Liquidity Breeds Stupidity? Just a few weeks ago I quoted a so-called expert who said that the current attitude that says "the markets are awash in liquidity" should really be changed to "The markets are awash in stupidity". As of the past week or so, you could eliminate the awash in liquidity statement. Investors are leaving the real estate and stock markets and the result is a large price drop in many sectors. In my post of May 15, entitled "Beware the Receding Tide", I warned that markets do not increase forever and we should be prepared for a correction of some sort. While we followed our own advice, we were unable to avoid experiencing a reduction in many, if not most of our accounts. In fact, some of our income generating accounts dropped more than the others because of the panic in the higher yielding real estate and business development companies. One of my favorite companies, American Capital Strategies, dropped from the high 40's to the high 30's, a drop of about 20%. That's the bad news. The good news is that the dividend appears to be stable and likely to increase over the next few months. It is not the company that's changed in value, it's the markets perception of the value of the income stream produced by the stock. My plan is to re-invest the next dividend in the purchase of more shares. At the current price the dividend rate is almost 10%. I will keep some cash in case better opportunities arise in the future. I am somewhat pleased that we had this correction. Too much liquidity in the market actually breeds stupidity as investors, unhappy with the yield on cash equivalents, scramble to find higher yields and over-pay for risky investments to improve their yield. It will be an interesting time on the markets these next few weeks. We will watch closely and try to get some idea of the next good opportunity.
Real Estate Close to the Bottom. In my May post, I also mentioned how difficult it has been to find good real estate investments. I promised to study some of the market statistics and try to give you some idea of when we might expect a turnaround. The statistic that has interested me most is the number of building permits being issued, particularly in the condo/townhouse market. The condo and townhouse markets usually fall first and further than single family markets. One reason for this is that homeowner associations can rapidly become insolvent when foreclosures are high. Owners in foreclosure, become delinquent in their dues and lenders who gain title to the property after foreclosures, more often than not, do not pay dues either. This forces an increase in dues for, even minimal, maintenance. This results in more foreclosures and the cycle continues. There may be some investment opportunities here but investors who jump in too early may find that the cycle doesn't end as soon as they anticipated. One statistic I try to watch closely is the number of new building permits being issued. When new construction is insufficient to keep up with an increasing population, the oversupply of inventory begins to diminish and prices can stop declining and begin to increase. This brings me to a discussion of the trend of building permits over the past few years. Single-family permits increased slightly in most of the years since 2001. Condos and townhouses dropped drastically from 18000+ in 2001 to 5700 in 2004 and 2005. Front range statistics for the first four months of 2007 shows a reduction in single-family permits of 45%. Attached housing decreased by 15%. The overall population is increasing by 1.4% per year or about 66,000, Net in-migration is steady at about 27,000 per year statewide. Sooner or later, population increases will force a turnaround in the market. I don't claim to know exactly when that may be, but I do know that now is a better time to buy a residential real estate investment than in 2005. We will continue to watch the statistics and try to determine when to enter these markets.
One of My Heroes Died Last Week. My Uncle John passed away quietly during the night. He was a gunner on a B-24 during WWII and survived 30 bombing missions. Over half of the planes in his unit were lost during these missions. He received the Air Medal and the Distinguished Flying Cross. We were buddies since I first met him 62 years ago. We hunted and fished together until he became too old to tramp the fields and Alzheimer's took away virtually all his mental abilities. We are losing those WWII vets at a rapid pace. As far as I'm concerned those who are left are a national treasure.
Sunday, July 29, 2007
Wednesday, July 11, 2007
BACK IN COLORADO
We Made It. Two relatively easy days of driving and we're back in Colorado. I have a to-do list as long as my arm but I'll be taking it one day at a time. Anyone needing an appointment can call the office and talk to Susan at 720-449-0200. If you want to try to reach me directly, the best number is 303-693-9610.
This will be a relatively short post since it is 11:15 PM. I am still trying to get a feel for this market. It appears that interest rate sensitive stocks are not doing well. Probably because a lot of folks are waiting for more rate increases on short-term bank deposits. I've been seeing some four to five per cent money market accounts advertised on the internet. Some of them from Banks. One such ad was from Capital One Bank with a 4.75% money market account. No minimum deposit was required and you were allowed 3 checks a month in the minimum amount of $250. I stopped by the Beaumont Texas branch to make a deposit but they told me that rate was an internet special and they were only offering 1.5%. Might as well keep the money under the mattress.
I've been watching a number of friends hit age milestones. My oldest grandson just turned 20. One of my best clients just turned 60, and my brother-in-law is turning 60 in September. I keep remembering that I turn 70 in January. One bit of encouraging news comes from an e-mail newsletter by Steve Goodier at lifesupportsystem.com. He reminded me that Churchill wrote a four volume masterpiece entitled The History of English Speaking People at the age of 82. Tolstoy and Goethe also finished major works at that age. Steve says you are too old when you have nothing left to give. Thanks, Steve I needed that.
This will be a relatively short post since it is 11:15 PM. I am still trying to get a feel for this market. It appears that interest rate sensitive stocks are not doing well. Probably because a lot of folks are waiting for more rate increases on short-term bank deposits. I've been seeing some four to five per cent money market accounts advertised on the internet. Some of them from Banks. One such ad was from Capital One Bank with a 4.75% money market account. No minimum deposit was required and you were allowed 3 checks a month in the minimum amount of $250. I stopped by the Beaumont Texas branch to make a deposit but they told me that rate was an internet special and they were only offering 1.5%. Might as well keep the money under the mattress.
I've been watching a number of friends hit age milestones. My oldest grandson just turned 20. One of my best clients just turned 60, and my brother-in-law is turning 60 in September. I keep remembering that I turn 70 in January. One bit of encouraging news comes from an e-mail newsletter by Steve Goodier at lifesupportsystem.com. He reminded me that Churchill wrote a four volume masterpiece entitled The History of English Speaking People at the age of 82. Tolstoy and Goethe also finished major works at that age. Steve says you are too old when you have nothing left to give. Thanks, Steve I needed that.
Monday, July 02, 2007
HEADING TO COLORADO
Time To Leave This Place. We have been in Texas since mid October and I have not been able to spend much time in Colorado. The remodel of our townhouse is pretty well finished and things should be back to normal soon. I am anxious to catch up with clients and friends that I have spent little time with during the past year. I plan to stay in Colorado until I see everyone who wants to see me. Call our office or send me an e-mail if you need to contact me.
The Markets Have Done Better than I Have Expected. While this is a true statement, it hasn't applied as much to many of the things we are putting our money into. This is because most investors have decided that the FED will not lower rates any time soon. Short term rates have risen to more appropriate levels and long term rates have followed. Many of our investments are geared towards producing cash flow and these have dropped slightly because investors can now get more respectable yields on short term bank CD's and money market funds. Our investments continue to produce better cash flow than these short-term instruments but the market perception of the value of this cash flow has diminished. In reality, I believe these cash flow investments are now more realistically priced. While I thought they were over-priced in the past, I did not try to sell at the high point with the objective of buying back later at a lower price. While this is theoretically possible, I don't believe you can add much to your return by trying to micro-manage and outguess the market. My philosophy is to purchase cash flow and pay less attention to the market price than the stability of the income stream. Occasionally, when the price seems more than the intrinsic value, it may be appropriate to take some profits and re-invest in areas that appear to be less over-valued. The key is not to bet the farm on any one sector. At this point, it is probably wise to buy stocks in some of the banks like US Bancorp, Wachovia, and Bank of America. These pay dividends in excess of 3.5 to 4,5% and have a track record of dividend increases. It appears that there are some opportunities for capital gains there. Incredible as it may sound, it appears that the markets may have under-estimated the potential for some of the energy stocks like Texaco and Exxon. Because the perception was that current high levels of oil and natural gas would probably not hold, investors have been paying less for a dollar of earnings than the potential for future profits justify. I am moving more capital into these issues.
Are We Placing Too Much Emphasis on Cash Flow? A recent article,by a well-respected financial writer states that we should be paying less attention to dividends. His point is that, while dividends are nice, it's total return that really matters. In other words, you can get by with low, or even no, dividends as long as the value of your portfolio continues to increase. From the point of view of wealth building, this is true; however, the characteristics of the individual investor are of paramount importance. I am sure many of you are tired of hearing me say this, but if you need a check to fund your living expenses next month, you don't want to be depending on selling appreciated shares to obtain your funds. While dividend checks are by no means guaranteed, they are several orders of magnitude more reliable than capital gains. Younger investors with good job stability, high incomes, and high tax brackets may be well served by zero dividend portfolios but those of us who utilize our portfolios to fund our living expenses, can ill afford to be at the mercy of market fluctuations. I am not totally against selling shares now and then to obtain income but it is much more convenient to own stocks that provide dividend income. An additional benefit to high income portfolios is that we have income to re-invest when the market suffers a down turn. The main point to remember here is that both cash flow and capital gains are important and neither is more important than the other. The ideal portfolio is one that fits the needs of the individual investor. There is no one-size-fits all solution.
The Age Thing Getting You Down? It some times bothers me that I am turning 70 soon and have less time left than I have already used. My best friend from grade school through college was recently ordained as a priest in the Episcopal Church. A major accomplishment for a person less than one year from a 70th birthday. He didn't sit around and worry about getting old. He went out and did what he wanted to do. I think that's a valuable lesson for all of us.
The Markets Have Done Better than I Have Expected. While this is a true statement, it hasn't applied as much to many of the things we are putting our money into. This is because most investors have decided that the FED will not lower rates any time soon. Short term rates have risen to more appropriate levels and long term rates have followed. Many of our investments are geared towards producing cash flow and these have dropped slightly because investors can now get more respectable yields on short term bank CD's and money market funds. Our investments continue to produce better cash flow than these short-term instruments but the market perception of the value of this cash flow has diminished. In reality, I believe these cash flow investments are now more realistically priced. While I thought they were over-priced in the past, I did not try to sell at the high point with the objective of buying back later at a lower price. While this is theoretically possible, I don't believe you can add much to your return by trying to micro-manage and outguess the market. My philosophy is to purchase cash flow and pay less attention to the market price than the stability of the income stream. Occasionally, when the price seems more than the intrinsic value, it may be appropriate to take some profits and re-invest in areas that appear to be less over-valued. The key is not to bet the farm on any one sector. At this point, it is probably wise to buy stocks in some of the banks like US Bancorp, Wachovia, and Bank of America. These pay dividends in excess of 3.5 to 4,5% and have a track record of dividend increases. It appears that there are some opportunities for capital gains there. Incredible as it may sound, it appears that the markets may have under-estimated the potential for some of the energy stocks like Texaco and Exxon. Because the perception was that current high levels of oil and natural gas would probably not hold, investors have been paying less for a dollar of earnings than the potential for future profits justify. I am moving more capital into these issues.
Are We Placing Too Much Emphasis on Cash Flow? A recent article,by a well-respected financial writer states that we should be paying less attention to dividends. His point is that, while dividends are nice, it's total return that really matters. In other words, you can get by with low, or even no, dividends as long as the value of your portfolio continues to increase. From the point of view of wealth building, this is true; however, the characteristics of the individual investor are of paramount importance. I am sure many of you are tired of hearing me say this, but if you need a check to fund your living expenses next month, you don't want to be depending on selling appreciated shares to obtain your funds. While dividend checks are by no means guaranteed, they are several orders of magnitude more reliable than capital gains. Younger investors with good job stability, high incomes, and high tax brackets may be well served by zero dividend portfolios but those of us who utilize our portfolios to fund our living expenses, can ill afford to be at the mercy of market fluctuations. I am not totally against selling shares now and then to obtain income but it is much more convenient to own stocks that provide dividend income. An additional benefit to high income portfolios is that we have income to re-invest when the market suffers a down turn. The main point to remember here is that both cash flow and capital gains are important and neither is more important than the other. The ideal portfolio is one that fits the needs of the individual investor. There is no one-size-fits all solution.
The Age Thing Getting You Down? It some times bothers me that I am turning 70 soon and have less time left than I have already used. My best friend from grade school through college was recently ordained as a priest in the Episcopal Church. A major accomplishment for a person less than one year from a 70th birthday. He didn't sit around and worry about getting old. He went out and did what he wanted to do. I think that's a valuable lesson for all of us.
Subscribe to:
Posts (Atom)