A Scary Lesson from Christmas Break
By Dr. Steve Sjuggerud
December 30, 2008
When you meet someone from Florida, please, DON'T ask how he or she is doing...
Don't ask how business is. And don't ask about family either. Don't ask what they've been up to. Pretty much don't ask about anything. This is a lesson I learned over the holidays.
People are hurting here, big time. I'm sorry to suggest this. But it is the reality of Florida today. I heard it over and over again. A simple "How's it going?" leads to a terrible story about how folks have lost everything. And that's just from the people who are open about it...
I'm afraid to say more, because friends and acquaintances will think I'm talking about them. They don't realize it's not just them... The stories are everywhere. It is scary.
The people in trouble aren't dummies. They took what they thought was a calculated risk. But they're probably down a million dollars in 2008. It went something like this...
A year ago they said: "We have $1,000,000 in rental properties with $750,000 in mortgages. So we have a net worth of $250,000 in our rental properties."
But now, their Florida rental properties may have fallen as much as 50%. The properties are worth $500,000. But the mortgages total $750,000. These smart people are caught... They're "upside down" by a quarter-million dollars.
Along the way, they may have bought a bigger house for themselves... Now they could be upside down on that by $250,000, too.
To add insult to injury, their stock portfolios are down 50%. All told, the typical upper-class Florida 60-something who dabbled in real estate probably lost a million dollars in net worth last year.
That is why you don't ask a Floridian how he's doing... Talk about college football in Florida. Or the Orlando Magic basketball team. Ask about where he's from, because nobody's actually from Florida. Heck, talk politics or religion! Anything but "How are you doing?"
Over the holidays, I heard a lot of answers to "How are you doing?" It makes me wonder if real estate problems will linger longer than I expect. The supply of properties for sale is incredibly high, and more supply is coming...
You see, the upper-class Floridas 60-something apparently has "two or three" or even "eight or nine" properties they plan to put on the market "when things get better." It sounds like most people are holding and hoping – which is one of the worst strategies possible with a losing investment, especially one you pay interest on.
Some people have accepted reality. They've taken their lumps just to get out. They're honest with themselves, and they're making changes. Their wives are going back to work, and they're scaling back their expenses in a big way.
The real estate market will finally bottom when the "hold and hope" crowd joins the "take your lumps" folks, puts their properties up for sale, and gets another job. They're not there yet.
I always try to find the silver lining here in DailyWealth. And the points I made last week in DailyWealth are still true: U.S. homes are actually affordable again, as mortgage rates are falling and home prices have dropped dramatically.
But from the sound of it, the supply of real estate coming on the market in the next year should be extraordinary. Only once that's "sopped up" can a new real estate bull market can begin. Hopefully, that won't take more than a year.
Until then, remember: Unless you're ready for a sob story... don't ask "How ya doin?" in Florida.
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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BEFORE YOU BUY GOLD STOCKS, READ THIS
If you're thinking about buying one of our top "rebound" trades this week, please think again.
As we mentioned earlier this month, gold stocks are one of the world's most volatile trades... the kind of asset that can boom 300% in a year. They also bust like crazy. Consider their 66% decline from July to October this year. Wild moves like this make the "golds" a terrific trading vehicle. If you bought 'em three weeks ago, you're up around 40%. Readers of our colleague Jeff Clark's Short Report made more than 80% on his "leveraged" trades in the sector.
Gold stocks are still one of our top long-term ideas. But after such huge rise in such a short amount of time, they're due for a break. Expect the latecomers to the rebound party to get "shaken out" soon.
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There was one safe bet that mutual fund investors could make in 2008 – that the stock market was a place to lose a lot of money.
Funds' performance stats for the year to date show that Wall Street's decline was so punishing that investors had almost nowhere to hide. A majority of fund categories had negative returns in the neighborhood of 40 percent, and some categories dedicated to financial services and natural resources had negative returns of 50 percent or more, according to Lipper Inc., which tracks fund performance.
Commodities funds' negative return totaled 44.48 percent for the year and 32.90 percent for the fourth quarter, while natural resources funds had a negative return of 51.99 percent for the year and 39.44 for the quarter.
Financial services funds, which suffered as banks and insurance companies were pummeled by the credit crisis and the collapse of Lehman and Bear Stearns Cos., had a negative return of 46.90 percent for the year and 32.10 percent for the quarter. |
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There's more cash available to buy shares than at any time in almost two decades, a sign to some of the most successful investors that equities will rebound after the worst year for U.S. stocks since the Great Depression.
The $8.85 trillion held in cash, bank deposits and money-market funds is equal to 74 percent of the market value of U.S. companies, the highest ratio since 1990, according to Federal Reserve data compiled by Leuthold Group and Bloomberg.
Leuthold, Invesco Aim Advisors Inc., Hennessy Advisors Inc. and BlackRock Inc., which together oversee almost $1.7 trillion, say that's a sign the Standard & Poor's 500 Index will rise after $1 trillion in credit losses sent the benchmark index for American equities to the biggest annual drop since 1931. The eight previous times that cash peaked compared with the market's capitalization the S&P 500 rose an average 24 percent in six months, data compiled by Bloomberg show.
"There is a store of cash out there that is able to take the market higher," said Eric Bjorgen, who helps oversee $3.4 billion at Leuthold in Minneapolis. "The same dollar you had last year buys you twice as much S&P 500 as it did a year ago." |
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