Sunday, December 11, 2005

So, You're a Real Estate Property Investor

So, You're a Real Estate Property Investor
You think you're on to something with your approach to real-estate investing? Could it be a full-time job and make you a ton of dough? I've seen some do very well with it and I've seen some crash and burn. So, here's some advice and some trends I see coming down the pike that you can take to heart or take with a grain of salt. For three ways to go broke in Real Estate see; Also see;

Turnover, Leases and Equity
First, as you may know, the house you live in is not an investment. But, property that can be turned-over quickly or leased-out is an investment. The turnover variety carries more risk because there is no guarantee of selling property once acquired. Whereas, the rental variety is safer if you buy in an area where it is easy to find reliable tenants.

Areas that have good tenants are usually in and around college towns and universities because students will pay top dollar for very little living space. Students are, by and large, well financed by others who can afford to foot the bills. Other areas for good for tenants are inside and surrounding larger cities where office workers commute to work. Some workers tire of the commute and look for something closer to work, they are usually gainfully employed, and dependable. You get the drift, as they say in real estate; the three most important things are location, location and location. ( I won't go into the mechanics of lease-agreements and carrying insurance).

That is not to say that you could turnover some property as well as lease it. The thing is, over time, as you acquire more and more property and build up equity in your holdings you can use that as leverage to acquire yet more property. Patience is a virtue and this can take years. Too many have tried to acquire property too quickly and find themselves in a negative cash-flow position, (your out-go is more that your in-go). But with patience and careful consideration as to what and why you are acquiring property you could eventually build up enough equity to build an attractive apartment complex or maybe an office building someday. Now, are we talking real income property?

Trends, ARMS and No-Interest Loans
These days are the days of the stretched consumer. I don't have to tell you about rising energy prices and the like. The savings rate, (as a percentage of income), hit a possible 75 year low at -1.5% in September. Yes, that's a negative 1.5%. What does this mean besides people are spending more than they make? Consumers have very little, if any, income to buy property with rising housing prices. Housing affordability is at a 14-year low according Merrill Lynch economists and mortgage applications are 20% below this last summer's high. On top of that, by January 2006, the FDIC and like governing bodies are looking to clamp-down on the creative risky mortgage loans we see as popular lately. Interest-only and ARM borrowers are in for a rude surprise when their payments increase as loans reset and they start paying principal payments and interest rate increases. Most of these types of loans are slated to have increased mortgage payments of 50% to 100% in the next five to six years.

Then what?
Well, if you're an investor it could be foreclosure heaven. Look for an over-abundance of housing on the market during this time period. Economically, over-supply means price reduction. The scale will tip and buyers will have the upper negotiating hand. For more inforamtion on foreclosures see;

The main idea is to be able to ride out the up and down trends that are inevitable in real-estate with larger holdings in income-producing property and the accompanying equity that comes with it.
Good luck out there.

Wednesday, December 07, 2005

The Four Investment Approaches

What are the four Investment Approaches?

Investing anywhere in the marketplace these days is a difficult challenge. People invest in mutual funds, equities, bonds, options or property. This article focuses exclusively on equity investing strategies. Equities impact an investors ability to profitably invest in other investment areas. For that reason, consider these four fundamental approaches.

The Four Strategies
The four personal approaches that lead to decisive investment focus are growth, quality, sentiment, and value:

Growth is investing in accelerating earnings-per-share growth (EPS), relative growth, growth momentum, rising expectations and enterprise sales growth.

Quality is investing in turnover speed, industry leadership, return on investment (ROI), and strong operating margins.

Sentiment is investing in consensus, high price-earnings multiples (PE), insider buying data, institutional ownership and lesser-known stocks.

Value is investing in contrarian opportunities, favorable values, EPS to growth (PEG), income stocks, and relative value.

Before deciding on an investment approach, know that one approach must predominate. The reasons are legion. Using all four at once may diffuse and dilute earnings. The separate strategies have different holding patterns, time horizons, and fit differing investment objectives. Finally, profitable investment requires a focus. Focus on the approach that fits with goals, style, and level of risk comfort.

It is possible to combine elements in a central strategy from the other three strategies. For instance, a value investor should consider sentiment because analyst's expectations can change equity values. Likewise, a growth investor concentrating on momentum and ignoring quality may run into trouble by not considering return-on-investment. Find, Analyze, Buy, and Sell
The strategies assume a more than a passing knowledge of the financial markets, financial ratios, and accounting. Once an approach is adopted, there is more work to do.

All equity investors need to;
- Find stocks
- Analyze Stocks
- Buy Stocks
- Sell Stocks

First, when finding stocks, it is a mistake to fall in love. Stocks and love do not mix. Find stocks that are performers. If they top-out or have stopped performing, then sell them. When choosing stock candidates, base choices on good data and good business reasons not hearsay, broker advice, or emotion. One way to do this is to use a good stock screen. The primary function of screening is to boil down stock choices to a select few based on preferences. Many screens filter the market based on pre-set parameters. Some screening tools are better than others. For instance, a value-oriented screen may filter 9,000 stocks down to only 23 stocks that fit certain criteria. Search the Internet for stock screens, there are several to select from.

The following are some places to get started with stock screening;
- Bloomberg,,
- Morningstar,,
- Reuters,, Yahoo,,
- MSN,,
- Marketwatch,

Many on-line brokers provide relevant information, analysis, and screening. Suggested on-line brokers are;
- ScotTrade,
- AmeriTrade,
- ChoiceTrade,
- TradeKing,
- TD Waterhouse,
- ThinkOrSwim,

Secondly, properly analyze stocks. Determine values, earnings, and discover the market expectations for stocks. Compare the stocks to other stocks; resolve financial positions for safety, margin, and cash flow.

Consider earnings estimates reports, valuation tables and ratio comparison reports, earnings estimates reports, performance reports and trends in financial statements. Throughout the preliminary investigation, maintain the major investment strategy. Thirdly, purchase the stocks that meet analysis criteria. The relevant questions to ask are; - does it fit a strategy of growth, quality, sentiment, or value? Does it meet long-term and short-term goals? Are principles of diversification used? Are there any negatives to consider?

Lastly, sell the stock. Sell it when it meets the criteria for being sold. Avoid riding out winners and dumping losers. Develop a set of parameters under which a stock must be traded. Has the stock met return objectives? How much does it have to lose to cut losses? This analysis is similar to the analysis for buying stocks.

For example, an investor may sell all stocks that have appreciated by 20%, sell all stocks that have depreciated by 8%, and hold all stocks that meet criteria for future growth or quality. If such a strategy is exercised, the investor never loses more than 8%, gains are 20%, and holds are to be determined. No love lost, trade it and start over again at step one. Buy a new one, do the homework, and score a winner.

Saturday, June 25, 2005

A Peck of Woe

Chart from

I could be bullish, but if wishes were nickels I’d have a bag full. Watching the market lately has been about as appealing watching the grass grow. Not that I have anything against grass mind you. The market foretells a particularly inclement season with higher energy prices, a housing market boil and an overvalued stock market that has all the markings of pin-hole bursting. But with all the rain, the grass should be fine.

Rudimentary Crude-Oil
Back in February, , I reported that because of domestic and foreign demand for oil that it would reach $60.00 a barrel by the end of summer. Well, it looks as if it’s heading in that direction. Crude-oil, (Nymex Crude), went to a new high of $59.84 yesterday and on Friday June, 24th 2005 the oil futures traders were betting on $60.05 a barrel. These savvy futures people usually know which way the market goes. See .

Money manager Scott Black reported in Barron’s, , recently that the market looks expensive except for some groups like energy. The overall S&P 500 is trading at near 17.8 times earnings. The message seems to be to look in the dark corners of energy for value.

What to do? And speaking of a peck of woe or a barrel for that matter. Well, you could join the futures traders. The overall market fell at the news of possible higher energy prices. The S&P 500 Index was down 25 points to 1,191 and the DJIA fell almost 300 points to 10,297 yesterday. So, the cost of doing business really does matter!

Over at Zulauf Asset Management, , there are three main reasons they see the markets at risk by the end of the summer. Oil prices in the $60’s will be bearish for the stock market and world economies, (with $60 to $65 a barrel being a given). World-wide inventories have been built up to peak levels without enough buyers in sight that will cause production slow-downs. Thirdly, the monetary environment looks like a weakening of currencies, especially in Europe, (read short the Euro).

Most are saying look for a correction after the summer run. The Financial sectors may be hit hard because derivatives are positioned for decline. Commodities may be the only safe haven long-term. I do mean long term. They will be a steal around September of this year and pay off beginning late 2006 through 2008. 2008 contracts on oil may be trading at discounts to spot prices.

Zulauf spotted another more obvious concern that is so blatant that it may slip by some investment houses. China, a big contender these days, has a drought this summer. So they’ll be needing a lot, (read a great deal), of our grain export. The message seems to be to hold on to wheat and corn. Read on to see what the guru’s are seeing for the next year.

What are the skilled practitioners saying?
Over at Bridgewater Associates, , as reported in Barron’s, , they see inflation coming up the pike through 2006. This forecast is because they see an increase in commodity prices and a depreciation of the dollar.
China’s economy has pegged it’s currency to ours and is growing at a 9% rate while we linger at about 3%. They’ll need more money-supply and it doesn’t look like the good old U.S. dollar can give it to them, (so far Beijing still buys about $200 billion in Treasury Bills each year).

At Morningstar Pat Dorsey thinks the market will take a 30% hit, . It’s just a question of when. A market downturn by one-third is a big drop. Will it be a sudden shock or a gradual decline? We shall see and hopefully we won’t get hit that hard.

Economist Marc Faber reported recently that the financial economy has inflated values compared to the real economy and there may be a correction ahead, .

Bill Gross, director of Pimco, is often been referred to as "the Warren Buffett of the bond world". Gross manages the Pimco Total Return bond fund (ticker PTTAX), which has averaged gains of around 7.94% for the past five years and is up 2.5% YTD. Bill sees the things that have been fueling the financial markets, low interest rates, low inflation and a depreciated dollar as supports that are going away. The U.S. and world economy will have big adjustments to make as rates rise, inflation climbs and if and when China revalues their currency. See the interview in Barron’s, June 20, 2005.

Housing Boil
Some of the reasons for concern may, in part, be the inflated prices in the housing market. As reported in Forbes, interest-only mortgages accounted for 63% of home loans in the last half of 2004. These notes have low payments for a few years and then a later down the road kick up higher when principal payments are due. If the housing prices decline, as they have many times in the past, these borrowers will have less equity to lean on. See Forbes at . In support of this arrangement is Marc Faber who said he’d short U.S. housing stocks in a Barron’s interview, .

Fortune magazine, , reported that for the 25 years between 1975 and 2000 homes sold for 2.7 – 2.9 times median U.S income. Now homes are selling for 3.4 times income and in California it’s up to 6.4 times income. Lipper says that prices must eventually fall back into line because rent values have not reflected the same trend. For the last 10 years home values have risen 25 percent faster than rents. Rent value always moves in step with home value because rents are based on real value.

Bloomberg reported that U.S. manufacturing growth probably held near a two-year low in June, a private report this week may show. Rising home prices and the risk of inflation will likely prompt Federal Reserve policy makers to raise their target rate a ninth straight time when they meet June 29 and 30. See .

In closing I could say good luck, you’ll need it. There are a few good tidbits to salvage here. Watch out and keep your liquidity out there.
In the same Bloomberg article sited above the conclusion of the Commerce Department on July 1 may show.

Bloomberg Survey
Date Time Period Indicator BN Survey Prior
06/28 10:00 June Confidence Board-Conf. 104.1 102.2
06/29 8:30 1Q F GDP 3.7% 3.5%
06/29 8:30 1Q F GDP Price Index 3.2% 3.2%
06/30 8:30 6/25 Initial Jobless Claims 325k 314k
06/30 8:30 May Personal Income 0.3% 0.7%
06/30 8:30 May Personal Spending 0.1% 0.6%
06/30 10:00 June Chicago Purchasers 54.3 54.1
07/01 10:00 June Confidence U. of MI 94.6 94.8
07/01 10:00 May Construction Spending 0.5% 0.5%
07/01 10:00 June ISM Manufacturing 51.5 51.4
07/01 10:00 June ISM Prices 55.0 58.0

Saturday, April 23, 2005

ETFs, Exchange Traded Funds

What are they? How do you use them?
First, what are ETFs? Exchange Traded Funds, invented about 11 years ago, are akin to Mutual Funds. Like their brethren, they are invested in a group, basket, sector or index of stocks, bonds or commodities or all of the above. Like Mutual Funds you can buy them through fund companies, but mostly through brokers.

That may be where the family likeness ends. Mutual Funds are priced at the end of each trading day, at 4:00 PM to be exact, so trading Mutual Funds takes place at the close price. ETF prices change throughout the day, so ETFs can be traded throughout the day. ETFs can be shorted or have options on them, where Mutual Funds do not. ETFs can use stop and limit orders and be bought on margin. ETFs can do all that because they are bought and sold on the stock market.

Another important point is that ETFs get rid of stock picking by fund managers and portfolio turnover because it stays in a solid sector or index. This reduces fund cost on capital gains and transaction cost to say nothing of stock picking error. The expenses are lower by a wide margin, ¼ of a percent versus 1.5% for the average Mutual Fund if you hold it. You will have to pay your own transaction cost when you buy, sell, trade and pay your own capital gains when you sell. Even after that, ETFs are less expensive than Mutual Funds with the average 0.6% round trip expense of buying/selling a $10,000 stake. That is, it’s less for the buy and hold type of investor. See James Glassmans article at

How do you use them? What’s available?
Check out and put in the following fund symbols. Try QQQQ, it is the Nasdaq-100 Index Tracking Stock. This fund is an exchange-traded fund which represents undivided ownership interests in The Nasdaq-100 Trust. The objective of the Trust is to provide investment results that generally correspond to the price and yield performance of the component securities of the Nasdaq-100 Index. For more information see . Try SPY, it is the SPDR Trust Series 1. This fund issues exchange-traded funds called Standard & Poor's Depositary Receipts or "SPDRs". The SPDR Trust holds all of the common stocks of the Standard & Poors 500 Composite Stock Price Index and intends to provide investment results that, before expenses, correspond to the price and yield of the S&P 500 Index. For more information see .

Mutual Fund companies are also in the ETF fray. Vanguard offers a 500 Index VFINX, Total Stock Market VTSMX, Small Cap Index NAESX, Growth Index VIGRX, and Value Index VIVAX to name a few. And Barclays is in the mix with Barclays Global Investors S&P 500 Stock Fund, WFSPX.

Are ETFs for you?
Want to join the ETF family? Be careful. The cost benefits of ETFs are not always what they seem. For one thing, trading costs add up to a weighty sum. If you're investing in a fund that tracks broad market indices such as the S&P 500 or the Wilshire and if you invest regular amounts in your funds, (read transaction cost), then your existing low-cost mutual-fund options may be difficult the beat.

Thursday, April 07, 2005

Bear Market, ain't no Sunhine ...

Bear Market
For those who can do sums without counting their fingers, or their toes for that matter, the current interest rates, energy prices, and employment numbers sing the same old song. It’s sung to the tune of the old Bill Withers; “Ain’t no Sunshine when she’s gone� and “she’s always gone too long anytime she goes away�. Of course, “isn’t any sunshine� would be proper English but we aren’t quibbling about sentence structure as much as the financial structure of the market.

The term to back and fill comes to us from sailing ships, where it signifies alternately backing and filling the sails, a method used when the wind is running up against a ship in a narrow channel. The sail is hauled back against the wind and braced so that the tide or current carries the ship forward against the wind. The same term applies now to the market. For a brief moment the market rallied at the end of March as major mutual funds and investment houses put in a last ditch effort to make the first quarter look good. Then the market was backing and filling against a wind of fundamentals that don’t look as promising as the rally.

The aforementioned fundamentals we are talking about, among other things, are the up-ticks of interest rates. The measured approach of the Fed is finally altering the market. The Federal Funds rate now sits at 2.75% up from 2.5%. The Prime rate followed suit and is now 5.75%, up from 5.5%. So are mortgage rates up? Yes, 5.12% and 5.52% for the 15 and 30 year respectively, up 4.25% and 3.18%. The 30 year T-Bonds were down 0.12% at 4.73% on April 4th. See for current news.

Oil, Interest Rates and Jobs
Oil, too, has come a long way baby. Goldman Sachs’ bank recently envisions oil going up to $105 a barrel, ( )! While this prediction may sound unbelievable there are murmurings out there about shortages and production short-comings. Oil was trading up to $58 a barrel on Monday. It was $51 a barrel back in February when I was predicting $60 a barrel and it appears I may have been too conservative. According to John S. Herold Inc., , things don’t look rosy for reserve replacement coupled with an increased demand of two million barrels a day.

The Fed chairman has this to say about oil reserves; "Markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation," Greenspan reported to the National Petrochemical and Refiners Association Conference in San Antonio Texas. "Increased demand and lagging additions to productive capacity have combined to absorb a significant amount of the slack in energy markets that was essential in containing energy prices between 1985 and 2000." (See the Dan Ackman article in Forbes, ).

Only 110,000 jobs were added to the economy in March. (See ). The seers were expecting 231,000 jobs. It appears the soothsayers aren’t any better than Nostradamus and may be a little more obscure at hitting their targets. Many pundits consider that over 200,000 new jobs are needed in order to grow the economy. The story is bad enough, but when you consider that the jobs created were largely bar, restaurant and health-care jobs you realize that wages in those sectors don’t add much to the consumption capacity in the economy. Consider also that while 110,000 jobs, of a kind, were added we also lost 8,000 much needed manufacturing jobs in March.

What to do until the sun comes out again
So for normal folk, and I suspect those not so normal, we can expect higher prices in interest rates, gas prices and in general prices on goods and services. For businesses trying to make ends meet, do they ever, it means that the cost of doing business will be higher making it more difficult to add personnel or consider expansion. What’s in store? Well, there are higher prices in the store. A little inflation may follow and I’m not even going to get into the deficit or the savings rate.

What should you do with your investments? There are many reactions out there. You can pick from complete withdrawal and take everything out of the market, put it in Certificates of Deposit to wait for the sun to shine once again on the market. In the other extreme, you can take the approach that this is the time to buy cheap stocks which will eventually, read hopefully, appreciate in value. (The latter choice may be a poor one making an allowance for the position that stocks are considered to be over-valued at the present time). Then, there is a vast middle-ground where you can look for value, buy gold or invest in energy stocks and funds.

Be careful if you go totally into the energy sector. It will do well into the coming months but, historically, it will drop off just as dramatically and possibly unexpectedly. Be careful out there and remember that it’s always darkest just before it goes totally pitch black, especially when it comes to oil. The sun will shine again one great day.

Wednesday, March 16, 2005

Social Security Reform and your Investments

Will it Wipe out the current “Trust Fund�?
Mr. Bush and the début of Social Security reform and, particularly, its privatization has not exactly heralded celebration in some sectors lately. Mr. Bush inherited a severely busted system that needs to be repaired. It’s time for clarity, not lugubrious scare tactics and naysayers.

First of all, the legendary Social Security Trust Fund is a fiction. There is no fund, because it doesn’t have a scintilla of funds in it. Ever since its inception, way back in the days of 1935, current tax dollars put into the system go right back out to the current Social Security recipients or as dollars for congress to spend. That’s where the story would end, but there’s more. The Trust Fund is supposedly backed by government securities. That doesn’t mean anything because the money does not have to be repaid. For example, if I hold a government bond, I have an asset that pays interest or has the liquidity to sell at any time. If the government holds a bond, however, it has no obligation to pay itself. It is meaningless.

Nothing has ever been saved in the Social Security Trust Fund or put into reserve. So there is no trust and no fund. The trust fund consists of IOU's from Congress, which keeps spending the money. Social Security taxes have been used, (read borrowed), to offset the federal budget deficit. A surplus in the Trust Fund means they took in more tax dollars that year than they had to pay out that year. In years when the Social Security trust fund was operating in surplus, as happened in 1995, the extra revenues were used to buy Treasury bonds that financed the general operating costs of government and to lower the deficit. They used the Trust Funds to pay the bills. This amounts to legal embezzlement. Representatives in government have been supporting the fiction of a Trust Fund for too many years.

Secondly, the maiden proposal is to allow the option, not the requirement, for tax-payers to put 4% to 12.5% of their FICA tax into their own personal retirement accounts with a cap of $1,000 a year rising $100 a year thereafter. Talk about going slow, this is a very soft first step! Funds will still be available for current retirees through the remainder of FICA collected plus selling more bonds to finance the transition.

Can we Afford the Transition?
Good old Uncle Sam has a net worth of about $50 trillion, ($80 trillion in assets minus $30 trillion in debt). Social Security reform is slated to cost approximately $2 trillion or about $200 billion a year over a number of transition years. To bring it down to numbers we can recognize, it is equivalent to saying; – does someone with a net worth of $50,000 have enough credit-rating to borrow $200 a year. The answer is, well in most cases, yes.

How will it Affect your Investments?
No one really knows what private Social Security accounts will do to the Financial Markets. Three things come to mind. First, we can only surmise that it, like tax-reform, it will increase the savings rate in America. If more savings are available then more capital will be available for future growth productivity growth. More savings also provide a buffer to inflationary tendencies in the economy since it mitigates shortages in the money supply.

Second, reducing retiree and other recipient’s dependence on the government can only foster more self-reliance and accountability on a public and governmental scale. Social Security individual fraud and governmental fraud would cease to exist when you take the government out of the game. The fictitious Trust Fund, that never existed anyway, would no longer be a source of extra borrowing for the government.

Thirdly, the influx of money may give certain markets increased demand and thus an increase in prices. This, steroid-like, shot in the arm may or may not have lasting effects as the initial exuberant run-up wears off.
Social Security, - it's time to change it. Perhaps more insidious and damaging, if we have no reform we can look forward to more taxes and more governmental hiding behind FICA spending. Hopefully, this administration may be our last hope if it has the fortitude to ignore the duplicity of fear mongers and get the job done.

Thursday, March 03, 2005

Tax Reform and your Investments

The System
At this time of year to say the tax system in the U.S. is bewilderment to all who approach it is an understatement. Working people making $50,000 may have around 25% taken for taxes every pay-check. That’s $12,500 paid each year! These legendary tax-payers may even end up owing taxes at the end of the year if they dared to make money through investing in companies who hire people and help make our economy grow.

What the Fed is Saying
So, what is tax reform about? What is on the table? Do we have place-mats or do we have some utensils to work with? Invariably, Alan Greenspan had something to say about the issue. The story broke today, the influential Fed chief said that replacing the tax on income with one on spending could boost growth, but likely opposition means that a hybrid may be the best approach to reforming taxation.

Clearly, Mr. Greenspan is talking about putting a tax on spending, (some form of a Federal sales-tax system), instead of the present IRS 1040. More specifically he’s backing a mixture of the two ideas and believes that a tax on consumption will foster growth. Just as clear, is that we need to reform and simplify the tax code.

The White House Council of Economic Advisers put out a report last month that basically agrees with Mr. Greenspan’s sentiment. They advised, as advisors tend to do, that incremental change would be better than a more sweeping shift to a national sales tax.

A Federal Consumption tax
Some are saying that a consumption tax would place an unfair burden on lower-income Americans who would end up paying more for the basic necessities of life. To counter this fear, the proponents are proposing a progressive system that would either exempt some income levels or exclude certain product categories like food.

Besides the April 15th deadline we are all familiar with, Mr. Bush has made a July 31st deadline for the tax panel to make some solid recommendations for tax reform. As far as I can discern, it appears that the proposal of merit will include a progressive consumption tax.

How will it effect your Investments?
We all know that time is money. But, is money time? Will it have a positive effect? Well, yes. An unbalanced amount of time and money is spent on compliance with and on gaming the current tax-code. With a simplified consumption tax system those vital resources would be freed to more productive capacity.

What else? Will it send the markets shooting up? The individual savings-rate has been too low in the U.S. for too long. A larger cumulative savings-rate provides a pool of funds for firms to reinvest toward growth. The tax reforms will increase savings, since savings won’t have such a tax penalty on interest and dividends. Lower rates on income – especially on investment income – will encourage investment and arouse the, presently slow-moving, economy.