[cabinboy]

The money has to go somewhere.

I have said it before on this board, and I’ll say it again…there is a lot of excess capital out there, and now that even morons understand that residential RE has clearly peaked, the money is getting plowed into the markets instead of housing. And there’s still plenty of room for more plowing. To quote a statement made in the flimsy Q3 report from one of my mutual funds:

“The U.S. consumer has a record $5.8 trillion sitting in money market funds and savings deposits. This is 50% higher than 5 years ago – at the peak of the last boom.”

Note that since the NYSE and Nasdaq have a combined capitalization hovering around $25 trillion, $5.8 trillion is not an insigificant amount of capital.

I worry that all the doom and gloomers are going to continue getting a lesson in the power of this money supply. The reason Wall Street gets excited by the interest rate pause is that it keeps fixed investments from being too attractive, promoting the flow of this capital into the stock market. If inflation and the dollar behave themselves, the FED won’t have to raise rates further, and stocks will continue to look attractive (even if the housing sector stinks). If rates go up further, all bets are off, since a fixed return that beats inflation starts to look too good to Mr. and Mrs. Risk Averse.

My prediction: The U.S. stock market will continue to do well over the next two quarters, unless interest rates are raised unexpectedly.

Why? With all the upward pressure from available capital, I don’t see a big drop in the U.S markets until corporate earnings stink it up. Earnings were good this time around, and it’s not likely they will be poor over the next two quarters given that oil and gas will be cheaper y-o-y.

Pretty simple explanation. Hopefully I’ll be like Eddie Murphy in Trading Places and get it right…:)

[cabinboy]

Bears: You might want to reconsider your position in the near term for stocks. The money we were spending on higher priced gasoline is now going out the door for other retail. Unless oil goes back up I’d bet on a strong holiday retail season. At the very least, bears should wait for additional earnings reports next week before getting out of the stock market or buying into inverse index funds.

See:
http://biz.yahoo.com/ap/061013/wall_street.html?.v=43

The markets were caught off guard Friday by a 0.4 percent decline in September retail sales. The drop reported by the Commerce Department stemmed from a 9.3 percent decline in spending on gasoline. Spending increased in other areas, however.

Malone said he believed the retail sales figure was positive because it showed consumers spent elsewhere as prices at the pump retreated. “For all the talk of the death of the consumer, that is definitely not manifesting itself.”

Indeed, consumers have grown more upbeat as gas prices have fallen. The University of Michigan’s preliminary consumer sentiment figure, released Friday, was a stronger-than-expected 92.3 for October. That compares with a 85.4 reading for September.

Noman Ali, a portfolio manager for U.S. equities at MFC Global Investment Management, said investor enthusiasm in recent weeks is tied to expectations of strong profit reports and the notion that consumers have continued to open their wallets.

“Underlying consumer strength is still pretty strong. There’s really little to worry about in terms of the economy going into recession.”

[cabinboy]

PS….

You say you are “not impressed with the Dow high” and that only 10 of the 30 are above January levels. You then go on to say that this supports a hypothesis that the market is weak. However, what if you’re wrong and it means the market still has room to rise without being overvalued from a historic perspective?

The current rally is pretty broad. Specific indexes aren’t the only thing you can look at. Just look at your mutual fund performance. My small to midcap fund is up 3% over the last month, and my mid to large cap fund is up 4% over the last month. These are broader than the Dow or S&P.

Finally, lots of folks use individual sectors as leading indicators, with varying degrees of success. Some of the biggies are keeping an eye on retail, consumer cyclicals, and healthcare. Watching transport and making inferences not as common. Maybe the flight from a predictable commodity sector like transport into other things shows optimism in more complex sectors and the market as a whole. Maybe it doesn’t mean anything.

Finally, I’m wondering if you could comment further on the timing of your flight to inverse indexes. Why did you do it before the bulk of the summer earnings reports? Do you know something we don’t? Are you planning to make 10% this month by getting in early on the Armageddon? (I say that with tongue in cheek.)

[cabinboy]

FormerSanDiegan…I do not disagree with your statement. However, “if you know you are correct about the future direction of given investment alternatives” is a BIG IF indeed.
There is a reason this board is doing better on housing market predictions vs. stock market predictions. Housing is a much longer, more predictable cycle. When someone says they have the stock market all figured out, beware!

[cabinboy]

PS…is this for real? Did you really stake your entire retirement on a single bet? Why on earth did you do that? Furthermore, are you actually going to suggest that others do this as well via your new investment advisory service? We may not like David Lareah very much, but at least he never publicly said that one should put all of their money into a single asset. You may very well win your bet with Beebo, but the risk profile you are taking on borders on insanity.
Why? Well, your doomsday predictions may be right over the long term, but what if they don’t kick in until summer 2007? The market could go up another 10% before it drops. That will hurt! You’ll be at least 25% behind anyone with a reasonably distributed portfolio. If retail does decently over the holidays (which it will), you are going to get killed.

[cabinboy]

“This success, however, carries a cost. As the number of applicants has soared in recent years, premier schools admit as few as one in 10 students, a far more selective rate compared with a generation ago. To make room for an academically borderline development case, a top college typically rejects nine other applicants, many of whom might have greater intellectual potential.”

The first sentence is a correct statement. The second sentence is erroneous (one other student doesn’t get an offer, not nine). It’s not a wonder Lereah and his cronies get to manipulate how statistiucs are presented all of the time. In general, folks in the media appear to have pathetic analytical skills.

[cabinboy]

Growth via globalization. Some of the brands you listed are already global (Dell). Others are not, and have not needed to be given the loose proclivity of the U.S. consumer. If U.S. spending goes down, these folks are going to have to grow by looking elsewhere. With any luck, they’ll do it more efficiently than folks did in the early 90’s, since there are many executives and consultants floating around that will be doing it for the nth time.

Clearly, KBH is not going to be able to capitalize in this way. Other brands will be able to. The ones that will survive will globalize. Look at IKEA and Microsoft.

[cabinboy]

This guy is a snake. Let’s dissect his statement:

“This is a normal pattern during a market correction, but home prices should return to positive territory within a few months and annual appreciation will be slower than historic norms,” he added.

1. Home prices have always been and always will be in positive territory. The cost of a home has never been negative.

2. Annual apprecation will be slower than histroric norms. Historic norms are right about at inflation. However, Lereah knows that average Jane perceives the historic norm to be 20% y-o-y.

So, Lereah gets what he wants. He makes a statement in the media that he could never be held accountable for in an court of law, and the average Joe believes it’s all business as usual.

If I were a realtor, I’d be pissed that the talking heads of my organization are a bunch of babblers whose statements are disconnected with the challenges the realtors are facing on the street.

[cabinboy]

This guy is a snake. Let’s dissect his statement:

“This is a normal pattern during a market correction, but home prices should return to positive territory within a few months and annual appreciation will be slower than historic norms,” he added.

1. Home prices have always been and always will be in positive territory. The cost of a home has never been negative.

2. Annual apprecation will be slower than histroric norms. Historic norms are right about at inflation. However, Lereah knows that average Jane perceives the historic norm to be 20% y-o-y.

So, Lereah gets what he wants. He makes a statement in the media that he could never be held accountable for in an court of law, and the average Joe believes it’s all business as usual.

If I were a realtor, I’d be pissed that the talking heads of my organization are a bunch of babblers whose statements are disconnected with the challenges the realtors are facing on the street.

[cabinboy]

And if it doesn’t, and you all miss out on 15% domestic returns and 25% emerging market returns between now and the end of Q1 ’07, will you call him out?

[cabinboy]

Our economy has weathered the recent 50% increase in gasoline prices without much of a hiccup. With fuel prices seamingly pulling back, a large % of Amercian consumers will now feel less of a bind than they have over the past year. I don’t care about the idiots with resetting I/O loans. Those folks never had a dime in the stock market or savings to begin with. They’ll simply BK before they curtail their consumption.
If the Fed doesn’t raise rates above the current level, I do not believe we will see a recession by Q4 ’07, let alone Q1. If rates go any higher, the stock market will suffer as fixed return investments simply get too enticing (they already are as far as I’m concerned). I think the dollar seems to be holding on to its value well enough for the FED to hold at a level that still encourages U.S. stock market investment. IMO, that’s why we’ve had a solid August, not because fool’s money is pouring in.

[cabinboy]

I would say that residential RE would be the worst place to be right now. The DOW is going to explore 12000 soon, while housing heads for the basement.

[cabinboy]

I agree with Chris. To talk about a recession as a foregone conclusion is not consistent with the views of many economists. Most recessions are preceded by RE drops, but recessions are not foregone conclusions after an RE drop. Keep in mind that during other RE drops, RE was at least fairly connected with underlying fundamentals. As we’ve all pointed out repeatedly, it is currently completely detached from any fundamentals whatsoever. This means RE’s current drop is not a reflection of some other poorly performing aspect of our economy. In essence, most here seem to perceive that RE is causal, where as I view it as effectual. It’s detached from fundamentals and it’s losing steam. So what? Now I know where not to put my money. And so does everyone else.
By removing oneself completely from the stock market, history tells us you are realizing about half the annualized gain you would make in a well managed value fund or Russell Value Index Fund. My favorite value fund has returned 2% in the last 10 days. 40% of my assets are in stocks. Come December, I bet ‘ll wish it was much more.
If a company misses earnings, it’s stock will go up if there is still a greater demand to buy its stock than there is to sell it. When companies miss earnings, the stock typically goes down, because institutional investors sell off portions of there holdings and put it into a company that did meet expectations. The net effect on the market is a wash. After the NASDAQ crash, when the market collectively decided to correct the P/E ratios awarded to tech companies, people gave up on stocks and went to residential RE. Now they’re going to give up on RE, putting upward pressure on other places to make money.

[cabinboy]

Relax. You’re reaping the benefits right now. You’ve fixed it up and you have a nice living situation near L.A. at 24! Most people still have beer can furniture at your age. Buy her a ring. Get married. Have a kid. Your kids won’t know the difference between renting and owning until they are 10 years old. That gives you at least 10 years and 9 months before you have to impress anyone you care about by owning a house.
If you really want to see what life is like with a mortgage and property taxes, force yourse to put $2500 in a jar for 12 months. It might help you appreciate how nice you have it now.

[cabinboy]

That plot is a bit silly. The corrleation may exist from ’96 on, but what did it look like in the last downturn? I suspect there won’t be nearly the correlation. Also, just because the S&P is dipping, that does not mean there’s no money to be made in the stock market.

Powayseller, I like your posts, but you may have reached the point where you’re a bit too in love with the outcomes you’re predicting. Your posts are packed with prediction upon prediction, each being less substantiated than the next. Most on this board agree that the the coming drops in RE prices will meet or exceed what happened in ’89-’95. This prediction comes primarily from the facts that our deviation from historic price appreciation is greater this time than the last, and the affordablity index is even lower. All reasonable. Now, opinions on this board begin to diverge as we discuss the impact that this RE drop will have on the overall economy, and most important to the individual investor, the future prices of stocks and commodities. Your doom and gloom predictions for the economy and stock prices as a whole are very aggressive, and represent a minority position even among bears (Roubini aside).
If I take Lereah’s advice and buy a home right now, I’m sure to realize a loss. If I get too influenced by your position, I’ll be 95% in cash (foreign currency, of course), and I’ll no doubt miss out on some nice gains (many mutual funds performed very well in 92-96, despite RE’s troubles). Granted, a loss is more of a bitch than an unrealized gain, but both will affect one’s living standard and retirement over time.
Be careful of falling into the same trap as the RE speculators. This board is highly populated with folks who sold RE in 2005, some by chance and some by foresight. Those that did are no more a financial genius than those that haven’t sold (though they likely do have an edge on the small % of folks who recently bought). If your portfolio of cash is not significantly larger in 2010 than it is now in 2006, you’ll have lost ground to a lot of moderates who are skilled at making money in a variety of markets outside of RE.

[Author]

Posts