AWASH IN LIQUIDITY??

Many Experienced Market Analysts Attribute Recent Market Rises to Liquidity. There are many investors with capital that they are looking to deploy. It has to go somewhere and there are risks everywhere. I recently had someone re-state the "Awash in liquidity" statement to "Awash in stupidity." Investors have been willing to pay more and more for a dollar of stock market earnings or net operating income from real estate. All this appears to be nearing the point where it is becoming extremely difficult to find a worthwhile investment. The stock market appears to have entered a period of pessimism with the Dow dropping in excess of 300 points over the past 3 days. Residential real estate is falling nationwide, including Denver where virtually all the condo/townhouse prices are lower, some drastically. The same is true of single-family properties in certain areas. So what is a good strategy to follow in this market?

Cash is Important. If you have followed our advice of the past 4-5 years and acquired investments that produce cash flow, don't be in a big hurry to reinvest that cash. Get the best yield you can on a money market account by shopping among banks and mutual fund companies. You should be able to get 4-5%. Your main risk is that you will be out of the market when it rises but the downside risk is more than the upside potential at this point.

Buy Stocks Selectively. Look for value when you invest in the market. It doesn't appear that index funds based on the broad market will do as well as carefully placed funds. Certain sectors such as energy, oil service stocks, and refiners still appear to be attractively priced considering the world-wide demand. Business development companies appear to offer attractive dividends at current prices. Certain bank stocks pay decent, tax advantaged dividends with reasonable expectations for price stability. The main principle here is don't bet the farm on any sector. Things could get worse.

Cut Back in Some Areas. If you invested in real estate investment trusts when we were recommending them in the late 90's, you received attractive dividends along with considerable price appreciation. Now is the time to take a look at cutting back. Some of these are paying dividends of 6% based on current prices. These are not tax advantaged and the premium over lower risk investments is not high enough to justify a major commitment to this sector.

Don't Be In a Big Hurry to Unload Your Real Estate. If you have well-located real estate, don't be in a big hurry to sell into this market. The number of properties being offered for sale is beginning to decline which is always an early sign of a market recovery. The Denver economy is growing stronger and residential vacancy rates are down from two years ago. We may be nearing the point where we can see moderate rent increases. That said, it may still be worthwhile to take advantage of sale opportunities, particularly in areas where prospects for future appreciation are limited. In any event, your cash flow from real estate will likely increase over the next few years. It may even be a good time to buy selectively in areas of higher rent demand. If you do have to sell a property, a good strategy is to make sure it is in top condition. The market will always pay for quality.

Take Every Thing You've Read Here With a Grain of Salt. Remember, what I am offering you is an overall strategy, any aspect of which may prove to be wrong at a later date, requiring a change in our outlook. No one, is capable of accurately predicting the direction of the markets with a high degree of certainty. We can only set a strategy and be ready to correct it if conditions change.

We Plan to be Back In Colorado Soon. Sitting in my air conditioned office looking out at the lush, green woods is gratifying. There is a magnolia tree with a 12-inch white blossom about eye level. That's the good news. The bad news is that you can drown in your own perspiration if you spend an hour outside working in the heat and humidity. Its time to get back to Colorado. Hopefully, I can spend some time with those of you I didn't get to visit on my last trip.