Muhammad Ali made the rope-a-dope famous in his fight against George Foreman. It worked like this: Ali, knowing he was outmatched in the strength department by Foreman would lay back on the ropes, letting Foreman pummel him with punches. Each time Foreman threw a punch, Ali blocked and Foreman lost some strength. By the later rounds, Ali, while tired from the punches he absorbed, was less tired than Foreman. He bounced off the ropes and poor George suffered an epic loss.
The US consumer is a little like Ali. He’s been hit by one volley of bad news after another. First the market crashed. Then real estate crashed. Now the job market has crashed. That’s three huge blows in less than three years. The question is whether the consumer will rise like Ali did…or not.
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Last week, the economy received further bad news. This time it was from the housing sector where new home sales were reported to be the lowest since they have been keeping records. If that’s not enough, the numbers are even WORSE than are being reported since they don’t count the number of houses sitting in a banking black hole somewhere. This follows up on the news that employment growth is non-existent.
I wrote to you last week about the prospects of a double-dip recession. That is becoming a more likely scenario each day.
The Silver Lining
Sorry, there isn’t one. Last week I was in South Florida meeting with some real estate types looking for the “deals”. Well, it’s still not time yet. There are some deals to be had, but the real good stuff is still not on the market yet. I am talking about the fire sale foreclosures that the banks are still not trying to move.
They are in no hurry. The government has already covered a good chunk of their losses. But, no one likes a home to sit empty…it just means more in repair costs later. Well, guess what? These houses and condos are not sitting empty. No, they are still occupied by the homeowner or better yet, the homeowner is actually renting the home out to someone else.
That’s right. The homeowner who is staying in the home is NOT paying the bank. The bank is in no hurry to foreclose. And, if the homeowner has moved on to greener pastures, he’s still making money by renting out the home to some unsuspecting shmo who’s thinking they have a legitimate deal. It’s pathetic really and something that is tearing at the social fabric of America. Those who are paying their bills are the ONLY ones getting screwed out there. The rest are living it up. It sickens me.
Until this situation is remedied there will be a strong under current of even greater mistrust in the financial system, the government and your fellow American. What does all of this have to do with investing? Glad you asked.
Investing is based on faith and psychology. One has to have faith in the system and market psychology has to be positive for good things to happen. When the opposite is true, people don’t invest, they save. They are scared because they are uncertain. That is why this market cannot figure out what to do. One day it looks like it will crash and the next it looks like it will soar. Sometimes it looks like it will do both in the same day.
There you have it. The market is signaling what all of us who are paying our dues are thinking. Something’s not right.
That Wall of Worry
A good friend of mine always remarked that “when things looked like they couldn’t get any worse” it was a signal to buy stocks. That has worked like a charm in the past. Right now though things are bad, but they look like they could get worse. That’s what has worried me. I am by nature a contrarian investor. One look at past articles and you can see that we have been advocating gold when others were heading the other way. With gold it wasn’t just about inflation, it was about global financial instability – something that is still not resolved.
The traders out there are having a field day, and so they should. This is not a market for investors to be planning how they will allocate their portfolio for the long term. There is too much uncertainty yet. My advice is to keep that list of stocks that you want to own handy and wait for a fatter correction. If it does not come, you may give up the first 10% of the gain, but better that than absorbing the first 50% of a loss.
If you are really itching to get your money to work – I know that banks are only paying 1% – then use a strategy that allows you to buy a few shares every week instead of going whole hog. This way you are not stuck buying at the highs or the lows but at every level along the way.
This wall of worry that is out there is quite real and it WILL produce some excellent opportunities for those of us who are patient. There are great companies out there that will survive this mess, and even thrive through it. But, there is no sense in overpaying for something when the probability of buying it for less is quite real and quite high…if you just wait to climb that wall.
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