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    February 28

    2006: Teetering Economy

    Continued lacklusterness in ths US economy is a discouraging sign for the rest of 2006.  Some of the latest data below confirms a theory I've had since 2003:  The recession starting in 2001 was not a real recession as the Fed and Bush tried to curb the downturn with a friendly rate and tax environment.  These artificial stimulants led to a thinly veiled and weak economic recovery and I think the coming years may prove that you can cheat an economic recession about as much as you can cheat death.
     
    The Data
     
    The latest housing numbers suggest flat to negative sales trends to come.  The first link talks about a record long inventory for new homes while the second link below shows nation-wide declines in existing home sales for last month.  Median existing home prices continue to rise year-over-year but are declining sequentially in all major regions except the Northeast.  Pundits are cautious about drawing a trend without another quarter of data, but there's nothing in the numbers to make me optimistic at this piont.
     
     
    A friend of mine also sent the link below, which is pretty appropriately timed.  It talks about very limited appreciation in American household net worth over the last few years as soaring home prices have been negated by corresponding rises in household debt.
     
     
    Bottom Line
    Of course, the temporary "technical" reversal in yield rates is going into week 3 now and crude futures (pictured below) continue to float at record levels.
     
    For me this means the following with regard to both real estate and broader investment decisions.  However, as usual, draw your own conclusions and remember that there's a reason some information is free :)
    • staying away from housing as an investment (housing for something to live in with a personal garage and a backyard is antoher story)
    • staying away from housing-related or rate-sensitive investments like REITs, Home Depot, and stocks in construction, some forms of trucking, banks, finance or insurance firms with significant assets in long-term fixed securities, etc.
    • staying away from other cyclicals like commodities, shipping, semiconductor stocks
    • considering protective value and recession-independent investments (the mortuary business is a fun example)
    10:54 PM | Add a comment | Permalink | Blog it
    February 19

    Yield Inversion Follow-Up

    A week after my last post, the yield curve is still inverted.  A friend of mine sent me a link to the following Washington Post article abut the trade deficit.  Towards the end of the article, it talks about a bond and real estate bubble created by the excess liquidity of other countries relative to developed countries such as the US.
     
     
    This article sparked something for me.  If you look at the purchasing power parity of the dollar versus other currencies (like the Euro, Canadian Dollar, Yen, Yuan, Peso, etc. from both developed regions and under-developed ones), the dollar has always carried a premium (i.e. a dollar buys less in the US than a foreign currency in its respective foreign country/region).  This implies that foreign countries are actually more efficient than the US in that they can buy (and thus produce) more for the same exchange-rate-adjusted amount of money.
     
    However, these foreign countries are investing their excess surplus in dollars or dollar-related assets like US bonds, stocks, and real estate due to the historical stability of these asset classes.  This is effectively a foreign-supported US asset bubble that will have to collapse at some point.  Here's a sequence of events:
    1. US economy has exceeded other economies in risk-adjusted growth in the last 50 years leading to a premium on US assets
    2. Other economies are now catching up, aided by a discount on capital relative to the US due to the above premium on US assets
    3. Other economies continue to invest in US assets, maintaining the US premium and fueling the catapult effect described in #2
    4. As other economies maintain superior growth rates over the next few decades, the US asset bubble will burst at some point - i.e. investors will realize that the premium on US assets is no longer justified given a sustained trend of superior growth in other economies
    5. Investors will sell off US assets, first in currency (we're already seeing this), then in real estate, bonds, and stocks.  The later equity classes require the greatest economic, political, and other intangible forms of stability and thus will maintain premiums the longest before a sell-off as foreign economies will need longer to prove themselves in these asset classes.
    6. US assets will settle into equilibrium with global assets and all will be well

    This is basically a standard lag effect between the true growth rate of an asset class and investor valuations of that asset class.  Unfortunately, even if I were confident that this is exactly what is going on (which I'm not), who knows how long such global macroeconomic trends will play out?  In the mean time, I suppose a good line to walk is to look for risk-averse foregn assets to diversify into but not panic given the expected time horizon of any such macro-trends.

    4:41 PM | Add a comment | Read comments (2) | Permalink | Blog it
    February 11

    Yikes! Yield Inversion

    I'm in disbelief!  The Fed is bumping up interest rates in the face of a strengthening economy and inflationary pressures, but the yield curve is also looking fully inverted past the 2-yr mark for the first time in this millenium (I think).  Macroeconomics isn't my strong point, but doesn't this worry you?
     
    How can the yield curve be inverted?  This seems to present an arbitrage opportunity (buy 2-yr treasuries and sell an equal amount of 30-yr treasuries) UNLESS investors foresee recession or deflation after 2008.  The Fed blames it on a temporary technicality, but this inversion has lasted for at least the last few days and the curve's been flat for months now.
     
    I'm really at a loss, post some comments if you have ideas about what's really going on!  Maybe it's time to move into foreign currencies until the government gets the twin deficits in check?
    1:54 AM | Add a comment | Permalink | Blog it
    February 10

    Johnson & Johnson

    This is probably grammatically improper, but I like to say that there's nothing like investing in a company that "I can sleep on", especially when the price is right.  I recently stumbled across Johnson & Johnson (NYSE: JNJ), a firm that has been around since 1887, is diversified product-wise and geographically, and owns household product lines that I love.  What's more, the company is trading at historically low valuations.
     
    Those attributes enticed me instantly, but, being prudish (and trying to avoid the bullish rush in price that immediately followed an S&P upgrade on the stock), I did my due diligence on the company's 10 year performance and governance.  I'd bore you with details, but needless to say it passed my bar.  Please do your own due diligence, but I think this puppy's worth a look.  And if you start by looking at their latest 10-Q, keep in mind that there's one less week in their latest quarter year over year.
    6:00 PM | Add a comment | Permalink | Blog it