Light at the End of the Tunnel
Wednesday, March 26, 2008 | Teeka TiwariRating:
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I want to turn you on to an excellent gauge of regional real estate strength/weakness. It’s the Case Schiller Index. This index tracks the re-sales of residential real estate in 20 high population urban areas. The index has built in time lag of two months, so yesterday’s announcement of home prices down 11.04% was actually from January.
What we are beginning to see is the effect of foreclosed home pricing start to creep into the resale numbers. As reality begins to sink in for many of the banks stuck holding these homes, they will begin to get more and more aggressive in getting them off their books. So things could actually start to look worse before they get better.
I stress the word “look”. The process of offloading non-performing or poor performing assets off a bank's books is messy and painful, but ultimately bullish. The clearing away of old loans leads to the making of new loans, and, at least in the early part of the next loan cycle, lending standards will be high.
On a side note, for those of you with cash and/or good credit, there are some great real estate bargains to be had. The rental market is still strong, as is the job market. Even if the job market were to worsen, people still need a place to live. These depressed real estate prices are creating some very low risk investment opportunities for landlords all across the country.
The Federal Reserve has essentially become THE liquidity in the mortgage market, and this will help grease the wheels of commerce once again. The credit markets are like a giant locomotive brought to a halt. It is going to take considerable effort to get things moving again, but once they do, the market will hum along quite nicely under its own momentum.
It’s looking more and more as if we will have a democratic president. This could bode very well for the market. A big drain on our resources has been the five year long war we have waged in Iraq. I would expect a fairly rapid removal of our forces should a Democrat be elected. This will have several economic impacts for us. Initially, we will have to print less money and sell fewer bonds. This would be immediately bullish for the US dollar. Deficit spending opened the throat of the US dollar and left it for dead ever since Presidents Bush’s arrival in office.
I don’t know that we will ever enjoy the moral high ground we once so dearly cherished and protected, but it is my opinion that a large measure of global confidence will be restored to our country once we exit Iraq. Big global money got spooked when we unilaterally went into Iraq on what's been proven to be false pretenses. Don't kid yourself - we can't live as a financial island! We need the continued confidence of our trading partners, and we need their money sitting in our banks!
Iraq has already devolved into full blown civil war. Our continued presence there will not change that fact. It’s an ugly reality that we must face. Our Iraq iniative failed. Like a bad trade, we have to know when to cut our losses. This is not a political discussion, but rather a business discussion. Our continued involvement in Iraq is hurting our economy, period.
It doesn’t make any of us less American to use our common sense. We might as well burn the money we spend in Iraq because we will never see a return on it. Once we exit Iraq, that money will go to work domestically and the magic that is the US economy will multiply that wealth in our economy again and again and again.
So is another Democratic policy fueled golden age (Think Bill Clinton years. Love him or hate him, we all made money with him!) about to be upon us?
Maybe, just maybe.
The future picture is beginning to look brighter. You must train yourself to be able to see the good when everyone is only talking about the bad, and the bad when everyone is only talking about the good! Having the mental flexibility to imagine different scenarios will help greatly in your efforts to maintain an even emotional keel. In markets like these, it’s easy to lose your head and your perspective. There is light at the end of the tunnel and no, it’s not an oncoming train!
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“Let the Game Come to You.”
Teeka Tiwari
Chief Investment Officer
Point & Profit
