October 19, 2008

Seriously, in theory, even though prices are plummeting, doesn't it feel CONTRARIAN now to buy a house or to buy stocks?


And doesn't that make you wonder?

Usually when I see all the sheep going one way, I stop in my tracks and make sure I'm not with them.

Baaaaaaaaaaaaaaaa......

Aren't the sheep all going the same way now?

And doesn't that make you wonder?


In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.

A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability.

Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. Conversely, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don't pan out. Avoiding investments in over-hyped investments reduces the risk of such drops. These general principles can apply whether the investment in question is an individual stock, an industry sector, or an entire market or any other asset class.

Some contrarians have a permanent bear market view, while the majority of investors bet on the market going up. However, a contrarian does not necessarily have a negative view of the overall stock market, nor does he have to believe that it is always overvalued, or that the conventional wisdom is always wrong.

Rather, a contrarian seeks opportunities to buy or sell specific investments when the majority of investors appear to be doing the opposite, to the point where that investment has become mispriced. While more "buy" candidates are likely to be identified during market declines (and vice versa), these opportunities can occur during periods when the overall market is generally rising or falling.

100 comments:

oc bear said...

I don't think that we are at the bottom yet is stocks or housing. It amazes me how people expect their 401K to bounce back next year and their house is "different" from their neighbors. When I see CNBC commentators capitulate then I'll know we're at the bottom.

Anonymous said...

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I have found myself thinking the same thing, but it is simply too soon.

Just like the boom lasted longer than it should have (and prices kept going up), the bust won't be over for a long time as well (and prices will keep going down) ...

G

seeker said...

There is still a good amount of money on the sidelines waiting to jump in. The sheep aren't shorn yet.

I believe this is indicated by the VIX. High volatility == high uncertainty. I think the time for the contrarian is when the VIX is low and there is a lot of value.

Anonymous said...

In 1929, that's what everyone thought too, this is a buying opportunity. But alas, in the next 4 years, the shit hit the fan as stocks continued their long winding slide.

You can buy now, and hope we hit the bottom, but from my perspective, the bottom is still a long way off.

With credit cards running rampant nonpayment, banks are going to be hit again.

The auto industry can't sell and the cars people did buy are going unpaid. The repo man is very busy.



People are starting to fill up parking lots at night sleeping in their cars hoping the repo man won't find them.

Unenployment will rise, food costs are skyrocketing.

The crash is yet to come.

Then, buy stocks.

As it is, I am sitting with cash, watching.

GreedKills said...

When you read an article that calls for the sheeple to be "contrarian"...you know it's just a pump and dump. Late-night infomercials are using the word "contrarian".

Try it for free if you don't believe me. Take up Detroit on an offer for one of their "free" houses. Then get back to me and let me know how that works out for you.

Chicago Wise Guy said...

I live in Chicago and I think now is still not the time to buy. A lot of overpriced houses, condos, townhouses are sitting on the market (anything over 350K). A lot of other properties below 350K are sitting and some are selling (a buyer gets 10K to 15K and they think they got a great deal). What a dope. There are some people at work who are jumping right in. I tell them the facts and they just want to believe the MSM and Realtor Kool Aid; "oh, now is such a great time to buy a house".

Anonymous said...

While it is true it would feel contrarian now, I still think it is early.

Many people still think a rebound is just a year or so away.

This false thinking needs to be wrung out of the collective thinking.

I would not say a lot of people are optimistic, but despair has not yet been achieved.

CrisisGuy said...

Being a contrarian, I gotta say that my contrarian radar isn't lighting up yet. House prices in the two areas I'm waiting to make purchases on (North L.A. County and Vegas) have not dropped to an acceptable level yet.

If the current downtrend of 1-2% a month continues then I expect my radar to start blaring about 24 months from now(30-45% decrease from today's prices). There's going to be 3-6 months of over adjustment around that time anyway so no hurry.

Unlike housing, stocks are more volatile beasts to mess with. Alot of stocks in the financial industry and even housing are shot to hell already and will most likely yield 2-3x or more your money in about 5-10 years. Tech stocks are nowhere near their bottom(another year to go for those I reckon), same with consumer discretionary.

There will also be a stagnant period when the market bottom is here so there's no real hurry. I figure a 1-2 month 7500-8000 Dow is a no lose period for buying if you can wait 3-5 years for profits.

If you're a daytrader, you're basically trading what little hair you have left for a ton of up and down adrenaline rush sessions until the bottom.

These are just my thoughts on this wacky situation we're in.

Anonymous said...

Yeah but you forgot that there's still a huge amount of sheep thinking that we've hit a bottom. Do you think that after seven years of excesses that we'll hit a bottom in a matter of two months and back to business as usual?

I think that you forgot the detail that stock returns are based also on EARNINGS. If nobody has a job to buy a product, why would you jump so soon on the stock of the company that supplies it?

See, this little get-rich-fast-ponzi scheme of jumping back in the market after one of two big nosedives is expected, too oversold by talking heads. There's no blood in the streets yet. Does it feel like people are lining up for soup yet? Not really. So where's the crash; where's the pain? Capitulation without tears isn't a true capitulation in my book.

I see many people jumping back too soon, when many stocks and funds are still with P/Es over 20. Is that cheap?

Anonymous said...

You've gotta wait for the layoff people to start losing their homes. That's the second wave, which just started in NY, San Jose/San Fran, etc. The layoffs in the tech sector are just getting warm.

NBC Universal just announced a huge restructuring. No wonder, who wants to watch that crappy MSNBC with angry lesbos bitching all night about Palin.

Anonymous said...

Does it feel contrarian to buy now - yes absolutely. Did it feel contrarian to buy Enron at $5 /share - yes absolutely. It felt even more contrarian at $1 a share. Ask yourself if this economy feels more like an Enron (a complete disaster) or something else. I see nothing that would indicate anything but a complete disaster.

My predictions:

Many, and I mean many, long standing corporations will go bankrupt. Some have already gone and some are really close, but we have only touched the surface of that so far. Trust me, it's coming.

We will continue to dig ourselves into a deeper hole with even more bailouts; spending and borrowing to solve the spending and borrowing crisis. Ask yourself if that makes any sense and if that type of solution makes things better or worse. The answer should be obvious. If not, stop reading as there is no hope for you.

Commodoties, stocks, and bonds will continue lower (believe it or not) as hedge funds get more and more margin calls and redemtion requests. Declining markets will feed on themselves until the mother of all investments (hedge funds) either stabilize or go away. Good luck on betting when that will happen.

In the meantime:

Throw away your charts, indicators, and "feelings" as they won't work in this type of market. Those things contain so many distortions from years and years of lies and misinformation that they now are void of any meaning. My favorite, the VIX, is currently at 70 (off the charts). Anyone who has used the VIX as an indicator to buy (in the last month or so) has gotten burried in this market. My point is that in this market, traditional thinking and methods don't work. They also failed to work at the onset of the Great Depression. Have we learned anything since???

And:

If you really think that you're being contrarian by buying at this level, ask yourself how it is that we recently had a record 935 point advance in the DJIA. Seems like we had an awful lot of contrarians buying on that day. Again, do you see the irony? If everyone was buying, it couldn't be contrarian.

So:

Everyone seems to be looking for a bottom to buy into. As a contrarian knows, the bottom will occur when no one is looking for it. The vast majority will have given up. Thats just not the case yet and I would argue that it could be a very long time before that happens.

I'm still on the sidelines, have been since DJIA 14,000, and will be for what looks like now quite some time to come.

Good luck to all.

keith said...

So, answer the question folks.

Is it contrarian to buy a house or stocks today?

Yes or no..

I vote yes.

That said, if you buy a house or stocks, you could get slaughtered. The sheep are all heading one way, and that's one reason prices are plummeting. Everyone just wants out.

The question will be - what is the maximum point of sheepishness? When does the last sheep sell?

Be contrarians, but don't be contrarian too early. Markets can stay irrational longer than you can stay solvent.

But be ready. That day, finally, will come.

Watch for it.

Andrew from Russia said...

> Is it contrarian to buy a house or stocks today?
> Yes or no..

No. Dipsters are not THAT contrarian.

the german dude said...

i went ahead and bought some stock the other day...will gradually shift more money into stocks over the next months...of course never more than 50% of my portfolio....

eric in vegas said...

It's not time to buy yet, not even close. Everyone around talks about how cheap houses are now that they're 25% off peak prices and all the houses are going to be bought up in a few months and we're going back to the moon next year.

Anonymous said...

"Is it contrarian to buy a house or stocks today?

Yes or no..

I vote yes"

Nope, the anxious couples who were priced out a couple of years ago, in the bubble corridors are all looking to jump in on their starter homes despite the precarious job markets.

Then, the 401K holders, who'd never seen a bad year other than '01-'02, want to increase their exposure to make up for the recent loss as if losses were only a function of a credit crunch. This is key to not understanding the real economy.

If anything, this is the blind man's bluff. The sheeple have no clue as to how a decade of the wide open credit spigot has induced a dislocated economy based upon hot air and little else.

All and all, until I see the dividend stocks become the new blue chips and the average buyer stops loading the train on the popular picks like Googs, Aapl, etc, then the mainstream has gone contrarian isn't valid yet.

les said...

Sometimes it's the stray sheep that gets eaten by the wolves.

Or

No time to be a contrarian when the house is burning down.


Honestly, we have a long way down. The US Govt and the Fed are desperately trying to sustain consumption levels built on 15 years of ridiculous credit expansion. The US Govt and the Fed should borrow the WWII 442nd Infantry slogan "Go for broke!".

i've had it said...

The recession is just starting to ramp up so it's not the time to buy a house right now. Companies are starting to go bankrupt (non-financial). In the Boston area, two well-established regional audio/electronics companies are going bankrupt or closing: Tweeter and Cambridge Soundworks. These were well-branded, well-entranched chain businesses for years in that area and now they are going under. On a national scale we've got Linen and Things, and I believe Circuit City is on the chopping block. On the tech side, software giant SAP has put out an internal memo saying it was ceasing all new hiring, not doing any internal transfers, and cutting costs.

We will hear more and more of this as we go forward. My point is that the economy is going down, and along with it so will the stock market and housing prices.

So, I don't think we're near a bottom. Granted, no one can call a bottom but it just seems to me that we are still a ways off. Also, I think once we hit it we will be there for a while. No "V" shaped recovery; more like a long "U" shaped one, so there will be plenty of time to buy a house later.

Anonymous said...

When I think that we can generally expect some good economic news, I will buy.
Right now I don't expect any for a long time.

a.creampuff said...

No. All I hear is "it's a great time to buy", people thinking about buying or actually pulling the trigger. It's nuts. Where I live, house prices have relaxed a notch, but are still overinflated. For me personally, it's gone from absurd to just out of reach. Still waiting on "affordable" much less "bargain". I'll allow that other markets may be more favorable - don't know.

W.C. Varones said...

It didn't pay to be a contrarian on the Titanic.

keith said...

This week we get earnings from yahoo, apple and conocophillips.

Should be interesting.

I think many of the hedge fund redemptions will be leveling off now, and so the market focuses (rightly) on fundamentals going forward.

Some will sink, some will swim.

Find the swimmers. The big will get bigger. The small will go away.

Especially when it comes to banks. This crash is the best thing that ever happened to Bank of America and Wells Fargo. Their competition will go away, and they'll be left standing.

I don't own 'em yet but I might soon.

keith said...

Also, I'm heading back to Phoenix for a week in December. I'll look around a bit.

If I see a home, decent neighborhood, 50%+ off the peak, positive cash flow, ready to rent, I might have to take a look.

Anyone want to post a listing like that here, fire away

I'm not sure if homes in Arizona, even after a 50% haircut, are seeing positive cash flow. And rents will keep falling as the Arizona economy collapses, so you'll have to use projected rent in 2010.

This may not yet be the time to buy (anything) but it's definitely the time to start looking.

Anonymous said...

This is bigger than a normal cycle. The shit is really going to hit the fan this time. The next leg down starts when the bond market revolts. The US wants to just bail this thing out... thing is, we don't have money. Eventually the Treasury market is going to figure that out.

Run the numbers. At $~13T GDP and a 20% tax rate, there's only so much debt service the UST can produce. At some point, the Chinese, Japanese, Arabs, and Russians are going to figure it out: "Short of massively devaluing your currency, you just can't pay me back. 4% for 30 years doesn't work... lets try 15%."

Then the whole mother comes tumbling down...

gutless and lazy said...

It's not 1929. This crash will not be the same. Today, all things happen much faster. Crashes happen faster. Stabilization happens faster. And RECOVERIES happen faster. Those who remain permabears will be the new sheeple. I'm not saying it's gonna be a V shaped recovery. I'm not saying the inflection point is NOW. I just agree with Buffett that "those who wait for the robbins will miss spring." HPer's you need to change your mindset. And change it NOW. Repeat after me: Cash is Trash, Cash is Trash, Cash is Trash. And be ready to change for investments out of cash. Change is the only constant. Remember ... Cash is Trash, Cash is Trash, Cash is Trash.

Don't try to catch falling knifes said...

Keith,

I can't believe that you were so right about the housing bubble all along and that now you want to declare a premature "All Clear" signal.

Have any of the underlying economic problems been corrected yet? NO!

Have housing prices returned to levels that can be supported by the rapidly declining wage base? NO!

Have the glut of Alt-A and Pay Option mortgages reset yet? NO!

Have the glut of foreclosures been cleared from the market place? NO!

I can't believe that you have been so right for so long, only to "go all wobbly" on us and recommend buying "Falling Knifes" when the crash has barely begun!

On your trip to Phoenix, be sure to investigate all of the Condo Towers and conversion projects that have been halted and scrapped mid-stream because they could not be sold or even rented out!

This is not the time to "go all wobbly" on us. Please remove your blinders and take a broader look at the economic devastation that is encompassing the globe!

In the 90's S&L crisis it took 4 years for housing to bottom. This crisis is certainly at least twice as bad and certainly will take longer to bottom.

Anonymous said...

I went all cash in May 2007. This was when the talking heads on CNBC were taking about when - not if - dow would it 20,000.

I am ow 35% in stocks, having bought in the past 2 weeks. I'm going to wait and see what happens this week and next but my plan is to be 60% stocks by year end.

When the dow loses almost 50% in a year, that's a buy signal for me. It could easily go another 10% down, I know. But I'm investing for the long term. And I'm failry confident that buying when the dow was at 9K, 20 years from now, will look like the best move ever.

As far as housing goes, I'm seeing houses sell briskly still. I keep wondering where this whole credit crisis exists. Houses in my neck of the woods are selling within a month of going on sale. These are houses in he $350K to $500K range. Upper middle class suburban area, with lots of professionals. I also see restaurants busy, mall parking lots full and lots of new cars everywhere.

If there is one thing I've learned is this: things are never as good as the media says and things are never as bad as the media says. I remember in 2004/2005 thinking where are these 100% house appreciations taking place that I see on the news every day? Wasn't happening to my house. And now I see on the TV that everyone and their brother is in foreclosure or laid off or about to be laid off. I don't know anyone who's in foreclosure myself and can't say I know anyone who's out of a job either.

So being a contrarian is definitely a wise idea. But not so much by doing the opposite of what others are doing, but by doing the opposite of what the media thinks you should be doing.

keith said...

This is NOT an all-clear. I think housing prices will keep dropping through 2010 or 2011.

That said, there might (MIGHT) be some good deals out there. It's time to start looking.

Nobody can get a loan. Sellers are desperate. Banks want houses off their books at any price. Foreclosures are everywhere. And the government hasn't disrupted the market (yet).

HP'ers are in the drivers seat, starting now.

Got it?

Patience. But start looking. Report back.

Over here in England, we're just starting the long leg down. You would have to be a total idiot to buy today.

But America, after 50%+ crashes, is on sale. Go shop. Report back.

Anonymous said...

Nobody can get a loan.

=======

Not true. Plenty of people can and are getting loans. Someone with a 500 fico cant get a loan anymore. Someone with a 650 fico can, just at a little higher rate.

Miss Goldbug said...

I can't believe it....

My BIL told my husband yesterday that he is afraid to buy a house now.

Him and my SIL are NOW telling us he's absolutely certain it's the wrong thing to do....

We've been telling them since 2006 not to buy, but they have been look at places off and on, and have put offers on at least two places but were rejected because both sellers said there offers were too low.

Now, one of those houses is in forclosure...

Times are changing. I think 70% of buyers know something is wrong with the market and refuse to buy, while the other 30% don't get it- but will...as soon as they buy a place. They'll realize they made a fatal mistake.

Don't try to catch falling knifes said... said...

Over here in America, we are also just starting the long leg down. You would have to be a total idiot to buy today.

Miss Goldbug said...

Anon said:"The auto industry can't sell and the cars people did buy are going unpaid. The repo man is very busy."


Agree. My husband saw a flatbed tow truck repo the neighbors Explorer a few days ago here in Alameda.

We will see this more and more as people get laid off and cant make those payments anylonger.

Anonymous said...

Kieth, I agree with the sheep concept. But think about what has happened since Lehman collapsed in mid September - all out flight away from assets. There's still no where good to turn.. way too early to call a bottom, or contrarian play. Keep the powder dry.

Miss Goldbug said...

Now is not the time to buy anything.

Two bay area companies-

Mothers Cookies and Mervyn's went bankrupt this week.

Everyone is talking about it. I see LOTS of empty office space in Mariner Square Business Park-here in Alameda, so much more than 5 months ago.

Yahoo and Ebay going to have massive layoffs soon.

Everyone is talking, and getting very scared.

Paul E. Math said...

I don't know about everyone else, but I am not contrarian just for the sake of being contrarian.

I think for myself and if all the sheep are headed for the oasis with the free beer and and sandwiches then I may check and make sure that it's legit but, if it's legit, then I'm right there with the sheep.

Like you've said yourself, Keith, the perma-bears and the perma-bulls get burned.

DANM said...

I'm doing pension consulting and every friggin' insurer is showing the same comments: stay put.

The all show the same stats with markets declines during past shocks and months of recovery. And they are all very selective in their shock periods. None of them show the 70s or the depression!

Honestly, nobody around me is spooked. They're pissed but they're jumping back in.

There is still too much cash sloshing around. I think market correction phase 2 will do the clean up work our leaders are not ready to do.

Afterthought said...

I'm not a contrarian, I'm a bear.

My "Big Picture" stems from the following:

Post WWII, America was the only industrial power not in ruins. We got used to that lifestyle and called it "Normalcy".

By the 70s the party was over, Carter tried to get us to be forward thinking but that was a loser with the idiot public who proceeded to elect an actor. The actor did two things:

1) He borrowed his way to a growing GOP,

2) He cut taxes and then changed the accounting rules so that Social Security was included in the overall budget. I.E. he didn't save for the Boomer retirement.

That was an expedient to DENY the loss of post-WWII greatness.

Now that the DENIAL strategy has come to an end, and we are 30 years too late to get with Carter's program of limited militarism, alternative energy, and reversing the population explosion.

America is in a very perilous Geopolitical situation: if Russia joins the EU, we are going to be a second rate economic AND military power with a competitor that neighbors the oil belt from Morocco to Uzbekistan. We must hope that they don't wise up; hope is not a strategy.

Anonymous said...

Keith, Time to buy is when valuations overshoot on downside like they did on the upside. S&P PE is now about 15, thats way too high, in 70's and 80's it went below 10 to 7. Also the public is "hoping" stocks come back because "they always do" so you need a public washout and stocks become a curse word. Hedge fund liquidation is past news. Keep your eye on long only funds and the public, that is the next phase

keith said...

Index funds are for lazy people

Right now is the time to do your homework and find the gems

Get to work

Or not

wings said...

WORDS OF WISDOM FROM WINGS:

Being in favor of the flavor-of-the-month octogenarian contrarian point of view, I proffer you nuggets and gems of great price: almost free (unless, of course you pay for satellite radio or cable TV!).

I've gotta say, hey, yay! My contrarian radar isn't busted nor is it lighting up yet like Rudolph the Red Nosed Reindeer's nose.

Prices of rice in Costco make people want to scramble to learn how to farm rice in Thailand for a living, giving them ample supplies of the grains for pudding and chow mein. Notwithstanding, of course, General Chow's famous plate of fine aromatic goodies!

In the two areas I'm waiting to make purchases on (L.A. Ghetto West, and the roughest parts of Vegas), I have noticed the amounts have not dropped to an acceptable level yet. This makes me angry!

So angry, I lined up twenty huffy birds outside of the house sales office in Vegas and had the birds puff out their chests and flap their wings in anger saying, "SKEEP! SKEEP! SKEEP!" for about two hours.

Needless to say, all of the agitated huffiness and angry puffery of the birds made people mad. A crowd ensued. Out came the hoes, rakes and torches. The landlord was chased down the street and everyone had a party afterward: they ate smores, roasted marshmallows and sang happy songs!

No, they're not gay. They just like fun and frolics and whimsicality over economic chicanery. They're blessed creatures. Simple. Sexy. Suave and sophisticated. Jejune, if you will.

If the current downtrend of 1-2% a month continues then I expect my radar will explode into a million shattered shards of broken dream.

I dare to dream of a great society. I dare to see birds of great huffiness flap their winglets in unison and wholesome whole wheat toast herbal shampoo greatness.

To start blaring about 24 months from now(30-45% decrease from today's prices) is a travesty and counterintuitive abrogation of fincial responsible wizardry. Hazard a guess in that direction and you might as well be a grizzled, old wizened fool with a staff, Druid-like on a mountain, getting struck by lightening.

There's going to be 3-6 months of over adjustment around Christmas time anyway so no hurry to flurry your way into the market.

Unlike housing, stocks are more volatile beasts to mess with when their fangs are blazing to tear you a new one.

Alot of stocks, like socks hung by the chimney with care, fair well with fair weathered financial industry friends and drunken sailor husbands and hussy wives.

Even housing stock are shot like buckshot pellets, Swiss-cheesed to hell in a handbasket: basket cases ready to yield 2-3x or more your money in about 5-10 years.

Tech stocks are nowhere near their bottom wreck (another year to go for those I reckon), same with consumer discretionary hos and bros that go wit da flow, ya know?

There will also be a stagnant period when the market bottom mistaken for a top and people's hearts fail and are shaken to bits of flambayed outmeal mush rice pudding treats for Santa.

There's no real hurry people. Be surreal, like WINGS. The market is; Bush is; Obama is; Greenspan is; all the federal handout people are becuase they always have a paycheck and health insurance. Everyone else is scared and losing their jobs but slaves to pay taxes so the federal people are cozy, warm, safe and have fat pensions.

I figure a 1-2 month 75000-80000 Dow is a win inflationary period for buying if you can wait 3-5 hours for hyperinflationary profits.

If you're a daydreamer, you're basically trading in an intellectually masturbatorial way with the little hair you have left making you look like the proverbial Gerber Baby.

A ton of up and down adrenaline rush sessions make your three remaining hairs stand on end, just like the Gerber Baby.

Until the bottom, you'll sit there drooling on your shirts, rattling your rattle, three Gerber Baby hairs standing on end saying, Ga Ga! Gee Gee! Goo Goo!"

And that, folks, is life in your newfangled economy!


KAGUNGA!

These are just my thoughts on this wacky situation we're in.

sundry vermin said...

Regardless what you think of his politics, the man knows money.

http://www.georgesoros.com/how-to-save-finance101308

DANM said...

Cash is Trash:

- If we get deflation. M cash gains value

- If inflation creeps up, everything mid to long term gets wiped out. Credit spreads will shoot up in the beginning and asset prices will tank before they start going up with inflation.

I'm sitting on my stash until I actually see inflation starting to get priced into asset valuations and EPS forecasts.

If you look at the Weimar republic, inflation took a couple of years to kick in. People did not see it coming. Yet the writing was on the wall. They had war debt repayments coming out their ying yang.

I think we have plenty of time. Rates are so low everybody is desperate for returns. There is no patience out there. Time for a second hit.

k.w. - Southern Ca. said...

Even when these over-priced houses are back to sane pricing, they are built so poorly that they still present a huge financial drain on anyone niave enough to purchase one.

I'm appauled at the houses that were build here in HB Ca. over the past 10-15 years, very poor workmanship. I don't see them lasting even 5-years without major renovations.

Housing has really turned into one of the largest tragedies across this entire nation.

DANM said...

One reason why I think investors will get wiped-out is because the entire North American retirement scheme is based on a flaky concept.

ALL Americans are being told to overweight equities, yet our equity markets represent only a subset of our economy total economy.

The head scratcher is why are equity markets generating better returns that the general economy? We have to question whether these traded firms can keep on generating such gorwth. In my analysis, the game has been rigged to generate the 9% growth but we're now at the end of it.

The irony is those with the best retirement plans, with a good weight in those high performing equities, are those of public servants. And something tells me their work is not generating 9% growth.

The system is compeltey out of whack. The wrong people are getting the gravy every everywhere you look. You can't borrow for retirement, so the shakeout is now upon us as the Boomers are starting to retire.

sundry vermin said...

>HP'ers are in the drivers seat, starting now.

Hey, I like the sound of that. Went 50% into the equities with a crapper load of dry powder I had stored up. Will go another 25% this week.

I had been getting frustrated with basically zero percent in CDs, but was fairly certain this day was coming. Glad I was right. This seat be feelin good mf'ers!!!!!

In two years sell off a chunk and pickup some RE.

Paul E. Math said...

"Index funds are for lazy people."

True. And they are not as profitable as buying individual stocks (or shorts).

But I still think they have their merits.

For one thing, index funds are safer. I could study a company but there could be some little detail that I miss or if they are engaged in some financial alchemy (like what Enron did) then I could get really burned.

If I, say, buy into a Proshares consumer services short fund then I'm shorting the whole industry. While there will be some hotels, restaurants and retailers (say, mcdonalds and wal-mart) that are part of that index and will thrive in the downturn, the overall trend across the consumer services sector is nonetheless downward.

This is lazy, yes, but also, if you're right on your macro conclusions, effective. Take a look at SCC. All you had to gamble on was that we were heading for a recession last december, and that was a pretty safe gamble even if we factor out 20/20 hindsight.

Someone might have made a killing with this SCC. Sure, they probably would have done better to directly short, say, starbucks, but buying SCC is sooo much easier.

Property Pro said...

Buy, buy, buy!!!

Well it's safer than leaving your money in the banks right now.

:)

vanilla ice said...

It takes a long time for sheep to go in one direction. Once going they go for a long time. We are making the turn now and will overcorrect.

Anonymous said...

"...WORDS OF WISDOM FROM WINGS:..."

Why, Keith?

thingamajig said...

Paul E. Math,

I've been reading this site since 2005 and you seem like a well measured and reflective young man. And I think you know equities much better than myself.

Here's what I'm getting to. Would you drop a couple of your top picks here for some of us less studied in stocks to benefit from?

In fact I'd be interested if Keith or Mammoth wanted to drop a couple hints also. Generally though I'd like to avoid Dopes' input and the general peanut gallery.

What do you say Paul, Keith, Mammoth. Can you give a brother a hand up?

Anonymous said...

My Realtor told me:

NOW IS A GREAT TIME TO BUY!

Do you think they are telling the truth?

Anonymous said...

George Bush and John McCain said

'The economic fundamentals are strong'

Do you think they are telin me the truth?

DIE U PIGS

Jeff said...

I've been considering gambling on Bank of America. If America, the country, survives, so will BAC. It was ridiculously low a week ago. And they own my credit card debt, so it's a way to get back what they've been getting from me for so long. :)

The Best Damn Windows Server 2003 Book Period said...

When all hope is lost in housing & stocks. That is when you get in again. At this point there is still hope of a recovery in housing prices and stocks so therefore no bottom yet. Allen Greenspan said that this was a once in a century storm after the fact.

area 51 said...

No,
it's stupidarian....

I agree with "greedkills"
Everyone and their brother is saying it's time to buy due to all the negative sentiment.

You're not some kind of contrarian thinker, just another of the crowd all saying the same thing.

Anonymous said...

Rent to mortgage ratio tells it all. Some places make sense and some don't. Personally I have rented and owned and I prefer renting and letting someone else deal with the maintenance, repairs, upkeep and bullshit

Anonymous said...

Phoenix is still overpriced even in the foreclosure market.I would wait till prices get to late 90's levels.Everybody who is underwater in their mortgage is trying to do short sales and foreclosures will still be piling into the market as the market declines more people will not see a reason to hold on.In some of the outlying areas of phoenix metro prices have already hit 1999 levels that's a drop of approx 60-70%.Steeper declines for Mesa,Gilbert,Scottsdale ,Tempe,Phoenix yet to come.

Anonymous said...

Keith is starting his pump job for Obama.

Baah

Anonymous said...

With the all the markets melting down, I've had to push forward the year of my retirement. The attached helped me to determine the year.

http://tinyurl.com/5mduhp

Anonymous said...

Sounds a little familiar...

Didn't you call at bottom last Spring.

How has that worked out for you, or the folks who followed?

Just askin'...

Anonymous said...

are you dissin on warren buffet again? didn't he also say "you can always tell who was swimming naked when the tide goes out" have you taken a look at GEAB's new public annoucement they are predicting that the US is going to be declaring bankruptcy next year. They have have been correct for the last 3 post, the systemic financial collaspe, the loss of retirement funds, and what was needed to fix this mess (by the way the one on systemic financial collaspe was posted in 2006, so don't tell me the people in charge didn't know this mess was going to happen) they say this is going to cause hyperinflation. Get Ready. BOHICA

Anonymous said...

Forgot to direct that last comment towards the stock market call, not the housing call...

Anonymous said...

Here's a cue on indexed funds... make your own. Call it a conservative, 'Hard-Times-For-Bubble' sectors dividend fund.

Essentially, find high dividend yielding equities (i.e. Tobacco - RAI), and see that the ticker symbol value didn't get halved, during the crash and put them into a set, roughly 10 of them, into a portfolio kit. The key here is that these are low volatile industries, less impacted by hype. At the same time, minimize putting financial/banking stocks into this roster since those are the industries in the *shock* state. Keep an eye on making this portfolio around tobacco, chemicals, food stuffs, utilities, etc.

Finally, let this pool stay for a few years, rolling over the dividends. The end result will be a nice 10-12% yield for the long haul with the idea that other legs down could occur for the overall market but the strategy here is to use dividends to buffer that loss but at the same time, as the S&P rises, your package will recover with it. Realize, there'll be quite a bearish channel here for another year or two.

LoneLibertarian said...

Is this a bottom call?

Anonymous said...

I won't buy a house until you actually can own one. If your governments can take it away at will, you don't own it, really. If they can dictate what you can and cannot do to your property, you really don't own it. I don't care if housing falls back to 1908 prices, I still won't buy.

keith said...

Remember folks I called Dow 8000 and got continually mocked for it.

And then, it happened.

I called 50% drops in houses, and got continually mocked for it.

And then, it happened.

No, this is not a bottom call. It's a continuation of the call to keep your eyes and ears open, do your own research, and start looking around for true bargains.

I'm buying, cautiously, and enjoying it. But my time horizon is 5+ years, and I don't need the cash. Every situation is different.

Always remember, it's the P/E stupid. There are companies to be bought and perhaps homes to be had, but you need to do your own research. Be patient, be smart, and above all protect your assets.

The days for HP'ers are coming. Cash was king, and then it was deployed wisely, before it was oh-so-predictably devalued.

And don't listen to me. Just go read Manias, Panics and Crashes again. Everything I predicted is from that one book. Plus a little Buffett too.

Out at the peak said...

Housing:
Sure the sheep know prices are going down now, but the herd is just getting started.

The herd will be right for a period of time.

During the housing boom, the herd was right between 2003-2005. Those were the euphoria years of when you were considered an idiot for not buying a house or three.

Don't catch a falling knife are your own words.

You know the numbers. The Alt-A and Option ARM mortgage paper still have major amounts of resets over the next three years.

REOs are getting multiple bids right now in California. Nothing is actually staying on the books. Things are not as bad as we will eventually see.

The next 18 months will be filled with panic and desperation. Perhaps there is a buy or two during the tail end of that, but not yet.

Stock:
My barring are not so good with this one now. My guess: we hit a low (could be temporary) in Dec or Jan.

Paul E. Math said...

Thingamajig, I'll lay my cards on the table: I'm no great stock picker. I've lost thousands on bad picks over the years. Some picks have been okay but I've actually never ever hit one out of the park. I'm just not that talented.

This is not my way of avoiding your request, I'm telling you the absolute truth.

So I'm saying the same thing as Keith: you have to do your own research.

However, there are some short-cuts. Others can chime in on whether they think this is a waste of time and money but I actually pay the 130 bucks per year, or whatever it is, for Motley Fool's Hidden Gems newsletter.

I generally throw away the printed version of the Hidden Gems newsletter but I use their website to get suggestions. Then I use the research tools that come with my e-trade account to dig a little deeper still. I did an MBA so I understand a lot of the terminology but a lot of it I'm still learning. So I'm making somewhat educated guesses.

The final test I do on a stock, and this is just personal, I do kind of an 'industry analysis' to think about whether this company is in an industry that I see doing well for the next few years. As an example, Hidden Gems recommends Toro and I'm sure it's a great company with great management but I can't see broke consumers and unprofitable golf courses buying a lot of their lawn-mowers and snowblowers over the next couple of years.

I don't know how Keith and other people get their picks. I doubt you would want to trust a stock newsletter implicitly but it seems that one you trust might be a good place to get suggestions.

Good luck!

Anonymous said...

N/A - Contrarian by definition means you are a group of sheep going in the opposite direction of another group of sheep.

Investing is real simple folks. Buy things for less then they are worth.

Yes there are stocks now selling below book after about 20 years, Wells and BAC are not on the list.

Homes in my area are still way over priced. I can rent the same home for less then a mortgage, are you stupid?

Sorry if they did not teach you basic investing in your 100K MBA program.

Suomynona said...

http://biz.yahoo.com/ap/081019/the_influence_game_housing.html

Freddie Mac secretly paid a Republican consulting firm $2 million to kill legislation that would have regulated and trimmed the mortgage finance giant and its sister company, Fannie Mae, three years before the government took control to prevent their collapse.

thingamajig said...

Paul, Keith,

I understand and appreciate your responses, and especially the Motley Fool paid service idea. Will pursue that lead.

I'm an aero engineer and have bought BA and SPR because I think they're devalued for three pts (of course I could be wrong). 1) Boeing Strike. 2) Boeing and Airbus slipping schedule on 787 and A380. 3) General market conditions and aircraft financing concerns.

This is common knowledge to me since I walk into a place where they machine parts and pound rivets every day.

soft landing said...

NO, it is not contrarian to buy stocks now. Everyone is convinced that its straight to the moon from here.
As far as buying a house...NO, not a contrarian thing to do. Everyone thinks its a great time to buy.
The Panic is just getting started, capitulation in stocks, maybe after the election. Capitulation in housing 2010.

thomas jefferson said...

"And I'm failry confident that buying when the dow was at 9K, 20 years from now, will look like the best move ever."

There is not enough oil, Oil, OIL left to recoup the accumulated wealth that will be lost in this crash.
Oil scarcity = the end of the global capitalist Ponzi scheme. Cheap energy is what makes this flashy economy possible. Oil is cheap now, but wait until OPEC gets its act together. Plus, though we are in a period of deflation now, wait until the pure cane sugar of all this free, easy cash hits the world's financial metabolism. All that bail-out money will go straight into the price of oil in inflation. Wah-La! Game over.
I don't think you've thought your cunning plan to be sitting pretty in 20 years all the way through!

sandman said...

keith... agree. but you're early.

keep your powder dry.

you're right... but wait until we see the whites of their eyes.

imho.

Anonymous said...

"I won't buy a house until you actually can own one"

I think that's a pretty easy formula: rent = avg mortgage payment (for 15-20 yr term loan). Or if you want to be really comprehensive, 1.25 * rent = avg mortgage (plus taxes and median maintenance cost).

Those are the conditions which reflect a non-bubble economy. Then, when you're ten years into the deal, you can subdivide a place, rent that half out, and pay all your taxes and costs thus lowering the cost of ownership even further. Otherwise, even after ten years into the purchase, you're simply paying the bank or the town. Many new owners are in the latter situation these days.

Anonymous said...

Out at the peak said"...Nothing is actually staying on the books..."

Surely you've read the accounts of why not much is really getting on the books. There is considerable inventory in the pipeline that will keep this going for years.

Then again there are other accounts of substantial collateral fraud; the same property mortgaged multiple times.

The common thread that ties it all together is opacity and the fervent desire of the holders to keep in it pools.

Witness our socialist solution; heave big sacks of taxdebtor IOUs at the afflicted institutions. Anything and everything to avoid having to open the books and pass an audit.

Something REAL SHADY going on here.

Catch the FBI story today? Can't work financial because they're tied up with Terra.

keith said...

http://tinyurl.com/6cuzkv

It was all about hedge funds selling anything they could in a desperate attempt to raise cash.

It wasn't about the fundamentals of the companies involved.

Get it?

Good.

Max said...

One of the stages of a bear market is when some known bears reverse and get burned big time.

The reason why this happens is because of the temptation to gauge the sentiment before realising the full extent of the fundamental problems.

keith said...

One more time - I'm NOT saying rush in. I'm saying do your homework. Look around. Run the numbers. Start shopping. And report back.

Man some of you folks are either dense, or you hear what you want to hear and not what is written.

I thought HP'ers were smarter than this.

Meanwhile, while some of you keep your head in the sand, others are being observant, and are perfectly positioned to take advantage of the situation when the opportunities arise.

keith said...

Meanwhile tampa better close this deal so I can go back to bed!

keith said...

Good quote on the housing price death spiral:

"We're in an ugly little spiral at the moment," said Keith Gumbinger, vice president of HSH Associates, a research company that tracks the mortgage market by surveying 2,000 lenders weekly in the United States.

"The market is suffering from oversupply and there has been very little improvement in factors that would contribute to demand," he told AFP.

"We could be talking another year before we see a stabilization and that all hinges on whether the economy deteriorates to a great degree."

http://news.yahoo.com/s/afp/financebankingushousingpropertyprice

Steve said...

IMO contrarian investing takes discipline. That's because by definition you should be questioning your sanity and getting a knot in your gut when you click either the Buy or the Sell button.

I am buying stocks now. And it doesn't feel right. But dollar-cost averaging and rebalancing has worked just the way it's supposed to for me over time.

In 3 years I plan to move up from a townhouse to a single-family home, once I pay off the rural 40 acres I got cheap in 2001 for recreation. Today it wouldn't feel right to move. In 3 years I think I will be quite comfortable with it.

Anonymous said...

Keith: Your own words from the BOOK- People of credit and wealth...Cash becomes King (not stocks, not real estate) It all ends badly....

k.w. - Southern Ca. said...

You hit the nail on the head.

We'll see our health (no care) system faulter as a wave of baby boomers start retiring - it's going to be a site to behold.

The gravy train will be running dry.


DANM said...
One reason why I think investors will get wiped-out is because the entire North American retirement scheme is based on a flaky concept.

ALL Americans are being told to overweight equities, yet our equity markets represent only a subset of our economy total economy.

The head scratcher is why are equity markets generating better returns that the general economy? We have to question whether these traded firms can keep on generating such gorwth. In my analysis, the game has been rigged to generate the 9% growth but we're now at the end of it.

The irony is those with the best retirement plans, with a good weight in those high performing equities, are those of public servants. And something tells me their work is not generating 9% growth.

The system is compeltey out of whack. The wrong people are getting the gravy every everywhere you look. You can't borrow for retirement, so the shakeout is now upon us as the Boomers are starting to retire.

keith said...

We are definitely 100% in the "cash becomes king" phase

But it does not last forever.

We are definitely in the fear/panic stage.

But it does not last forever.

And eventually, your cash won't last either, as its value gets destroyed by the government printing press.

Stay alert.

Anonymous said...

It took till 1954 to regain your losses from 1929 crash, and till 1982 adjusted for inflation. We are going to DOW 7500 in the next two weeks. America won't survive this, we are going BK and will end up like the Soviet Union, balkenized by 2025. America as we know it is over. The Soviet Union was much better prepared for collapse because the housing was owned by the state, here housing is owned by banks. Mass homelessness and wandering is our future. Face the truth.
Americans are so naive.

Anonymous said...

Unless you can pay all cash, you are insane to buy a house. You spent years here thinking you would be able to buy a house and suddenly after this collapse everything would be rosy, for you. LOL

Stocks will fall and fall because the empire is dying.

Nobody will want to own homes in five years, people will want to live in government subsidized housing.

Anonymous said...

even if it's 50% off and ready to rent......who will rent it....what will be his job and why yours as opposed to the 30 other similar options ?
i don't think you grasp the enormity of this situation.

Anonymous said...

Keith said:
"Especially when it comes to banks. This crash is the best thing that ever happened to Bank of America and Wells Fargo. Their competition will go away, and they'll be left standing."

Wells Fargo is making their books look good by cutting back on their reserves. Check out Denninger's site.

"If I see a home, decent neighborhood, 50%+ off the peak, positive cash flow, ready to rent, I might have to take a look."

There was a story about a Japanese guy a while back who felt that he had been priced out forever and had missed his opportunity to get rich with Japanese real estate in 1989. He was happy to buy at 50% off a few years later, only to watch the real estate go down another 50% over the several years following his purchase. Don't know what the percentage was at the bottom (assuming Japanese real estate has hit bottom, doesn't look like the Japanese stock market has yet hit bottom).

keith said...

Very good point last poster. Just because something has fallen 50% doesn't mean it's a good deal

Just ask pets.com stock holders

It's all about the P/E. If a home has crashed 50%+, AND it has positive cash flow, it's worth a look. Otherwise, it's not.

And looking is different than buying. Patience. This unwinding is gonna take time. Years perhaps.

But it's fun to look. Go look. I really would like to know if there are homes selling in America that cash flow, or if the prices are still completely out of whack even after these historic falls.

And even if it cash flows today, with the job losses and recession coming, it might not cash flow tomorrow. Factor in a 20%+ drop in rents I'd say.

gk said...

Homes aren't anywhere close to cash flow positive in my area. These dumb shits around here still don't get it, and they keep putting more overpriced crackerbox houses on the market. This may be one of the worst cases of "it won't happen here". Hell, home prices nearly doubled here in 3 years time, and these mental midgets around here claim that we don't have a bubble. Yeah, ok, debtslaves.

Anonymous said...

I've started looking at buying rental and farm property in my area, but thus far everything is way overpriced,so no go. I'd expect to pay cash, and I don't think I'll find anything priced reasonably before the end of next year, if not later.

Anonymous said...

A very stupid person said:

"We are going to DOW 7500 in the next two weeks."

Sure thing dummy. Dow up 200 at open today.

dwr said...

Hey Keith-
Why not go on record and identify a "gem" you are currently investing in? Kind of like your aapl pick at $135.

Anonymous said...

But it's fun to look. Go look. I really would like to know if there are homes selling in America that cash flow,

====

Sure there are, but probably not where you want to live. Plenty of cheap homes in Cleveland or Toledo. And I don't mean cheap as in $5000 crackhouse. I mean you can get a decent house for $80K that could rent for positive cash.

Only problem is, do you want to live in Cleveland or Toldeo? Or do you want to invest in the future of Cleveland or Toledo?

On the other hand houses in NY or LA or San Diego or Seattle, the cities people want to live in, are not anywhere close to affordable. And I don't think they ever will be. Look at NY City. For as long as I can remember, 15+ years, the cost of living there has been crazy. 2 bedroom apartments renting for $3000. Yet somehow millions of people manage to live there year after year.

I think what we are witnessing is a situation where 1/2 the country will be Cleveland/Toledo, with cheap housing and the other 1/2 will be NY with outrageous pricing. The choice will be up to each person where they want to be. Do you want to live in NY and live in a cramped studio for $2000 a month? Or do you want to live in a house in Cleveland for $800 a month?

But expecting to pay $800 a month to live in a house in NY or in Seattle or in SD is pie in the sky thinking.

Anonymous said...

Loads of BS on this site today:
"We'll see our health (no care) system faulter as a wave of baby boomers start retiring - it's going to be a site to behold."

(sigh) Go look up the average boomer's retirement savings. Please. They are not going to be retiring. Then go back to square one and refigure everything you thought you had all figured out.

"It took till 1954 to regain your losses from 1929 crash, and till 1982 adjusted for inflation."

And with reinvested dividends? Somewhere in the 1930's.

"Nobody will want to own homes in five years, people will want to live in government subsidized housing."

We already have that - they're called projects. You go live in them...my family's safety is priority and that means no projects, thanks.

Uncommonadvice said...

here in the UK we still have months of bad headlines in the housing market to come. The only sales going through at the moment are distressed so this will be reflected in the data coming out in 3 months time (we have a 3m lag in Britain). Then we'll have the quiet Xmas/ January time. therefore we will be hearing about the housing crash right through until next Summer.

I'll tell you something though - when the market changes it'll happen in a flash.

yoski said...

Yes for stocks & commodities, no for houses.
The S&P 500 is basically where it was 10 years ago before the .com bubble. Many good companies have P/E ratios of 4 - 10. Commodities will come back fast and furious as supplies will drop at a 5% annual rate due to lack of investment and exploration. The reason we were well supplied was that a barrel of oil was fetching $120+. Now with that incentive gone many marginal sources (where costs to produce exceed $70-80) will be retired for now. Demand might be dropping, but soon supply will be dropping even faster.
For housing things will take a while to bottom, at least here in Miami. Too much supply and too little credit out there right now. With the economy tanking I don't expect a quick turn around as unemployed people typically don't buy houses. Patience will be rewarded.

Anonymous said...

This is important. It is not contrarian to be a bull now, because everyone is getting ready to buy the dip. It will be contrarian when all the bulls waiting to pounce are sick and disgusted, not bothering to watch any more.

That is the capitualtion and despondency phase we see at the bottom of the cycle.

Anonymous said...

A very stupid person said:

"We are going to DOW 7500 in the next two weeks."

Sure thing dummy. Dow up 200 at open today.


You were sayin'...