Now I want to say something about real estate. My father was in real
estate all his life. Dad was a civil engineer, and prior to the
Depression he was a builder. He knew building from the foundations
to the elevators to the roofs to the electrical systems. Then the
Depression hit, and construction stopped dead. Nobody built a darn
thing - wait, the government built post offices and roads, mainly to
give people jobs.
During the Depression and afterwards, my father went into
management. He managed buildings for Tishman Co. and these were all
New York City Apartment houses - many on Park Avenue. In those days,
times were so tough that you had to negotiate a lease on an
apartment. In other words, you had to sit down with a prospective
tenant, and try to get him to sign on the dotted line. Believe me,
it wasn't easy, and my dad would often come home exhausted after
getting someone to sign a one-year lease.
My father had a "formula" that he used when buying a house, any
house. He insisted, "No matter what you buy, figure it's going to
cost you 10 percent to carry. That includes loss of interest on the
money you put down, property taxes, wear-and-tear, repairs, extras -
your cost will ALWAYS come to 10 percent." I've checked these
figures over and over again, and my father was correct. When you buy
real estate, think 10 percent!
Recently in the WSJ there's a group (with pictures) of five houses
that are listed as rental and income properties. The first house is
typical. It's in Sanibel, Florida, a two bedroom condo - price
$1,150,000. The house rents for $39,000 for the year. OK, so the
house cost you $115,000 to carry (10%), and you pull in $39,000.
Loss $76,000.
Russell conclusion - This is an income property? It's selling at
near three times what it's worth as an investment, in my opinion.
And this is typical of almost all real estate today.
You want your own home and a roof over your head that you can call
your own? Fine, buy a house, own a house. But if you think you're
getting a bargain today, forget it. Houses, like stocks, are
overpriced. Period. The only economic reason to buy a house today is
the thesis that inflation will bail you out. The only thing I don't
like about that reasoning is that the public has swallowed it hook,
line and sinker. Too many people own homes today and far too many
own them along with fat mortgages.
PHILOSPHY OF INVESTING - What are we really trying to do in this
investment business? We're trying to improve our lives with the help
of increased income and therefore purchasing power. Or are we trying
to make our lives safer by increasing our assets? Or are we simply
seeking more freedom, which is what money can give us?
Seasoned investors think of investments three ways.
First and most important - is the investment safe, meaning, if we
buy it will we eventually get our capital back? One measure of
safety is the risk premium compared with government 10 year T-notes.
Second - Does it throw off income? Income increases our purchasing
power. Income also allows us to compound.
Third - Will it increase in price? If we buy it, is there a chance
that we'll be able to sell it at a higher price to a future buyer?
On another level, everything in the markets boils down to a flow of
funds. In other words, which way is the big money, the important
money, going? Then another question arises - why beat our brains out
trying to decide what's a value and what isn't? Why knock ourselves
out reading reports when the important factor is simply the flow of
funds? Where's the money going?
Ah, that's a key question. After half a century of struggling and
asking questions in this business, I've concluded that you should
have a good idea of what constitutes a VALUE. But once concluding
that an item is a value, you must check and confirm your opinion via
a flow of funds.
For instance, if you think that General Electric stock is a value,
you might be correct. But before you buy GE stock, you better check
its price action. In this business you must accept the thesis that
nine times out of ten, the market is smarter than you are. If you
can accept that thesis, you'll be way ahead of the game.
So if you believe that GE is a value, then check the chart and see
whether GE is in a rising trend or not. If GE is in a declining
trend, then I don't care what you think of GE as a value, you're
going to lose your money. You'll lose your money simply because
you're at odds with the market.
OK, let's take it to the present, and talk about the stock market.
By any historical measurement, this is a very expensive market. But
what about the money flows? So far, the money flows have been
favorable. Money has been pouring into the stock market. In fact,
January's inflow into the markets has set a record.
But the overvaluation is a huge consideration for seasoned investors
like you and me. We have to decide about safety, particularly if
we're not traders. The S&P is now selling for almost 30 times
trailing earnings. That's about as overvalued as the market ever
gets. So even though the flow of funds into the market has been
favorable, should we participate? Critical question, and a personal
question.
The great money in investing has been made buying undervalued items -
stocks, Picassos, gold, silver, housing, bonds, you name it. So
what about the stock market now in its overvalued state? I've always
believed that an overvalued market is an unsafe market. But since
the trend has been UP, I have advised limited participation in the
market via the Diamond ETFs, which are a proxy for the Dow.
Recently, because of the non-confirmation by the Transports I've
said that I, personally, have "had enough." I sold the Diamonds, and
now I'm prettty much on the sidelines.
The current policy of the Federal Reserve is to inflate. Alan
Greenspan stated recently, literally, that he would keep interest
rates low and inflate. And there's little question in my mind,
that's exactly what he's doing. On his "word," stocks and bonds both
surged.
Let's return to the idea of values. With gold today at less than
half its peak 1980 price, it seems to me that the best and the most
unappreciated value around is gold. But gold has something going
against it. The establishment is against it. Rising gold indicates a
preference for intrinsic money over the fiat money that the
establishnment (i.e., the Fed) is creating. Therefore, we can expect
the establishment to do everything in its power to discourage the
public from buying gold.
For instance, we've been hearing about a "Gold ETF" which will be
traded on the NYSE. Britain has a gold ETF and so does Australia.
But weeks go by, months go by, and I understand that the hoped-for
US gold ETF is being "held up" by the SEC. Why? Why should it take
so long for a Gold ETF to become available? The answer is blowing in
the wind.
On February 11, the Dow broke out to a new recovery high, but the
new high was not confirmed by the Transportation Average. Maybe the
Transports will confirm today or tomorrow or next week. But a
persistent failure by the Transports to confirm is a "red flag" as
far as Dow Theorists are concerned. When the Averages disagree,
something is wrong.
So that's one of the main items that I'll be watching for in the
period ahead. To confirm the Dow, the Transports will have to close
above its January 22 closing high of 3080.32.
TOPPING OUT - As subscribers know, I'm of the belief that the bear
market (upward) correction that began from the October 2002 lows is
now in the process of topping out. Along these lines, let's study
this daily chart (courtesy of StockCharts). By the way, for
definitions of some of these terms, please see my Glossary on the
home page of the website.
Look at the shaded area at the top of the chart. This tells us,
according to RSI, that the Dow was seriously overbought. Note that
the Dow then moved higher, but RSI did not confirm. Nor did MACD
(the heavy black line at the bottom of the chart) confirm.
The Dow then backed off to the 10470 level, where it sat for a few
days. Next the Dow rallied to new high of 10737.70 on February 11.
Again RSI and MACD refused to confirm. And that brings us to the
present.
Now note that MACD appears to be rolling over just above the thin
black line at the bottom of the chart. The little vertical columns
are called histograms, and they simply measure the distance between
the MACD and the thin black line. The thin black line is a 9-day
exponential moving average of MACD. Buy and sell signals are given
when MACD (the heavy black line) crosses above or below the thin
black line.
More tech comments follow
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