovery was gaining traction -- which meant that earnings were sure to go up, and therefore stocks were cheap.

I remember reading once that the definition of a politician is someone who looks for a parade and then runs to the front of it.

A good number of money managers subscribe to the equivalent: name the latest trend, and announce that they anticipated it.

P.S.: So did they? It can be very hard to tell.

For one thing, money managers can be bullish one day and do an about-face the next (can you say "Barton Biggs?").

For another, many funds engage in what's called quarter-end window dressing: whichever stocks or market sectors have been the most successful the preceding quarter, is what they buy for their fund . . . the last day (or hour) of the quarter!

Shelter From the (Stock Market) Storm?

Real Estate as a Haven

Conventional wisdom to date has been that a rocky stock market bodes poorly for upper bracket housing.

That's because, compared to other Buyers, upper bracket Buyers presumably have more exposure to stocks.

When stocks take a hit, so does their purchasing power.

Witnessing the latest stock market gyrations, I'm wondering whether at least some drained investors have decided that they want off the roller coaster.

Smart investors heed one maxim: 'buy low, sell high.'

Nothing is a better value in today's housing market than upper bracket homes (it doesn't hurt that mortgage rates are at record lows -- another side effect of stock and financial market turbulence).

P.S.: a half dozen or so sales do not a trend make, but in just the last two weeks, 7 homes on or near Cedar Lake, Lake Calhoun, and Lake of the Isles -- ranging in price from $900k to $3.3M -- have gone pending.

Rays of Hope on Wall Street: Goldman Sachs Criminal Charges?

"Better Late Than Never" Dept.

No, I'm not wishing that the stock market goes down.

But at least it's going down today for a "good" reason: it's being pulled down by a sharp drop in the price of Goldman Sachs stock, which may now be charged criminally (it is already the subject of civil fraud charges).

While the criminal charges are long overdue, they are certainly welcome -- what's that line about "justice delayed is justice denied?"

Also heartening:

--Judging by the abrupt price drop today, nobody got tipped off early.

Unfortunately, it's now common practice to witness seemingly inexplicable moves in stocks ahead of significant news. So, maybe some honesty and propriety really is creeping back into the market.

--A drop in Goldman Sachs' stock -- everything else being equal -- means that the company has less money to spend on politicians, lobbyists, and defense lawyers.

Not to mention hiring (warping) the nation's supposed "best and brightest," who have responded to the siren call of Wall Street riches in record numbers the last, oh, 30 years.

To paraphrase Martha Stewart, "that's a VERY good thing."

Stock Market Today

Big Rally

Hard to improve on this assessment by Jake Dollarhide, chief executive of Longbow Asset Management:

When you have zero percent inflation, zero percent interest rates, zero percent money markets rates, and when you have metals and gold that have skyrocketed to astronomical levels, stocks look pretty good in comparison."

--The NY Times (11/9/09)

So where does that leave real estate, and specifically, the housing market?

More posts to come . . .

P.S.: Can "Dollarhide" actually be a real name?? (That of a money manager, yet.)

New Bubble, Same as the Old Bubble?

Be Careful What You Wish For

Recession-Plagued Nation Demands New Bubble to Invest In
--headline, The Onion (7/14/2008)

Like many readers, I'm delighted that my decimated (and much too modest) stock portfolio is showing signs of recovery.

On the other hand, I'm leery that the gains are for real.

As I see it, first came the 90's stock market bubble, fueled by Internet mania. Then came the housing bubble, engineered (or not) to counteract the effects of the punctured stock market bubble.

And now . . . exactly what?

The makings of another stock market bubble, to speed recovery from the housing bust?

I don't make stock market calls -- staying on top of the housing market is hard enough.

However, it's hard to escape the fact that better-than-expected corporate earnings -- supposedly the fuel behind the market's 40% pop since March -- are characterized by two things: 1) they're good only in comparison to previously lowered estimates; and 2) most companies are making money -- or losing less -- thanks to cost-cutting rather than top-line (revenue) growth.

To me, neither of those make for the underpinnings of a sustained, new bull market.

Or, maybe I'm just a spoilsport.

Bernie Madoff & the Path to Recovery

Stock Buyers Strike . . . For Good Reason

When will the stock market finally bottom?

Here's a thought: it won't be when P/E ratio's hit some magic level, or market cap's (capitalization's) become tantalizingly low, or even when the housing market finally stops falling.

It will be when Bernie Madoff is in prison, and he and his family are stripped of their -- his clients' -- assets. (Just plain stripped would be even better.)

For now, Madoff sits, under house arrest, in his $10(?) million Manhattan penthouse while his lawyers plea bargain and argue, however implausibly, that his wife should be allowed to keep $67 million now titled in her name.

And Madoff's victims?

Three months after their money disappeared, they are selling their homes to raise cash. I personally know of four such houses on the market in the Twin Cities, and wouldn't doubt that the number nationally is in the hundreds (don't expect an accurate tally, because in most cases, you'll never know).

Who wouldn't pull their money out of such a market?

What sane person would commit fresh money?

No wonder the stock market is suffering from the granddaddy of all buyer's strikes.

And that's before the debacle that has befallen investors in financial stocks, whose primacy in today's market was even greater than tech stocks' in the late '90's -- and whose subsequent fall has been harder.

"Madoff Homes"

Investors are right not to trust a market where the top securities cop, the SEC ("Securities and Exchange Commission"), outsources its "whistle-blowing" function. Actually, it doesn't even do that: when someone credible like Harry Markopolos presented it with credible evidence of fraud . . . it did nothing.

Meanwhile, our legal system allows well-heeled defendants to make a mockery of the presumption of innocence. Even if Madoff hadn't confessed -- which he did -- there'd be no doubt as to his guilt. (If it's all a big misunderstanding, somebody had quick better tell all those people selling their homes.)

In the meantime, any rational, functioning system would: 1) promptly incarcerate Madoff; 2) trace any assets attributable to his victims, and label them as fraudulently conveyed; and 3) confiscate such assets, and put them in trust for his victims. Done. End of Story.

Instead, Madoff is clearly using his clients' money to pay for expensive legal maneuvering. Instead of Madoff selling his homes, Madoff's victims are selling theirs. Watching all this, one would be forced to conclude that, at best, the authorities are impotent; at worst, they're corrupt.

The New Testament famously says "the poor will always be with us." It doesn't say anything about scoundrels like Madoff.

Until investors are satisfied that the Madoff's of the world have been dealt with appropriately, and convincing steps have been taken to assure that there won't be any more . . . don't hold your breath waiting for a sustainable stock market rally.

Foreclosure "Wipeout's" Skew Housing Market Stat's

Where: 328 Burntside Drive, Golden Valley
What: 6 BR/5 BA; 4,407 FSF
How much: $369,900
Last sale: $899,000 (3/8/07)
Tax assessed value: $757,700

Just like not all stocks have dropped equally in a market now down more than 50%, not all homes or neighborhoods have suffered equally.

In fact, one of the reasons why the Twin Cities overall is down about 25% from the 2006 peak is that, while many homes have suffered relatively small price declines, others have been near wipe-outs.

Call them the "Citigroup's," "General Motors," and "Fannie Mae's" of the housing market.

The home pictured above, 328 Burntside, is a good example of the latter group.

Sold last for $899,000 in March, 2007, its new asking price of $369,900 reflects an almost 60% drop -- and less than half(!) the current tax assessed value. And that's just the asking price; the ultimate selling price could very well be lower (because I haven't been in, I'm not going to venture a guess).

Typical of the homes that have dropped the most, it's a foreclosure.

Speaking of '97 . . .

Stocks at 12 Year Lows

4/11/97: S&P 500 = 743
2/23/09: S&P 500 = 743

If somehow you decided in 1997 that stocks were just too expensive and have resolutely remained on the sidelines ever since . . . you now have another buying opportunity (assuming you have the money and the stomach).

After today's 3.4% plunge, stock prices are back to where they were in 1997. Factor in inflation, and they're actually much lower.

I'll stick to housing, thanks very much . . .