Friday, August 15, 2008

Future Tense

The years 1980-1982 were an interesting time. We were just coming off a 20 year bear market in stocks. If you opened up a paper, talked to friends, or were looking for investment advice, just about the last thing you heard was that you should put your money into the stock market. Only 17% of American's even owned stock during those years. So looking back at what happened to the markets over the next 20 years from that point, what could have been the best possible investment class for you to be studying and learning about? Stocks.

Starting in 1982 we experienced an unprecedented run up in the value of American equities. While a big part of it was the creation of the 401K in 1984, by the time the year 2000 rolled around 84% of the country now was investing in the stock market. Many people were quitting their regular jobs to become day traders because there was so much money pouring into the market.

I like to look back at 1987-1990 as an interesting time in market history as well. A tax law was created in 1987 that severely hurt investors in real estate. A ton of properties were dumped on the market over the next few years, both residential and commercial, leading to a government act known as the Resolution Trust Corporation. This act pooled homes together and sold them into the marketplace at pennies on the dollar. Back in 1987, when real estate started it's decline, what would have been the best investment to be studying? Real Estate

In 1990 real estate found a bottom and went on a 15 year tear ending in 2006. From the year 1997 forward, if you had your money in real estate you could not lose and most likely you became very wealthy.

As real estate was just starting to take off in 1997, oil, gold, and commodities were perhaps at their lowest point in history. Money was pouring into the stock market and just beginning to enter the real estate market heavily, and commodities became virtually worthless. Oil was at $10 a barrel and gold was around $250 an ounce. I was in high school at the time, and when kids asked their parents what they should study so they could be successful, I would be willing to bet that geology was the last subject mentioned at the dinner table.

Now ten years later, as all the stock brokers have disappeared after the crash of 2000, and the real estate industry is becoming a fraction of what it was just a few years ago, who do you think is having the least trouble in the world finding a job? The geologists. Oil, mining, and natural resources are what you hear about when you turn on the news. Companies are dumping money on strong geologists and there are bidding wars for their services. The point of all this is that I spend a ridiculous amount of time thinking about and studying market history.

There are probably three areas of investment right now that are more out of favor than any other:

1. Residential Real Estate
2. Structured Finance
3. Commercial Real Estate

It may seem like I spend most of my time studying currencies, commodities, and natural resources, but that's not the case. I only talk about them the most because that's the bull market that we are in right now.

During the day I spend my time building a residential home building company. I sit in on land development meetings, I learn about putting together financial statements to bring to banks, and I learn about the systems necessary to run a large real estate company.
At night I read books about structured finance. I read about words like derivatives, CDO's, and ABS's.
For vacation twice a year I travel to different parts of the country and sit in a classroom learning how to invest in commercial real estate. I learn how to value buildings using software based on it's net operating income, cap rates, and growth potential.

Do I own a home, or any commercial buildings, or even stocks? No, my money is commodities. But I'm preparing myself for the window of opportunity that I mentioned yesterday. Just as a geologist was laughed at relentlessly in 1998, people cringe when I tell them that I spend my time learning to invest in real estate.

When will the window of opportunity open? I don't know, that's out of my control. All I can control is my preparation for when it does.

Thursday, August 14, 2008

The New Global Recession

It seems over the past week or so the general consensus of the financial professionals is that we have now entered into a ''global recession.'' They say that the slowdown, stock losses, and inflation have now become a global problem that we will be dealing with for years to come.

What is never mentioned is that all the problems with foreign economies stem from the basic fact that they have lent the United States a lot of money that we cannot pay back. Yes, they made a mistake in doing it, and there are going to be significant losses in the short term and they are going to have to lick their wounds. But what I like to think about is, what is going to happen after that?

During the subprime mortgage era of 2002-2006 it was standard procedure for banks to lend money to customers they knew had no way of paying them back. Because of securitization they were able to offload the losses onto the final holders of the CDO's, and it was only a question of how many loans could be given out and thus how much "market share'' you were capturing. Fannie Mae recently admitted their lending restrictions had become far too low during the boom, but they felt it was something they had to do because if they didn't they would lose "market share" and their stock price would suffer in the short term. Their goal was to lend as much money as possible to homeowners that had no way of paying them back.

Looking back now it is so obvious how foolish the situation was. Now that we can look in the rearview mirror, the question is; when banks finally finish taking their losses and their stocks have been finished getting beat to death (we're still a long way away), do you think they will then go back and open up the credit lines to subprime customers?

The answer is no. So, it's important to understand that the economy that we live in now is the American subprime economy. The foreign countries have lent us a lot of money that we have no way of paying back, and they are now taking losses in the short term. But once the smoke clears, and they "write us off", they can continue their real economic growth and stop throwing away money that will not be paid back. It will become obvious to everyone at that point that we are what is holding their economy back and after their short term pain they can then continue their economic growth as we collapse without their life support.

Just as Goldman Sacs can go back to focusing more on investment banking, for example, New Century Financial's doors will not re-open. (The former largest subprime lender)

The dollar is going to get pummeled, and the American stock market is going to lose a tremoundous amount of real value. Where is the stock market going to end up? Here's where:

An ounce of gold is going to be worth the value of the Dow Jones. Where will that be? I don't know. It could be:

$5,000 gold, 5000 DOW
$7,500 gold, 7,500 DOW
$20,000 gold, 20,000 DOW

The numerical value of the stock market does not matter, but it's purchasing power is going to get absolutely destroyed. It's very, very difficult for people to see this because we live our day to day lives in this bubble; Subprime America. Just as it was impossible for real estate agents to see the magnitude of the implosion during the spring of 2005. When the bubble bursts, it's going to be the greatest transfer of wealth in history, and American assets are going to go on a fire sale. There will be a window of opportunity that will open and how you position yourself now for that moment will determine your financial future.

Wednesday, August 13, 2008

Changing of the Tide

A major discussion of this forum is going to be the value of our currency; the US dollar. There are 2 major reasons why I like to focus as much attention as I do on our currency:

1. The news and financial advisors put very little focus on it's impact in the marketplace
2. It's impact on the marketplace is enormous

Over the past three weeks there have been massive ramifications based on the dollar's huge spike up, and subsequent spike down from other major currencies:

1. The price of oil has all but collapsed downward bringing with it the yearly cheers of the end of the bubble. These are the same cheers heard when oil prices fell from $50 down to $40, and $70 down to $50 during this bull market that began in 1998 when a barrel of oil was $10. The price of oil is going to $200 a barrel, and it's only a question of when we will arrive at that point.

2. The price of gold and silver have been pummeled. Similar to oil, these investments are very seasonal with their large moves up usually coming in the fall. A major reason for this is the demand from the Indian holiday season which begans in September. Also similar to oil, the cheers have come that the bubble has popped, just like when gold fell from $400 down to $325, and $750 down to $500, during the bull market that began in 2000.

3. The money that has moved out of commodites has moved back into fianancial stocks and retail stocks. This has also cause a short covering rally spiking these prices even higher.

4. When our currency is strong it also gives foreign investors confidence is investing in our beaten down financials because they feel that the money they will be getting paid back will still retain it's value. When foreigners are willing to invest in our debt it allows banks to lend more freely keeping mortgage rates lower. It also keeps treasuries lower as the money we send overseas for our debts continues to be recycled back into our country. This has helped the real estate market.

What we are witnessing right now is a short term reversal of the long term trade. We are currently in a bear market for the American real estate and stock market and a bull market for commodities. In a bull market you have long gradual rises with short term violent pull backs. In a bear market you have long gradual falls with short term violent rises. That is what you are witnessing now.

The following is a preview for a movie that comes out next Thursday, August 21. It will be shown for one night in theatres all across the country. It's a great opportunity to understand where the United States economy is headed in the future and how to protect yourself.

Welcome to The Daily Tuna

It's been about a year since I was at my office one afternoon thinking about some of the events in the marketplace. I wrote down a couple of my thoughts and sent it out to four of my friends that follow the markets, and it sparked some conversations with their thoughts. That initial conversation then led to a weekly discussion that was coined the daily tuna.

From those original four, the list has now become about 12. Some of those 12 now forward the conversation to others who in turn forward it to others. I have no idea how many people are now involved, but it's given me the opportunity to speak with many people I probably would have never met and give them my thoughts on what the future holds.

To mark the one year anniversary, I decided to make the Tuna a little more formal, and I've even decided to take the e off of Daily. With the new look, I will also become a little more vocal on my specific opinion on what the news of the financial landscape will mean to the markets moving forward. Please note that I am not a financial advisor, and any opinions that are given are just that, opinions, and you should speak with a financial advisor before making any investment decisions.

Please continue to provide feedback to the topics discussed. That was the original goal of The Daily Tuna, and I hope it will continue to provide that moving forward.