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  • "The market can remain irrational longer than you can remain solvent" - John Maynard Keynes

    Friday, April 22, 2005


    The Economist on the Housing Bubble

    I don't hate houses or housing but I keep mentioning overvalued housing because most people have the majority of their net worth tied up in houses. According to the economist, using a rent to home value metric, houses are overvalued "by at least 60% in Britain, Australia and Spain, and by 46% in France." and "America's ratio of house prices to rents is 32% higher than its average value from 1975 to 2000".

    The study of behavioral finance predicts that people will make all sorts of excuses for why their house is a good investment. Everything from "real estate can't go down in price" to "I need a house to live in so the price doesn't matter". If you own a house that has appreciated significantly in value, then make the effort to move into rental accommodation for a few years. If you think that's ridiculous, would you do it for $50k a year? It could be worth even more than that AND you can get into the next housing upswing at the bottom.

    Saturday, April 16, 2005


    More thoughts on the pullback

    I think based on valuation we are in for a rough patch in the overall market. I believe that until PEs reach single digits for the broad market a new secular bull market will not begin. We are in a secular bear market and close to the end of a cyclical bull. I also believe that this cyclical bull was an "echo bubble" of the .com bubble and the following bear markets will be deeper than 01-03 and the cyclical bull markets that will be spread inside the cyclical bull will be less powerful than the one ending now.

    I also believe based on monetary factors, new demand from Asia, under investment and low valuations resource stocks are in a secular bull market and a cyclical bull. The secular bull market in resource stocks will end with outrageous valuations, overinvestment and supply exceeding demand and significant inflation (so significant it will actually show up in the government hedonically adjusted statistics).

    Moving to the current pull back, I heard a fantastic quote today from Andy Kessler author of Wall Street Meat and Running Money in addition to the soon to be released (and freely available on his website) How we got here. This quote sums up my feelings on the current pullback perfectly. He said it's not what you've got going into one of these pullbacks that matters, it's what you come out with. IT'S WHAT YOU COME OUT WITH.

    Interestingly during the great bull market in the Dow Jones Industrial Average from 1980-2000, the DJI dropped a maximum of 37% below it's 200 day moving average. The DJI dropped below it's 200 day moving average every 80 days (on average). It spent 409 trading days 10% or more below its 200DMA and nearly 780 trading days 5% or more below. One of the greatest bull markets in history had plenty of pullbacks.

    Of the stocks I recommended in the last few days, FLX is trading at 3.1 down from 52wk high of 3.94 but its 200DMA is around 2.4. STM is trading at 1.69, down from 52wk high of 2.95 and its 200DMA is around 1.5. IVW is trading at 1.57 down from 52wk high of 2.35 and its 200DMA is around 1.38. I could go on.. but the pattern is clear.

    These stocks are still in the money from an average purchase price over the last 200 days. This is a small pullback, even though it looks big compared with the 52wk highs. It is an excellent buying opportunity, but at some point over the next 5-10 years we will probably see buying opportunities where resource stocks fall as much as 30% below their 200DMAs BUT they will be falling from valuation levels much higher than today's or stated differently, they'll go up a lot from here and fall a lot but not nearly as much as they went up. On the day that the DOW dropped to 37% below its 200DMA in October of 1987 it was still 111% above it's price on Jan 2nd 1980 (1st wasn't a trading day), 1 year later in October 1988 you were up 25%.

    Thursday, April 14, 2005


    Buy Recommendations

    There has been a great pullback in many of the undervalued stocks I own. I'm not going to review purchasing reasons but I will list my target price. These are in order based on the degree of the pullback.

    1. Strathmore Minerals (STM.v) $1.65CAD target $6.63CAD
    2. Silver Standard Resources (SSRI) $10.82USD target $37USD
    3. Ivernia ( $1.56CAD target $2.68CAD

    I also like FLX but it hasn't really pulled back like the others. Currently $3.12AUD target $5.89AUD.

    I may not update targets or mention when I sell but of the universe of stocks there have great fundamentals and they've pulled back.

    Real Estate Bubble

    Yet another great real estate bubble article here. James Grant (of Grant's Interest Rate Observer) reiterates the primary value criteria for housing (as an investment rather than as a home).

    "For many years the standard cash return on income-producing real estate was 9%, O'Connor relates. In booms it was less; in busts, more. But 9% was the number to which it regressed. Today it yields 5% to 7% on average--with all signs pointing to even lower yields just ahead."

    There are many stories, reminiscent of the .com bubble, of buyers purchasing a place and flipping it within days. There are also stories of new condo's being flipped multiple times before they are even built.

    In the end, my friends say that real estate over a 10 year time horizon never lose money. In real terms that is probably not true if you buy at the top and 10 years later is a bottom. However a meek return of a percentage point after inflation is probably awaiting most house buyers that buy today. Condo buyers (the valuations of which have been estimated to be nearly 30% overvalued) could see real capital losses for more than 10 years.

    Is anyone going to sell their house and then rent for 2-3 years to take advantage of the overvaluation? Again people I talk to say no. Because they don't feel that it's worth their while, after all moving house is incredibly stressful. So what would a 5% to 10% yield mean in capital losses.

    300K house at 5% yield is 15k rent per year
    Assume rent stays the same (a reasonable assumption of the short term, especially as rents will be capped by the poor economic environment that would go with a big housing slow down) then;
    15k rent as a 9% yield is a 166.7K house. A 44% loss.

    Today no one thinks that they are going to see a 40% loss on their house just as no one thought worldcom or Enron's stock would be worth $0. Well in fact, it is not true to say no one. Value investors that understand the value of an investment is the value of the returns from that investment do believe that some housing will decrease by a significant amount, just like they believed that .com companies with no earnings were worth zero!

    Is it worth moving house and renting for a few years with 150k to lose. It most certainly is. Many people have almost no equity in their houses, are going to default and companies with significant mortgage exposure are going to go broke when their "secured" portfolios lose 20-40%.

    On an unrelated note, I recommend reading this blog and others using an RSS reader. The RSS (Atom) feed for this blog can be found at .


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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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