[cabinboy]

Just to clarify…
In no way did I mean to imply that one should only invest in the Fortune 100. I’ve been about 50% in international over the last couple of years.
jg, I fail to understand how the link you posted contradicts what I was saying. There is plenty of growth on that S&P chart. I did not state an earnings growth number, nor did I say that earnings would be as easily had for all companies in all sectors. I simly stated that there’s still good money to be made in some sectors, and that’s pretty well reflected in that chart.
Now, on the other hand, you have predicted that Goldman and Morgan will be eating humble pie. If our definition of humble pie is getting a 2007 Christmas bonus that is smaller than 2006, well then yes, they may very well be getting humble pie. If your definition of humble pie is suffering the same fate as LTCM, well then I believe you are quite mistaken. LTCM was about as close to a one-trick pony as you can get. It is ridiculous to equate LTCM’s risk profile with the risk profile for a Goldman or Morgan.

[cabinboy]

SD Transplant…I think you’re pretty much on the mark. America’s Fortune 100 companies have become incredibly efficient at exploiting the globe for both topline revenue growth and bottomline cost savings. This is reflected in the solid earnings growth we’ve seen, and for companies that operate in sectors with decent global profit margins, this trend will continue. Watch the sectors and product lines…as they commoditize, companies will have to transform themselves just as they’ve been doing for the last 30 years.
How many Fortune 100 CEO’s are getting quoted saying, “gosh, we really have to completely redirect our business right now because we just can’t make money doing what were doing.” Housing and mortgage CEO’s are crowing this tune, but there are plenty of other sectors where you don’t hear much bitching. That’s a pretty solid sign that times are good and stocks will generally behave in accordance with the historical trend (UP! for those of you who have forgotten).
I’ve said it before, and I’ll say it again: the general sentiment on Piggington is at least one to two standard deviation units over to the bearish side. People on here were griping last summer when investment banks were projecting that there were decent gains to be had. Well, what happened? Hmmm…most of my funds are up at least 15% since last summer. Thanks JP Morgan and Goldman Sachs for your thoughtful projections. Good thing I trust your 100+ years of experience and glorious returns more than I trust people I don’t know on the web.
Folks, if in the span of 2003-2007 your portfolio has not made 10%+ per year, you need to ask whether you might be one of the people who for whatever reason significantly underperforms every major stock index. If you are in that category and you want to do better, consider listening to the guys that have been doing this since the advent of modern banking. Don’t listen to “knowledgeable” people on the web. Goldman Sachs does not have half of its assets in a double-inverse index fund, and neither should you!

[cabinboy]

jg…

I fear you may need a head examination. Going into a double inverse fund with a significant portion of your portfolio defies any explantion whatsoever. Anyone who does this is by definition working under the assumption that they can correctly time the market. You are operating as a speculator in a market that is much more difficult to judge than the housing market. You are risking up to 20% of your principal on a monthly basis, going AGAINST a significant long term trend that has existed for decades and shows no sign of going away. That is not a winning bet my friend. Heck, even the speculators who bought homes at the peak in ’04-’05 only had 0-5% of their principle on the line. You are proposing to operate in a capacity that makes these people look like geniuses.

Folks, making 10-15% a year in the markets is not hard. Obtaing a standard deviation unit above this takes special skill and a whole lot of work. Deviating below this is also challenging, but done routinely by folks who for whatever reason just can’t seem to understand how the world works. Pity. Pity.

[cabinboy]

PS, your analysis puts the cart ahead of the horse…your first two points automatically assume that the overvaluation estimates in the article are 100% certain and even underestimated for many of the markets.

Statements like:

“and then buy back in when your house is worth half. Heck, you could pay cash for the house in 5 years!”

“you would lose all that paper profit. It won’t be there in 5 years.”

assume that this housing bubble deflation is going to behave very similarly to the last. That’s still a big assumption. So, far everything looks like it’s on track to behave the same way…But, what if it just drops 20%, plateaus for 5 years, and then goes up again. Suddenly your advice is not prudent decision for a much larger percentage of folks.

The big-money cash out your talking about doesn’t exist for many of these markets. Sure, it works in SF, SD, and LA, since our homes were fairly expensive to start out with, but the guy in Duluth who bought at 65K isn’t going to bring in “the biggest payoff that you may have in your life.” Futhermore, the couple that bought at the top in Duluth for 140K and faces a potential 30% decline is far from committing financial suicide.

So, to summarize…there are a lot more factors to this decision than the little red number by your hometown. I’ve pointed out 2 of them, but there are many more (quality and location of the property being another big one that’s never considered in your sweeping analyses).

BTW, your SVP friend was likely chasing some very sweet relocation packages and made some very serious coin at each stop along the way. The kind of coin that rivals your once in a lifetime payout.

-CB

[cabinboy]

This is an extremely disappointing post. Why on earth are we discussing conspiracy theories on Piggington? Maybe we should be discussing the economic implications of 100+ IQ people actually believing that the burden of proof lies in disproving the conspiracy theory beyond a shadow of a doubt rather than proving it beyond some measure of doubt. I encourage anyone intersted to Google a phrase like “Psychological State of Conspiracy Theorists” to get an cursory assemssment of the path they are heading down.

Wall Street is one of the most important institutions in our country today. The U.S. government does not want to do anything to damage it. There is no motive for the U.S. government to do anything to damage the island of Manhattan. It’s a jewel in the U.S. crown, and anyone who doesn’t realize this quickly needs their head examined.

For every structural, materials or aerospace engineer that will say they’re suprised by how the buildings behaved, you can find one that says they are not. Remember the U.S. fighter plane that severed the tram cable like it was butter in Switzerland? Materials do very strange things under stressful conditions. The average engineer doesn’t know squat about material properties beyond standard boundary conditions. So folks, any argument from any engineer as to what they thought should have happened doesn’t prove or disprove anything. The smartest bridge builders in the world built the Tacoma Narrows bridge, only to see it collase within 6 months.

A number of folks here are quoting things that people say when they are not under oath as though it is the truth. If one can be sure of anything in our modern society, it is the fact that a tangled web of self-interests will necessarily emerge on the other side of any catastrophe. Everyone will say whatever they can to avoid bearing the burden of any liability. What do you think an engineer from the Steel company who produced the WTC beams is going to say in an interview? So please, before any of you try and use a statement as support for your viewpoint, please try and assess what that person’s motive is.

In science, knowledge is forwarded by forming a hypothesis and testing it. The difference between successful and unsuccessful scientists is the degree of thought that goes into forming the intial hypothesis. This would not be true if we had an infinite amount of time to test every possible outcome, but obviously, we don’t have that luxury. So, scientific progress is accomplished by a very careful concentration on the factors that are *likely* to matter the most.

In this forum, there are some that like to sling around the concept that one must have an open mind to every possible concept or explanation surrounding a problem. Futhermore, they go on to chastise those that do not as “close-minded.” This is just simply not true. The open mind wants to make progress towards a solution, and understands that that progress can only be achieved in a finite amount of time by eliminating the absurd and evaluating the facts surrounding the possible. The conspiracy theory developing mind is in fact the close-minded one, since it crafts a web of facts to support an intial hypothesis rather than focusing on the standard scientific exercise of elimintating the remote. Psychology is not my field, but I might hypothesize that since a closed-mind is far more comfortable clinging to a “truth” for long periods of time (even an infinite amount of time), it sabotages its search for that truth from the very beginning by constucting a low probability theory and then looking to support it (and even asking others to try and discredit it??!!?? Goofy city!).

Along these lines, I have on final bone to pick with some of the posters here…especially those who present their interpretation of some tidbit of fundamental economic data. Please make an attempt to harvest at least four distinct interpretations of this data. Right now, we know what Roubini thinks. But, what does Jim Rodgers think? What does Soros think? What does Warren Buffet think? What does Joe analyst at Merrill think? Roubini is not the only smart guy in this world, and furthermore, he’s well down on the totem pole of people who make money by interpreting fundamental economic data. Either get a clue, or get content with your +5% returns from fixed income sources, and -5% from variable ones.

[cabinboy]

Powayseller (aka Chicken Little),

Why on earth would you want to post something about a non-anonymous person that could be interpreted by other readers as negative? Jim is a realtor for his livelihood and does not have the cloak of anonymity that you get to enjoy. This is outrageous. Do not even try to recant and think that the fact you’ve dropped in some positive comments justifies presenting such an analysis of the efforts of someone who is clearly trying to do his best to keep people informed.

Folks, Jim maintains a web site that provides us a very nice and unique look at what’s going on out there. HE POSTS REAL DATA, and any prospective client can go ahead and examine that data in detail, along with Jim’s analysis of the data and what is happening in the market. There are plenty of folks in this world who will by a home for the long term even if they know $200K is going to get shaved off the top. Now is clearly a better time to buy than 2004 or 2005. Will it be better still in 2008? It depends on the needs of the buyer, and Jim has a clear understanding of the diversity of needs among his current and prospective client base.

Frankly, Poway, you need to study up on how the world uses fundamental data to predict the directions of the markets. First, understand which pieces of data and which specific sections of reports the WISE money looks at, and second, the significant limitations of using even the right data and leading indicators for predicting which way the markets are going to go. I don’t mind when your carrying on about housing- a market whose status even the general media has now caught onto, but when you start crowing about the dollar and other issues you clearly know very little about (like the stock market), I start to get a little irked.

You missed a 10% runup in stocks, as did all the other folks who were influenced by the highly effective cheerleading you do to promote your market timing plays. Please pull back a little bit, particularly when you start making assessments on non-anonymous folks that start to lie in the gray area that could easily be interpreted as negative by the casual reader.

[cabinboy]

Powayseller, I realize I did not address your comment:

“cabinboy, how did the average American do following your 4-step plan when they were buying up homes to flip? Or just buying a house at the top of the market with an Option ARM because their tax guy said it would save them on their taxes? How well off is the average investor who followed this 4-step plan?”

The average investor who was doing this was not following a solid, comprehensive plan (at least those that were utlizing high margin mortgage instuments based on *very little* cash in pocket). Many were completely ignoring a chief risk in housing: the potential lack of liquidity. These investors were obviously inspired by their (correct) belief that the near term likelihood that housing prices would increase far exceeded 50%. However, even prior to 2005, leading indicators were beginning to suggest that this probability was starting to level off in some of the “canary in the gold-mine” markets like San Diego. At that point, housing’s well established potential for illiquidity pushed the risk-reward ratio away from housing speculation. Folks more savy than the average flipper perceived this change (for example, Rich and Ben).

With obvious booms occuring in China and India, commodities became a safer choice. There’s been all sorts of ways to profit. You don’t have to just buy copper or steel or gold. For example, given the average American’s seemingly high tolerance for risk and obvious comfort with doing things on margin, they could have made an absolute killing on various commodity supported carry trades in the FOREX market (a market with infinite liquidity at any trade sizes relvant to the average Joe). People have taken risks in housing that dwarf the standard risks in FOREX (with no stop-loss!!), but the avaerage flipper had no concept that this was the case. Folks more savy than the average flipper perceived this, and have been rewarded accordingly without getting any paint under their fingernails or granite countertop dust in their lungs!

By now you can probably tell that my philosophy is that anyone who wants to beat the performances of general indexes needs to know how to profit (or at least not lose) in a variety of markets. I may be right, I may be wrong, but this is precisely what hedge funds do. Hedge funds that do not suffer catastrophic failure typically beat index funds over time. Catastophic hedge fund failures typically occur because inherent risks were underappreciated or mischaracterized, not because a specific market was entered at an improper time.

[cabinboy]

Powayseller,

From everything I’ve read and heard about Rich, he does indeed seem like the kind of person one could feel confident about using as a financial advisor. Rich clearly has a passion and intellectual curiosity about the field of economics and investing that the typical CFP doesn’t seem to have.

As far as where one should go for investment advice, I suppose it would depend on that person’s level of interest and the amount of time they want to spend managing their portfolio and gaining insights that might be helpful. I view money management and effective trading as a life long skill that is really worth knowing, so I like getting elbow deep in the stuff. Those who don’t want to get elbows deep are likely best off finding a CFP they trust to guide them.

I love the Blog phenomenon. Blogs consolidate relevant news and information on a subject in a way that has not been seen before. Piggington has clearly emerged as the best thinking person’s blog on the housing bubble, with many people delivering their careful thoughts on the subject that go beyond the news and the simple observation that many people are going to get screwed. It’s fantastic!

I do think that one has to keep in mind that since Blogs typically only serve as sources of consolidated news, they tend to focus on the reactions of major cyclic information announcements (the stuff that makes the papers).
So, avid readers of Blogs are continuously bombarded by interpretations of monthly and quarterly data in a manner that has not occurred in the past.

Now, many would say that this increase in information will naturally lead to better investment decisions. Or will it? Who knows? The greater availability of consolidated news will certainly increase the average person’s understanding of medium trend fundamentals, but will that necessarily lead to better investment decisions? Maybe, maybe not. That type of data and analysis is just one piece of the puzzle.

What’s another piece? Recall the posts and thoughts of ChrisJ, someone who is an active and apparently successful trader. He is someone that looks at trends one would find in an investor almanac and manipulates his positions accordingly. A sound strategy, with clear historical precedent.

There are many other pieces as well, and one of the things someone attempting to manage their own wealth needs to always ask themselves is whether they are seeing all the pieces that compose the whole puzzle.

What types of information do I think are underepresented in the Blogosphere? Personal accounts of successful investment managers (different from economists!). More are beginning to emerge. One that I like is http://www.dailyspeculations.com/. Victor Niederhoffer has made and lost and remade more money than 99.9999% of us will ever see. I like balancing my daily Roubini with someone who is much more applied and optimistic and observes the world through a lens of confidence constructed from a historical record of fairytale success and devastating failure.

[cabinboy]

Sorry, above post responds to doofrat, not Kev374…

[cabinboy]

Kev374…

Just to clarify…I was being sarcastic when I suggested comparing 6 month returns. Comparing 6 month returns clearly does not tell you anything. I beat Berkshire Hathaway over the last 6 months. Am I the next Warren Buffet? Nope. Luckily, I don’t need to be. He’ll sell me stock in Berkshire anytime I’m interested.

My argument is that Rich should keep the forum open since learning how to apply all 4 skills across a wide variety of markets takes many years of applied to master and has nothing to do with one’s level of education.

I’m not trying to take credit away from anyone. Those of you who effortlessly apply the 4 points know their importance and likely have the hard fought wins and losses to prove they’ve mastered them.

I agree with you that people are not likely opening E-trade accounts to run afer the timber sector based on what they read in Piggington (though it is likely decent advice). However, my hunch is that there are people out there heavier in cash than your average successful investor after listening to the very compelling arguments of some of the more bearish folks on Piggington.

[cabinboy]

PD,

It’s unfortunate that I sounded arrogant in my last post…that was not my intent. Let me repeat, I agree with Powayseller…there is significant value to her efforts, Rich’s efforts, and all the efforts of this collective blog.

The post was strongly worded only because it was meant to be a disclaimer that no one should take isolated pieces of advice too seriously without having an overall wealth accumulation and maintenance strategy. Maybe it didn’t need to be said.

I am definitely not a financial advisor. I’m not selling advisory services. I simply stated that there is a lot out there to learn and people should find these things out for themselves, if they do not already know them. I also did not include myself in the 5% of people who know such things. I do not include myself among the 5%, in large part because I do have the experience having made AND lost money in each and every investment class. (this 5% number is pulled out of a hat, could be .01%,.1%, could be 10%…I don’t know).

Now, since I’m accused of arrogance, let me humor you…

Anyone who takes their entire California housing bubble proceeds and bounces them around between the stock market and cash or bonds in one giant, undiversified chunk is simply a speculator who has little understanding of how risk can be managed to produce higher returns than even a reasonably lucky speculator will return over time.

How about another one. Financial planners are typically not among the 5% of people that know what the heck is going on. There are obviously good ones who do. I would consider a hedge fund manager who has a 35% annual return track record over ten years by squeezing the nectar out of every type of investment instrument that our fine earth offers as someone who knows what’s going on.

(I’m not that hedge fund manager either by the way, but these people exist.)

[cabinboy]

Wiley,

You and I agree. My point about the sixth months was said with sarcasm…6 months is indeed speculative.

Also, I did not say fundamental analysis does not have its place. It just needs to be applied over a suitable investment horizon. Clearly, as you point out, Warren Buffet is extremely good at this, among other things.

[cabinboy]

Bikerider…I believe it’s a product of the fact that Fox News, with it’s strong right bias, is going to remain as positive as posssible between now and the elections. Until then, they will complement and support the status quo in every way they can. Fox News has developed a very interesting style recently, wherein they have an interview on a tough topic, the interviewer states all the doom and gloom news, and then throws a softball question up for the republican to hit out of the park. It’s become so pervasive that Saturday Night Live even did a parody on it.

The forward looking statement business is a great one to be in- the only accountability is your own bank account, and your holdings don’t have to match what you’re predicting.

[cabinboy]

Also, for the Roubini fans on this site:

Given your knowledge of his predictions, what will it take for you to consider him wrong? What if the S&P500 surges another 30% by the end of March 2007? What if the Russell2000 is up 20% by the end of May 2007? Will you consider him wrong? Just curious where people would place the “he was right” and “he was wrong” thresholds given his present predictions. If we can draw these lines in the sand now, we can realistically evaluate them when the future is upon us.

[cabinboy]

Nice post.

San Diego residential real estate is crashing. New home median price down 17% y-o-y for September. That is a stunning crash in an assett class that is supposed to be sticky on the way down. To me that statistic already indicates that 20% of the top for resale homes already is in the cards…and this is before any real panic. I’ve been concerned that housing prices would not return to historic levels. This drastic drop in one year is the most encourahing data I’ve seen yet.

So, I think the California residential RE doom and gloomers will be right, and the drop will be significant enough to be called a crash when we analyze the data 10 years from now.

As for the equity bears who are completely out of the stock market, I just don’t understand the rationale. Sure NASDAQ hasn’t gotten back to what it was, but we all know that those pre-crash P/E’s were off the charts. The Dow, S&P500, and Russell2000 didn’t have nearly the peak and retrospectively obvious overvaluation, and they did not take a precipitous fall. Since ’03, the slopes of these indices have been more or less like they were back in the pre-exuberance days of 1990-1995 (coincidentally, the last Cali RE bust). I simply do not see a need for a large correction in any of these indices at this time.

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