We have been so dour lately (actually this entire calendar year) that some of you may have ceased reading our monthly Investment Commentary. We are confident that the day will come when we will write glowingly optimistic summaries of the global economic conditions and just as optimistic predictions of the future performance of securities markets…..but not quite yet.
There were some positive signs in the month of August:
The price of oil dropped to approximately $115 per barrel on the last day of August. It closed the previous two months at $124.08 and $140 respectively. It traded below $113 during the month of August. After paying over $4.00 per gallon in June and $3.79 in July, I paid $3.52 yesterday.
Just this week the Commerce Department reported that GNP for the 2nd quarter of this year grew at an annual rate of 3.3%. It was originally reported to have grown at a rate of 1.9% so this was a significant upward revision. The strength of the 2nd quarter was likely due to the economic stimulus checks that most Americans received and to an increase in exports as a result of the weak dollar (a weak dollar means our products cost less to consumers in other countries so we tend to export more when the dollar is weak).
Corn and wheat as well as other key commodity prices continued to decline in August.
We continue to have serious concerns about the global securities markets. The prospects of other countries “bailing us out” by continuing to purchase our
exports is dimming as most developed and emerging economies are dealing with their own slowing economies. In addition, for reasons listed below, we feel the real estate meltdown in our country has not yet run its course.
- In the 2nd quarter of 2008, U.S. home prices fell 15.4% from the previous year. Current inventory of homes for sale is approximately 11.2 months.
- We think home values can decline significantly further for several reasons:
- The number of buyers that can qualify for a mortgage has declined. Lenders are requiring a down payment of 20 percent or more.
- Credit scores have to be good (many credit scores have been destroyed in the past few years).
- The property has to have a successful appraisal. In a neighborhood where values have been declining, appraisals are less reliable. This increases the cost of the mortgage.
- There are fewer lenders from which to borrow. Many large mortgage companies are no longer in business and there will probably be a few more casualties.
- The cost of borrowing has increased. Fannie Mae and Freddie Mac have added fees to new mortgages which have to be passed on to the borrower.
- According to the National Association of Realtors, July sales of previously owned homes rose 3.1%. That would seem like good news. However, at least one-third of those homes came from foreclosed properties.
So as the dominoes continue to fall, we have tried to take this a step further and speculate what the next couple of dominoes might be.
In the past 20 years, we have had several “recessions”. During each of those recessions, we don’t recall that our nation ever experienced a very disappointing holiday shopping season. No matter how bad the economy, the holiday season always seemed to muster enough spending power for computers, I-Pods, flat screen TV’s, etc. We are going to go out on a limb and predict that
may not happen this year. Here is why-
In previous recessions, when the household primary breadwinner was temporarily out of work, the household managed to bridge the gap by tapping home equity or by increasing credit card debt. Billions of dollars of home equity have vanished in the past year and, if you still have any home equity, you might have difficulty finding a bank that will lend you funds against your home equity. Credit card debt is at an all time high. This could be a “reality Christmas”.
Another domino might be the commercial real estate market (shopping malls, office buildings, etc.). We haven’t heard much about this yet. But if the consumer can’t spend, commercial businesses might not be able to continue to make their lease payments, ultimately resulting in unexpected empty retail space and office space. The next logical event is that the commercial realtor cannot pay his/her loan to a bank…..a bank that may already be reeling from billions of dollars in write offs from mortgages, credit cards, and other delinquent retail loans. Watch for another large bank failure.
Meanwhile, on my daily bicycle ride (see Investment Commentary for June, July and August), I now count 26 real estate For Sale signs….a new high. There were two new signs and one house actually sold. I stopped and asked the next door neighbor if the house had sold or had the owner just given up and taken the sign down. He said it sold but that the owner had originally asked $1,999,000 (it’s a nice neighborhood) and sold it for less than $1,500,000.
At Boyer & Corporon Wealth Management, we still have high allocations to cash and short-term fixed income. Although we expect global stock markets to begin to rally BEFORE the economy shows significant signs of strength, we are not concerned that will happen anytime soon. Before that happens, the markets have to have factored in all the bad news. We feel that has just not occurred.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.