Opportunity Presenting Itself as Fear Grips the Market Again

Investment OpportunitiesThere is a bubble forming in today’s economy and I believe that bubble is in U.S. Treasuries. Yesterday, the yield on 10-year Treasuries fell to 2.5% for the first time since 2009.

Why the big rush to U.S. T-bills?

A one-word answer explains the situation: fear. The fear is that the anemic U.S. housing market will not recover, and thus the U.S. economy will lapse back into recession.

Despite the rate on a standard 30-year mortgage sitting at only 4.53%, according to the National Association of Realtors, purchases of existing homes fell 27.2% in July 2010 from the previous month. And that has fear setting back into the stock market.

But I see the fear as opportunity. Here’s why:

The popular S&P/Case-Shiller 20-City Index says that U.S. home prices fell 33% from mid-2006 to April of this year. This is the biggest decline in home prices in the U.S. on record. To give you an idea of the magnitude of the fall in prices, during the Great Depression, home prices fell only 15% in the U.S.

With the housing market backtracking, the S&P 500 has hit a five-week low, with the popular stock index’s price/earnings multiple falling to 14, matching the price/earnings ratio of the Dow Jones Industrial Average for the first time in weeks.

I see the decline in the U.S. home price market and the fear surrounding a further price decline in housing as an opportunity for investors to buy at bargain basement prices. Yes, home prices in the U.S. have fallen during this recession by more than double the rate they fell during the Great Depression; but remember unemployment during the Great Depression hit 25%. Today, unemployment in the U.S. is less than half that, at 10%.

Further, during the Great Depression, about 10,000 banks went under in the U.S. The Great Recession that started in 2008 is expected to claim 1,000 U.S. bank failures before the economic contraction we are experiencing is over — and depositors at those banks will have their deposits protected by the FDIC.

Only a few short decades ago, the U.S. government created the Resolution Trust Corporation to deal with all real estate U.S. thrifts and savings institutions foreclosed on, as oil prices crashed in 1986 to about $10.00 a barrel level. I remember those days very clearly.

No one wanted to buy U.S. real estate in the later part of the 1980s because no one believed real estate prices would ever come back. Boy, were the great majority of investors wrong. The smart money made a fortune in the late 1980s buying foreclosed-upon real estate from the banks and RTC. I see that opportunity again today for risk-takers.

This year, U.S. banks will foreclose on about one million homes in the U.S. The “smart” money is buying foreclosed real estate, as property prices continue to be depressed across America. Meanwhile, the “scared” money is chasing U.S. Treasuries for meager returns.

Who do you think will be the big winners in the end?

Michael’s Personal Comments:

Ever hear of a fellow named Douglas Yearly Jr.? Didn’t think you did.

Douglas is the CEO of Toll Brothers, likely the largest builder of luxury homes in the U.S., with an average price per home in excess of $500,000. Toll, which has been around for over 40 years, lost over $1.0 billion since the U.S. recession started.

But, even with U.S. homebuilder confidence at its lowest level on record, Yearly is buying land at dirt cheap prices…and plenty of it. Since January 2010, Toll Brothers has invested 250 million dollars in land acquisitions at bargain basement prices.

I believe that time will prove Yearly to have been a very smart fellow.

Where the Stock Market Stands:

The Dow Jones Industrial Average starts this morning down 3.7% for 2010. Above, I talked about the fear gripping the stock market these days.

While I’m long-term bearish on the general economy (due to too much government debt, a falling U.S. dollar, the U.S. Treasury bubble, and higher interest rates ahead), I have yet to see evidence that the bear market rally that started in March 2009 is over.

Yes, the rally has stalled for several months now, but the rally has not reversed or ended.

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.