The Stock Market’s Oblivious Run
Wednesday, November 22nd, 2006
By Michael Lombardi, MBA for Profit Confidential
Consider these two startling studies:
— During the past ten years, the average number of new homes built and for sale in the U.S. at any give time was about 350,000 units. In 2005, that number ballooned to 450,000. Today, we are sitting with 550,000 new homes for sale in the U.S.–57% higher than the ten year average.
— According to a study by First American Real Estate Solutions, as of early this year 29% of people who bought homes in the U.S. during the first nine months of 2005 were sitting with equity of zero or less. Another 5% decline in U.S. home prices would result in close to 40% of 2005 home buyers having zero or negative equity in their homes.
So here’s what we have dear reader: Home ownership in the U.S. is at a record high. Personal debt in the U.S. is at a record high. The personal savings rate in the U.S. is at record low. And housing prices are declining. If this isn’t a recipe for disaster, I don’t know what is.
Of the 49 major economists reporting to a WSJ.com survey, a ratio of 2 to 1 said the worst for the U.S. housing market is over. Wall Street and the stock market go along the merrily way oblivious to what’s happening in the housing market.
Sure, I’ve heard all kinds of stories about why the stock is strong in the wake of a weak real estate market: We’re in for a soft landing in real estate, not a hard landing. A decline in real estate prices will result in money going back into stocks from real estate. It’s only the lower income earners in the U.S. that will be affected by the housing decline. All this reasoning… simple unsubstantiated ramblings to me.
Let’s get real. The Dow Jones Industrial Average is near its record peak because the money supply and liquidity in the system has never been so great. (But take into account inflation since 1999 and the Dow Jones is still well below its record high.)
If I were investing in stocks, I’d be wary of the big cap stocks and blue-chips that are dependent on U.S. consumer spending. I ruled out home building and retail stocks long ago… and there may be more categories of stocks that may be hurt as the U.S. economy slows. History has proven small-cap companies with niche markets, new products or new capable management has always beaten the performance of big companies. This is no time to bet against that historic trend.
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Tags: stock market, U.S. economy, U.S. home prices
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
