September 2005 Newsletter
Issue Nine, Volume Six

POP GO YOU WEASELS

By Mike Gasior

First and foremost, let me apologize for the unusually long delay in getting this month's edition out to you faithful readers. While I may be sorry for making everyone wait, I am not sorry that your inconvenience was caused by an extremely busy schedule for yours truly. I've been busier than a one-legged man in a butt-kicking contest and until anyone actually pays me a nickel for this hideous newsletter I will always need to make my bill paying clients my number one priority. With that said, my priority right now is to try to save some of you from perhaps making the grievous mistake of getting into a market at precisely the time you truthfully should be getting out of it. While I might already be able to make a very small case for my saying "I told you so" since I titled my March 2005 newsletter "Real Estate is Over", it is now six months later and evidence is beginning to pile up to support my view.

Before I lay out the rash of evidence that has accumulated over the last couple of weeks, do us both a quick favor and review some of the things I wrote four and five years ago in an effort to warn my readers:

******************************************************(Segment from April 2000 Newsletter)

I CAN'T HELP THIS...SORRY

On March 24th I sent 150,000 people around the world the March edition of this Newsletter. On that day the NASDAQ Composite Index traded up to 5,078.86 which was basically it's all-time record high. This afternoon, Friday April 14, 2000 the NASDAQ Composite Index closed at 3,321.27. Well, well, well....

Now I promise you that I am not going to rub everyone's nose in anything since this could all turn around on a dime and still make me look like a huge idiot. All I want to do is remind you of a couple of my comments from a few weeks ago and then I'll drop it. Or at least drop it for this month.

--"Over the next ten years nearly any other asset category will outperform stocks."

--"The stock market still goes down. We just haven't seen it in a while."

--"There are lots of people managing money who haven't got a clue what a bloodbath looks like."

--"In as little as 10 years, college professors will be talking about this period of U.S. stock market history as one of the 'classic' speculative bubbles."

--"Of the Internet 'pure plays' trading right now, probably 90% of them will not exist in five years."

I stand by all of those statements I made last month with both feet. However I do want everyone clear on another point: As much as it seemed as though the stock market was scaring me, I was neither hoping it would go down, nor was I wishing it would go down. It's going to be bad for the economy. It's going to be bad for your business. It will be bad for MY business. Basically, it's going to be bad.

So here is my update for anyone who cares what I'm thinking now.

--We have another quick 1000 points of downward movement coming on the NASDAQ. A lot of those points might be lost Monday morning as you're reading this.

--It might be a long, long time before you see 5,000 on the NASDAQ again. For example, if you are currently in first grade, it might be sometime not long after your high school graduation. Sorry for that.

--And finally, if you think the worst is over, you're wrong. There's still plenty of time to get out and much more blood to be shed here. Sorry, sorry, sorry.

I am not lying to you when I tell you that I am currently listening to both CNBC and CNN right this very second as they cover the "Market Collapse". They are interviewing the "man on the street" about their thoughts about the market now, and their predictions for Monday morning. Over and over I hear them say, "this isn't the beginning of a bear market" and that Monday will be "a buying opportunity". The only thought I can have is that they are "like pigs led to the slaughter". And since very few of these "men on the street" have been around this whole stock market thing for very long, I will remind them of an age old axiom of Wall Street they may never have heard: "Bulls make money. Bears make money. Pigs get slaughtered." Perhaps these are words to live by at the moment.

*************************************************(Segment from November 2000 Newsletter)

IN SUMMARY

Bonds will outperform stocks for the next few years. I think maybe as many as ten years.

The NASDAQ has another 700 points to lose...at least.

************************(Segment from January 2001 Newsletter Titled "HEDGE FUND TIME AGAIN?")

The other factor that might make hedge funds superior to mutual funds and other vehicles is that they have tremendous flexibility in what they can invest in, as opposed to the mutual funds, which often must be managed via strict guidelines. For example, if I'm allowed to short sell it enables me to make money even during declining markets. This might prove a huge advantage for quite a while going forward. Some month soon I'll spend a little time discussing particular hedge fund styles of management.

There are lots of factors that can contribute to this, and why I think that hedge funds might prove a superior harbor for money in the coming few years.

******************************************************(Segment from May 2001 Newsletter)

THE STOCK MARKET REBOUND

I mentioned last month that the current rally was nothing more than a classic "bear trap". Even someone as jaded as myself about recent stock market valuations would have to agree that the market was severely oversold after the shakeout of the past year and it was due for a rally. However, this is all it is, a rally and nothing more. This is by no means the beginning of a "new" bull market or some sort of throwback to the "roaring 90's". Here is why:

--The current consensus on Wall Street is that the earnings on the S&P 500 will increase about 15% this year. This is part of the basis for what has driven the indexes to their current levels. I see no chance of these companies meeting expectations and as earnings disappointments begin, the market will once again begin to slip.

--We are coming off a period in history where we enjoyed five years of 25% gains in the stock market. Never before had we enjoyed more than two years of 20% gains. When you go back and consider my comments about the savings rate and the aging of the population, this might point toward a change of attitude about the stock market. No longer can you look at the stock market as the endless profit machine. Many people nearing retirement will stay closer to fixed income at this point. Simply stated, there will be fewer people rushing blindly into the stock market now. Once burned, twice shy.

--The only thing working against me is the old motto "Don't fight the Fed". The current Federal Reserve actions would seem to be very market-friendly moves. I feel that the changes have not gotten much traction so far and that Greenspan believes the economy is still in a tremendous stall, thus his comments about the economy "not being out of the woods". You cannot argue that the Fed dropping rates so dramatically and this pending tax cut aren't good for the economy. It is good, but it's my feeling that it won't be enough this time.

With all that said, I am sticking to my December feelings about the stock market. The Dow Jones will finish below 10,000 and the NASDAQ below 2,000 by year-end. I don't foresee any bloodbath, but a protracted sideways/downward move that will drag on for several years. My comments over a year ago were that almost any other asset class will outperform stocks in the coming years and I continue those feelings.

**********************************************************************

NOW ON TO MY LATEST WARNING - OCTOBER 2005

I said that real estate was over back in March and was bold enough to venture that I might even be making that call at the "top". Only 180 days later I think the evidence is mounting that I might have been correct.

Also, please pay particular heed to the facts I will share with you next if you are still feeling the compulsion to rush into the housing market at this ridiculous moment in history. In a fairly short period of time you will feel like the only person driving toward New Orleans in the hours before Katrina struck.

Rather than being the preachy SOB that I often am, let me instead allow you to read some of the information I have had the chance to look over in the past several days:

SOME NATIONAL INFORMATION

--The median price of a home nationally is $220,000 and required a household income of $51,740 in order to qualify for a traditional mortgage to purchase it.

--So far in 2005, insiders (senior executives, board members and large shareholders) at publicly traded home-building companies have sold off in excess of $1 billion worth of their own stock.

--A recent letter to the editors of the Wall Street Journal bragged that there were now more than 1.2 million Americans who identified themselves as "Realtors". That would mean, according to U.S. Labor Department statistics that we now have more real estate agents than we have doctors, lawyers, police officers or even bartenders.

LOOK OUT CALIFORNIA

California was one of the hardest hit states when the real estate market collapsed back in the early nineties and the following information does not bode well for the future for my friends there. Consider this:

--A total of 86% of Californian households cannot afford to purchase a "median" priced home, which in August reached $568,890. Using an interest rate of 5.87% and a normal down payment of 20% a homebuyer would need a household income of $133,800 to qualify for the mortgage to purchase this median house. The California Association of Realtors released these statistics this week and the only other time they ever reported such dire numbers was back in 1989 right before their real estate market imploded.

--The median price of housing in California has more than doubled since 2001.

--Traditionally, mortgage lenders like people to only need to use 28% of their income for the payment of mortgages. Incredibly large numbers of Californians are dedicating 40 to 50 percent of their income to make mortgage payments.

--In 2000, only 1.4% of Californians taking out mortgages opted for an interest-only type of product that typically carries a floating rate. In 2005, approximately 32% of all mortgages taken out so far this year have been of the interest-only variety.

--Up in the Silicon Valley area, the median home price in Santa Clara County raised more than $90,000 in 2004. The somewhat unsettling offset to that number is the fact that the median household income in Santa Clara County is $74,509. Also interesting is that the membership of the Santa Clara County Association of Realtors has grown by 80% in the last three years.

--The inventory of property listed for sale in the San Francisco area rose 16% during the past year.

MANHATTAN SAGGING

Always one of the most expensive locations in the world, the island of Manhattan has seen some of the headiest gains over the last five years. No doubt the report recently released by Prudential Douglas Elliman could not have been comforting to anyone who has recently made a New York City purchase. The report outlined a somewhat grim picture of the third quarter of 2005:

--The average price of a New York City apartment (including condos and co-ops) fell from $1.32 million in the second quarter, to $1.15 million in the third quarter. Almost a 13% decline in a single quarter.

--The "luxury" market segment, which is defined as the top 10% of all sales in terms of value, fell 26% from $5.2 million to $3.8 million during the same three month period.

--During the second quarter of 2005 there were 17 sales where the purchase price of the property was above $10 million. The third quarter boasted only 4 such sales.

--On average, it is taking 30.4% more time to sell properties in 2005 than it took in 2004.

FLORIDA COOLING OFF

One of the absolutely hottest marketplaces of late has been the Sunshine State of Florida. The Sarasota/Bradenton area has been able to boast the most dramatic increases in property values in the entire United States. And a condo-building boom has been taking place in many cities from Miami to the west coast of the state. No doubt these stories from the past week paint an interesting picture of what the immediate future might be looking like:

--Federal regulators have just stepped in and shut down the construction lending business of a leading, southwest Florida bank. Officials from the FDIC have just ordered First Community Bank of Southwest Florida to stop making construction loans to builders and to improve their lending practices, as well as better manage their existing loans. The bank has about $183 million in construction loans outstanding, which represents about 64% of their entire loan portfolio. The President of the bank, Edward "Chip" Black said that construction loans were the bank's largest business and they had made 12% of all the construction loans in Lee County in 2004.

--Fort Meyers, Florida saw the opening of their first downtown condominium just about a year ago. The Beau Rivage condo tower opened in October of 2004 and Greg Teich bought two of the brand new units via investment companies he operates. Unit 1406 was purchased for $579,000 and according to Lee County Appraiser's records he recently sold the condo for $533,000. The other unit Mr. Teich bought was number 606 for $528,700 and that once sold a few weeks after unit 1406 for $495,000.

NEWS FROM A COUPLE OTHER LOCALES

--The area of Virginia close to Washington, D.C. has experienced some amazing growth in housing values, but the amount of properties for sale has swelled by almost 50% between August 2004 and August 2005.

--In one of the very nice suburbs of Boston (Brookline, Mass.) there has been an exploding increase in the inventory of properties for sale in just the past few weeks according to local brokers.

FINALLY, SOME "CONTRARIAN" TIDBITS

There are many who think that little investors (read average homeowners) are often the most accurate of market indicators, since they tend to rush into markets near the top and the finally sell when things hit rock bottom.

With that in mind, consider the following survey results:

--In a recent survey, 60% of homeowners expect that their property will rise in value by at least 5% per year for the next several years.

--A full 24% of respondents of the same poll thought they would enjoy annualized gains of at least 10% per annum during the same time period into the future.

--Only 3% of homeowners surveyed thought that their home might decline in value during the identical timeframe.

SO.............

I hope that any, reasonable person was able to draw from these current news stories the only conclusion that makes sense, which is that the movement of housing prices in the past five years was excessive and the time for digestion is now already upon us.

Every, single, itty bitty tick upward in interest rates, energy prices and unemployment will be akin to throwing gasoline on this already smoldering situation and caution will be your friend over the next several years.

If you haven't already bought a property in the last couple of years, then congratulations are in order and you should consider yourself lucky indeed. This is the time to remain patient and keep your powder dry (which means keep your money safely in the bank.......liquidity is a many splendored thing) and the market will come back to you in the next few years. In the meantime, enjoy your renter status and your time at the beach while us sucker-homeowners tend to our dandelion filled lawns.

For those of you who purchased an overpriced piece of real estate during the past few years, I hope you at least like the property you bought. Nothing will make you more miserable than losing buckets and buckets of cash, along with HATING the house you purchased that is causing you to bleed out of every orifice of your body. If I have any advice to give it is garnered from first hand experience. I bought my very first home at the top of the last bubble in Connecticut in 1987 (with a 9.75% mortgage by the way). After considerable patience, $75,000 in renovations, and 14 agonizing years of waiting, I was able to sell that house for a $40,000 profit back in 2001. Unfortunately, if I had put the purchase value of the house plus the $75,000 into 5-year Treasury Notes I would have enjoyed a $192,500 profit instead. Even worse, if I had put the purchase price and the $75,000 into the S&P 500 I would have had a $1,127,987 profit versus the 40 grand. Gosh...I think I need to go kill myself right now.

So, for those of you whose rallying cry is that, "real estate always goes up"; all I can tell you is that you are not only wrong, you are most probably an idiot besides. And remember to send those thank you cards when I actually saved you from a fate similar to my "virgin" real estate experience.

THE VIDEO COMMENTARY IS UP

In a continuation of the Derivative topic, this month's video clip is dedicated to the subject of options, caps and floors. Since I had spent last month discussing the Derivative market as a whole, including a thorough conversation about the differences between hedging and speculating, this episode deals specifically with these particular vehicles. Since I was in Grand Cayman I thought I might take advantage of the beautiful background to shoot the clip while I was there.

You can view both high-speed and low-speed by visiting the homepage at:

http://www.afs-seminars.com/index.html

All of my past commentaries and radio programs are now being archived on the website and those can be viewed by clicking the following link:

http://www.afs-seminars.com/v-commentary.html

Finally, you can also read all past newsletters spanning six years at this page:

http://www.afs-seminars.com/newsletter.html

FINAL SEMINARS OF 2005

I will be presenting several of our most popular sessions in New York City during November and December if you or colleagues would like to attend. Clicking any of the links for a program will take you to the page that gives you a complete description of the seminar and will also direct you to the registration page.

All our Manhattan programs are held at the Madison Towers Hotel at the corner of 38th Street and Madison Avenue and we have a negotiated room rate for anyone coming in from out of town.

Securities Operations, Processing and Accounting
--November 14th and 15th
http://www.afs-seminars.com/securities-operations.html

CMO, ABS and CMBS Securities
--November 16th
http://www.afs-seminars.com/cmo.html

Advanced Securities and Markets
--December 5th, 6th and 7th
http://www.afs-seminars.com/advsec.html

I hope to see you there.

HERE IS THIS MONTH'S BRAINTEASER

I don't think I have ever given my readers a question where I really don't expect almost any of you to get the answer. The upside, however, is that I found the answer fascinating and I'd like very much to share it with. You can certainly still take a shot at the answer, but I wouldn't trust any friends of yours who also read this newsletter that tell you they knew what it was.

This month's question is:

"Back in 1925 the Ford Motor Company was selling their Model T for $250 per vehicle. What was their profit margin on each car sold?"

At least try to guess or research the answer before turning into a weasel and clicking the following link for the answer:

http://www.afs-seminars.com/brainteaser_Sep2005.html

And the answer to LAST month's brainteaser is:

Little Richard

http://www.afs-seminars.com

Copyright 2005, Michael Gasior. All Rights Reserved.

PREVIOUS | NEXT