BRUTAL MARKETS.

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.