Opportunity Staring Us in the Face

This is a tough time for bottom callers.

Mark Hulbert wrote last week that the best market timers in his database are bullish, while the worst ones are not.

Steve Sjuggerud wrote:

U.S. real estate is no longer a bubble. It's affordable once again. The median family can afford the median home in most of America. Sure, we have an oversupply of homes for sale. It happens in recessions. That'll work itself out. No big thing. (Really!) And sure, it will likely take many years for the market to stabilize, much less recover. But the bubble is gone.

The forward price-to-earnings ratio for the Dow Jones Industrial Average is about 12. By that standard measure of value, stocks are the cheapest they've been in a quarter century... That's hardly a stock market bubble!

Meanwhile, people are downright fearful. Instead of being scared, you should think about buying. Stocks are 1) cheap and 2) hated. We're just missing 3) our uptrend... Then, it's time to buy!

That part about a missing uptrend is worth noting, especially Monday morning.

You may recall the market's performance last Monday: The Dow lost 7%, the S&P 500 8.8%, and the Nasdaq 9.1%. It was the S&P 500's worst day since the 1987 crash.

The bailout bill passed on Friday, though, so all was supposed to be well. It wasn't. The relief rally from that lasted all of three minutes before rolling over and ending the day down again.

Sunday night, here's how the rest of the world fared:

-4.3% Japan

-2.6% London (9:00 a.m. Eastern)

-4.7% Germany (9:00 a.m. Eastern)

The U.S. is set to open lower following those acknowledgments that a $700 billion bailout plan that replaces the worst assets in banks with lendable cash still can't make banks lend. More is yet needed, and a fine step according to traders would be another interest rate cut.

I always like to point out opportunities where they exist, and it's awfully easy to see the one staring us in the face right now. Real estate prices are down at the same time that interest rates are down. You can fairly often get one or the other, but rarely do you get both.

Consider spending time away from the stock market to get some money together for a down payment (remember those?) on something that's become a great value. Experts disagree on whether real estate has bottomed and it varies by region anyway, but now is a good time to become that fabled "prepared man" who's favored by chance.

Comments

[Rede2fly:]

Some interesting thoughts, Jason. Measuring the market against projected earnings while still looking at past recessions isn't valid in this case. Credit has evaporated which will restrict growth on the supply side and the consumer is strapped on the demand side. Just as GE halved its dividend recently, we have to look at future growth with a look to the future, not the past.

I see a market with some bargains, but not ones that will appreciate in value near term.

2008 Oct 07 08:37 AM

[ain't no fo...:]

Anyone who is so naive as to assign credibility to the myth of "Forward PE's" in this market and economy deserves what they get... more pain.

But the brokers must love that kind of talk.

2008 Oct 07 09:33 AM

[Rhett:]

If you thinik real estate is now a buy, I've got a Hummer to sell you.

2008 Oct 07 09:44 AM

[robert.b.fe...:]

Jason is on the right track regarding real estate. Credit is still available for folks with excellent credit scores from local institutions. Even some of the largest mortgage lenders are activly courting these people for debt consolodation, home equity or new mortgages. I don't think that the bottom is here yet but it may well arrive soon and I plan to be ready when it arrives. It may be a shop worn truism but it is still accurate people don't plan to fail they fail to plan.

2008 Oct 07 09:57 AM

[Trying to R...:]

Looking at forward P/E's assumes that earnings stays constant. With sentiment being at a low and public/corporate purchasing on the decline, earnings will surely fall, and that will increase the P/E.

Looking at home ownership assumes that there is a constant pool of buyers in the market. With foreclosures abounding and boomers retiring, the pool of buyers is declining. Just another factor to think about.

2008 Oct 07 11:43 AM

[short WFC:]

home prices still historically hi relative to inflation, or population growth, as i recall theres 10-15% deviation still relative to the long term levels..you might have mentioned it.

given current economics conditions i suspect the gap will reverse itself ie we will soon have inflation get to historical hi relative to home prices- either by rising or by home prices falling further . either way buying homes at this point seems like a losing proposition

2008 Oct 07 01:24 PM

[Tom Lindmark:]

Good advice. One further thought. If you are buying for investment purposes and have a somewhat long term horizon, prices now suggest you get into the market. If you can buy at 9 or 10 cap rates and generate close to double digit cash returns then you should move regardless of your price outlook. Looking for the absolute bottom is usually a fool's errand.

2008 Oct 07 02:05 PM

[lefty37:]

Someone please explain how a median income ($40,000) can buy a median home ($175,000) $17,500 down payment. Plus taxes, insurance, etc. I could not pay the real estate taxes.

2008 Oct 08 07:08 AM