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I’ll just have to get this doom and gloom post out of the way before I post another market update. Don’t worry, at least nothing new has changed in the real estate market. Slow has become business as usual for most. Now the rest of the world is starting to realize that this wasn’t just our problem. As I see it, it seems like the majority of people are just beginning to understand that there is even a problem with the financial markets. More and more people are figuring it out. Thiis new insight is not because people have educated themselves as to what’s at stake. It is starting to show up closer to home. I suspect that most people about a month from now might begin to think that $700 billion could of been a pretty good deal.

“If you don’t like this offer, you won’t like the next.”

Often times, foresight and taking action are more useful than waiting for the perfect approach. There is a lost time cost that needs to be considered.

Confidence is at the core of the problem. Perhaps we shouldn’t call it confidence, as at this point, that term is almost laughable. We’ll call it “faith”. Faith that you’ll have a job and you will continue to make a living is central to being a good little consumer. Faith in businesses is at the core of how a business may raise money to cover their operating expenses. Faithful businesses lend money as they hold the belief that the vast majority of people and other businesses they lend to are good for it (What if they’re wrong?). Faithful consumers, spend money between paychecks using credit cards because they can count on that check (What if they lose their jobs?). What happens as the once faithful businesses begin to doubt that they’ll be paid back (What if we don’t get paid for that last invoice?). What happens when the once faithful consumers can’t get credit or know that soon they could be out of a job. When minor liquidity problems turn into a financial ‘ice age’, what then?

One only wonders how Bernanke and Paulson could keep people in the ‘pews’ and involved in the day to day business of being a good consumer if those people lose their faith in the system entirely. If those people begin to feel that they could be out of a job next week what effect does that have. How much will that cost the economy. What happens when they feel that everything they’ve worked for, their house and their savings, could be lost. Heaven forbid they even take a look at their 401k plan. Pretty soon people would be (some already are) stuffing their mattresses with money and buying gold bars.

Think of Washington Mutual, people lacked faith that it was safe. They felt it was not safe enough to hold their money and not safe enough to be lent money even short term. People start pulling money out of the bank. Their credit rating gets cut down to that they can no longer raise money. Soon enough their $310 Billion in illiquid (frozen) assets are taken from them and sold to JPMorgan for $1.9 Billion where the ‘thawed out’ assets are instantly worth much more.

The concept that the value of a business, an asset, or your dollar is determined by market forces presupposes that there is a market. What happens when there is no market? That being said, bail away. Take action to establish that there is a market. Draw a line in the sand or something.

Can you imagine what the Mona Lisa would look like if Leonardo da Vinci worked quickly with a 4 inch brush?  He probably would not have caught the details necessary to communicate his intent and we likely would never have even heard of this masterpiece.  If the details get lost in translation, much of the artist’s intent will be lost.   Similarly, it’s difficult to communicate complex ideas with just a few words.  A couple months back Jim Cramer of “Mad Money” made a few broad statements about the housing market.  Anyone that watches his show “Mad Money” knows that he claims that there is a bull market in every market (stock market) and he’s going to help you find it.   I find that interesting  coming from a man that said on the Today show that ‘anyone that bought a house now would be making a big mistake’.  Where’s the positivity for the housing market?  In fact, he even said that anyone that bought a house then would lose money.  That’s a pretty broad statement and of course, Realtors and sellers everywhere got all worked up about it. 

The media loves to overstate fact in order to generate some fear.  They love to stumble across the financial equivalent of the ’if it bleeds it leads’ statement targeted to get the public to stop and stare.  Scared out of their wallets, afraid to make a move.   Combined with their love to oversimplify, they start getting dangerous.  They love to pretend their audience isn’t intelligent enough to make their own decisions.  Instead, they make the decisions for you.  That’s not conducive to good investing in housing or otherwise.   Most investors know they can’t just buy the stocks that get hyped each day on CNBC.  They know they need to dig a little deeper.  Sometimes when most people are saying sell, that’s when you need to be buying.

Real estate can be just as complicated as the stock market but thankfully, real estate moves a little slower.  There’s a lot more real estate markets and homes out there than all the stocks that Mr. Cramer claims to have in his head. (I think he’s claiming 2000…)  Certainly, the opportunities in housing have to exist.  I know what and where they are in my area and I’m sure if you work hard enough, you’ll find them in your area too.  

Anyway,  Cramer was on his show yesterday and mentioned that with the rate cuts, he thinks it could be a good time to buy a house again.   Funny part is that, during the time between his first public denunciation of real estate and his recent reprieve, not much has changed in Denver or anywhere else.  Just the Fed’s interest rates.  Mortgage rates will eventually follow but truth is they weren’t bad three months ago.  Some of the outlying areas of Denver will have some issues with the foreclosures, that hasn’t changed.  Maybe the only thing that changed is the fact that media feels it needs to put a new twist on the news.  

 For the most part, the new urbanism movement in Northwest and Southeast Denver has helped those areas of the city through most of the slump.  In fact, I pity the people that passed on the home they wanted in these areas based on news that they should be waiting for a better deal.   Most buyers are looking for the 20% price reduction that will never come.   It’s their loss.  I’ve said it before.  The rest of the country’s problem isn’t necessarily Denver’s problem.   We are not immune from the problems but all the factors that contribute to a strong local economy are still in place.   So don’t get worked up when you hear incredibly outlandish statements saying to ‘do this’ or ’don’t do that’.   There are always opportunities if you know where to look.  I’m sure a sane Jim Cramer would admit to that.

 …have you ever noticed Mona Lisa’s wandering eye?  Maybe she spotted a deal over the artist’s shoulder.

  I’m putting on my armchair economist’s hat today.   I’m still amazed that people would get excited enough to buy stocks just because the Federal Reserve announces a rate cut but it happens more times than nought.   You would think that a savvy investor would buy a particular stock based off of expected growth of the asset or the strength of the company’s financial statements.  What happens when you toss the homework aspect of a purchase aside?  

I think the Wall Street adage is, “Bulls make money, Bears make money, Pigs get slaughtered.”

In my opinion there are only three actions a smart trader would take:  

1. Absolutely nothing.  No reason to buy or sell right then.  Plenty of reasons to wait for the volatility to decrease.  Double check your facts and assumptions based off the new information and revisit the stock later.
2. Short term day trade.  Very Very Short term.  A little risky but to some a drastic, yet predictable, price move could mean a pretty penny.  
3. A move to safer ground seeing that the Fed has reaffirmed that yes, things are slightly less rosy than when they made their emergency rate cut.  Thus, when you see your position spike for no good reason, you’d sell and get into something else…or maybe take your position down and wait until tomorrow.

Now, I’m not a economist or even a stock market analyst, so don’t get too worked up if you understand this much better than I do.  I know this is an oversimplification, but my understanding is that rate cuts are applied when the economy is slowing down.  So when the seven economist types that sit on the Federal Reserve Board of Directors get together, and six of them vote to cut rates by a half a point,  my take away on that would be some concern that there could be some problems in the short term with the economy.  Problems with the economy usually doesn’t bode well for most stocks.  At least until the stocks account for the expectations in the stock price.  So when I see a rally like I saw at 2 P.M today, I try to think about what the people were actually thinking.  The truth is, the people that were buying weren’t really thinking. 

Those that were buying, for the most part, were buying based off emotion.  That’s pretty dangerous when you’re making a purchase.  Whether it’s a stock or a new home, it’s a safe bet that you should only make the purchase if you really understand what’s going on.  What is the asset worth?  Do I need to buy it now?  What’s the advantage of buying right now?  If I wait, do I miss an opportunity or will I pick it up next week cheaper?  Do your homework.   For the stocks today, the simple explanation of it is that everyone expected that there was going to be a 50 basis point cut today.  They’ve expected it for weeks.   It’s been so expected that it’s already priced into the stocks.  So when the Dow Jones Industrial average goes up 226 points without any real basis for it, and especially since the underlying factors actually suggest some negativity in the underlying assets, the smart money that already owned the stock would probably sell,  right? 

Just for fun, I wanted to take the pricing data stats from my previous post about market timing and apply a slow stochastic to the prices.

Here’s essentially how they work with stocks.

On the lower part of the image is an example of a slow stochastic. A buy signal is interpreted when the %k (green line) crosses up over the %d (white line). This is most important when value is crossing up from 30. A sell signal is the opposite. When %k is crossing down over %d from 75 (numbers on left). Go ahead and ignore the right numbers and red line for now. Essentially stochastics are trailing indicators of price trends. Trading decisions should never be made entirely from an indicator. It’s just an illustration of a trend over a time period. Depending on the time period you’re looking at, long-term and short-term trends can be identified.

Now, that being said. Here’s a slow stochastic showing short term (seasonal) market trends for the Denver Real Estate Market.

The stochastic demonstrates the change in price trends

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