wrote a piece here that introduced you to an old friend of mine, Fast Eddy. Eddy got his fast moniker because he was always coming up with a "can't miss" get rich scheme. At the time, I wrote about Fast Eddy's past run-ins with "fad stocks" and at the time I told you why I was avoiding fad stocks like Croc's (CROX) and Heely's (HLYS).Back in June, I
hindsight I am very glad I avoided them, in June when I wrote the
story, CROX and HLYS were selling at $46 and $29.50, respectively.
While CROX did climb briefly up to around $80 a share it has since
dropped to $36.50. HLYS is the more cautionary tale as it has been
hammered dropping to a recent $6.40 per share.
Now, I rehash
that story because I caught up with Fast Eddy last week and our call
resulted in another cautionary investment tale. Eddy is a "newspaper
investor" -- you know one of those guys that reads several stories in
the Wall Street Journal or worse, Time Magazine, about how hot
micro-breweries are -- and as a result he rushes out and buys the stock
of several micro-breweries. Of course, by the time the story reaches
the mass media everybody knows about the industry and the smart money
has likely come and gone.
Well Eddy called to catch up last week
and I thought I would probe into what he was doing with his money these
days. I ask both for the humor in the response and the contrary
indicator that it elicits. Turns out Eddy had been affected by all the
doom and gloom in the newspapers of late and had decided to sell all
his stocks in mid-January. He also wanted to get my opinion on shorting
some of the home-building and mortgage stocks as "this is the worst
housing recession since the Great Depression".
Hmmm, could this
be a good contrarian sign? Given his past experiences, it might be --
but who really knows. One thing I never do is try to time the market. I
am not smart enough, nor do I even think it is possible to win
consistently in a market timing strategy. And while the economic news
has been gloomy, I believe there are some potential signs of relief in
the strong headwinds that have been battering the housing and consumer
markets over the past 18 months.
First, the steep drop in
interest rates over the past 6 months is starting to provide a reprieve
to over-leveraged consumers. In the past week, I have talked to 3
friends that are refinancing mortgages. That is a positive sign for
both consumer spending and the large number of ARMs repricing this
year. This will reduce the monthly expenses for millions of Americans
and lessen the risk associated with the large ARM anvil hanging over
the heads of millions more.
Second, lawmakers are working
diligently on a bill to increase the limit on mortgages that Fannie Mae
and Freddie Mac can purchase. Currently that limit is in the $400,000
range but they are discussing increasing it to around $750,000. The
implications are very positive for wealthier consumers that have large
mortgages. A jumbo mortgage is priced higher than smaller mortgages
because of the lack of liquidity in the secondary market. If Fannie and
Freddie are let into the jumbo market this should increase liquidity
and drive down mortgage rates for this very important consumer
Lastly, the lower borrowing costs should begin to
entice potential home buyers to begin looking again. Given the very
slow rate of sales of both existing and new homes over the past 18
months, there is pent up demand that will be released eventually. Many
consumers are sitting on the sidelines because of an existing home they
cannot sell or because they want to wait for home prices to stabilize.
However, at some point interest rates will get low enough that greed
will outweigh fear and then home sales should begin to turnaround.
I think we have hit the bottom? I don't know, but I do know from past
experience that the turning point always occurs during a period of
great uncertainty. No one rings a bell at the bottom (or the top for
that matter) to signal it is time to buy (or sell). Rather, I choose to
remain fully invested at all times because the long-term upward bias of
I am not happy that my portfolio is down 21% over
the past 3 months, but over the past 6 months my portfolio is still up
about 5%. I stay fully invested through difficult times, because when
the markets turn it will turn quickly and it is easy to miss the first
15% to 20% of the next upturn. I also do not short stocks because I
don't like the risk reward ratio associated with shorting (unlimited
downside but limited upside).
Rather, I focus my efforts on
finding great companies that should continue to grow right through the
difficult economic environment. Yes they still go down because of
market sentiment as a whole, but they will be posed to increase much
faster than average once the market gets moving again.
end, I cautioned Eddy to remain invested and that sometime in the
future it is going to be very dangerous to be short home builders and
mortgage companies. Could the market and those industries drop further
-- absolutely. However, at current market levels I think there is much
more risk in missing the next market upturn. I am content to suffer
some further short term pain in order to position myself to enjoy all
of the future upside. Will Eddy listen, probably not, but I hope that
Note: Fast Eddy is a fictional character loosely based
upon investment mistakes that I or others I know have made in the past.
I use Fast Eddy to illustrate important tenants in my overall