Bottom Fishers may want to wait.

Third Times the Charm!

There is a lot of market selling going on right now and you might not even know it! That’s right, because every doom and gloom report that hits Wall Street is turned to a positive in hopes that you don’t see the bottom line data. Wall Street has been cramming this crap data down your pie-hole to convince you that everything is just peachy keen and your investments are safe—you know the headlines: Real Estate sales up, Jobs claims down, Inflation is low, Consumer spending is up, cats and dogs are seeing eye to eye on everything, farts smell like roses and no, that shirt does not make you look fat! We are bombarded by all this yellow journalism in hopes that you will believe there is nothing wrong with the U.S. Economy. But we are Broken. Actually, under the $3000 suit, your broker is most likely freaking out and shorting anything in the U.S. market, while telling you that your nest egg is just fine. Look for fingernail bites next time you shake his/her hands.

Let’s take a look at the S&P500—Historically the S&P500 is the bible for investments. Most mutual funds will perform at or near the S&P500, and because of it, many investment portfolios are based on it. The S&P is about to test some nasty historical data this is NOT good for your Green Backs!
S&P 500 6 month Chart from CNBC.com
Start Dec 2007 and end June 2008


We are in the Midst of a triple-bottom in the major U.S. markets—a point where a major sell-off is imminent unless something magical happens, and the FED may have already used all of the get out of jail free cards. The 1st bottom happened back in January when the credit crisis really showed it’s head. The futures markets on the open looked so grim that people were expecting a 5-7% drop, but Benny B and the fab Fed 5 came in and dropped the benchmanrk lending rate by 75 basis points. Wowzers! They saved the day! People started to buy stocks again, the markets slowly recovered and banks continued to lend, but at a tepid pace. But we were not done. The 2nd bottom came in March with a sell-off of Bear Sterns. The not-so-grizzly Bear had a liquidity crisis and was going to go on a permanent hibernation, but the Fed came in wearing shiny suits and again saved the day with a quasi-bankruptcy-buy-out that allowed the Bear to be bought out by JP Morgan. The Fed was saving the banks from doom and the Bear issue had been caged! This again brought more buyers of stock who believed that this HAD to be the market bottom. But it was not the bottom, as you can see in the chart above. After reaching a high point in May, the markets have been in a turbulent sell-off. We are seeing the triple-bottom as the trend is breaking through the lows of the 2nd bottom. Uh Oh! This is not good!

People like to make money—and they hate losing money, especially when they have lost money twice. When someone buys stock at the 1st bottom, they see the stock go up and they are happy! They buy things—houses, cars, kool-aid, gas, coloring books, boxed wine and smokes—They are happy people because they made money! Then the stock falls back to the point where they bought it and they are sad. But it’s OK—the stock goes back up! But then it comes back down again! Now the stock buyers are not happy at all—their cash has been a wash or a loss at this point. When we start to hit the 3rd bottom most people will just say Phuket Thailand and Sell Sell Sell, regardless of the price or the loss. This sell off will continue as all the bottom of the market is not in the seeable future.

But wait! The Feds came in the last two times with magical rate cuts and quasi-bankruptcy love… can’t they save the markets this time? This is a tricky one. Because the Fed, Benny B and Crew, have been loving on Wall Street during this whole no-inflation, no-recession, no-problems, no-economic nuclear winter roller-coaster, they are stuck inbetween a rock and a hard place. You can’t have inflation during a recession, and you can’t say we are in a recession—it’s a psychology thing you know—you can’t tell the U.S. consumer who can’t afford food, gas or electric, and who is losing his/her job that we are in a recession… that might just break him. The recession is the huge 10,000 pound pink elephant in the room that no one is talking about. If the Fed raises rates it will strain the already broken banks by stripping a percentage of their profits (ha ha… I said profits when referring to the bank stocks). But if they don’t raise rates, inflation will come and gobble up the already mentioned consumer. So, for now the Fed has to sit on the sidelines and see what happens. This is bad for the third bottom. Investors will continue to sell sell sell until something is done—until someone screams, “The is a huge elephant in the room people! A HUGE pink elephant!” And when that happens we will see another steep sell off as the roller-coaster barrels down faster and deeper than the previous two dips. This sell off will be rough, but with the cat out of the bag, we will find the sought after market bottom.

But with no recession and no inflation and no problems being talked about, who knows how long this could take?

WHY COULDN’T WE HAVE LEARNED ANYTHING FROM THE BEANIE BABY BUST???

The year was 1993 and the US was happy to be out of the 80’s. The beaten and tired consumer was ready for something to sink his/her teeth into... Here came the Beanie Babies—a $3.99 piece of fabric, sewn to look like an animal and released upon the world with the likes of Legs the Frog and Spot the Dog. People went koo-koo for Beanies right off the bat. Beanie addicted housewives were clawing each other’s eyes out to get the rare versions of Peanut the Elephant or Nana the Monkey… it was total chaos, with the collectable resale of the stuffed animals (yes people-- stuffed animals, and they were not stuffed with gold) shooting up 100-200% as soon as they hit the shelves.

In a sick demented way, Beanies could help explain the bubble that was created in real estate in the last few years.

The idea behind the Beanie was simple—create a product that is desirable that anyone can buy, but that will gain in value because people ‘perceive’ the product to be worth more due to the demand—sound like the 1100 sq foot Kay-bee home that sold in Escondido CA for $500,000 in 2006? It should. With Beanies, all you had to do was be at the right place at the right time. TY, the Beanie producer, created a stir by releasing small numbers of the toys and distributing them at small stores instead of chains… So anyone, at any time, could be ‘lucky’ enough to get their hands on one of the prized bears, rabbits, horeses or snakes. And with the rise of the internet, you could sell the babies with ease, to collectors across the world at a premium. At it’s highest point, a Beanie Baby sold on Ebay for $24,000...

Can't you see the similarities with the Real Estate bubble. When credit became loose (Jenna jamison Loose from 03-07), all you had to do to get a home loan was have a pulse and a valid ID— 21 year-old kids were getting $300,000 home loans because the had high credit scores (Regardless that the only credit they had was being an authorized signer on daddy’s Amex). People that drove garbage trucks were all of a sudden 'Sanitation Entrepreneurs' with incomes stated in the six figures. Loans were like crack, and everyone was addicted! People were buying up homes at 100-125% Loan to Value with no income verification and no money in the bank, site unseen from a website 1000 miles away. Getting into the real estate 'game' was easy and everyone wanted to play.

And Why?

Because Americans have been told for decades that a home is the best investment you can make! I remember my dad, smoking a Marboro, with his flannel shirt and wavy mustache, telling me that whatever I do, buy home and you will one day be rich. We have had the idea engrained in our minds that you buy a home and you automatically make equity—the imaginary wealth that somehow happens overnight when you belong to the homeowner club (sadly there are no Member’s Only jackets). And it worked! Loose credit, easy commisions and a bunch of inventory pushed people into home buying from 2002-2007. When greed tookover because rates stayed rock-bottom Greenspan/Greenback low and loans got easier to get than phone numbers at a singles mixer, people's attitude went from the idea of buying and owning a home, to the idea of turning a quick profit… and this is bad.

You see, as we take a trip down memory lane, when someone bought a home in the past (let’s take the 70’s and 80’s) the bank made you pay a higher rate to borrower the money, and you had to put some ‘skin in the game,’ with a down-payment. This forced people to ‘hunker-down’ and stay in the house in fear of losing their down payment if they sold or stopped making payments. Housing also was rising at the rate of inflation… So, while the owner paid down the principle and gained an inflation adjusted gain in value, there was equity created. This is how the miracle of home ownership is supposed to work—with supply and demand principles, along with affordability dictating the price of the property. Just like a $3.99 piece of fabric and googly-eyes is supposed to be a $3.99 piece of fabric and googly-eyes to make kids happy, a $200,000 home is supposed to be a $200,000 place to live in, that you should be able to afford, pay-off for retirement and enjoy.

While Beanies were being bought and sold for a quick profit with no real reasoning behind it, real estate found a similar cycle. When everyone can get a mortgage, regardless of credit or cash, the allure of owning the home will wane. When people look at the home as a bank and expect a home to double in price in 2 years, the glow of being a homeowner is gone—now you are an investor. And what does an investor do when an investment goes wrong? They dump the investment and look for other avenues. Sadly, the run-up in prices in many markets was due to this, and Bob and Sally Homeowner got stuck in the middle, holding a $700,000 mortgage on home that is now worth $550,000. And so is the Beanie Baby collector that spent hundreds, maybe thousands of dollars buying up stuffed chickens and cats, selling what he/she could on Ebay in hopes of huge profits. Both our homebuyer and our Beanie buyer can do is hope that the market turns. I think the Beanie Baby collector has a better chance of getting back their investment—you see, a person can buy a $4.00 toy these days, but unless you win the lottery, getting financing on the $700,000 house will take an act of god, or a HUGE W-2 wage salary, perfect credit, cash reserves in the bank and a 20% down payment at a higher interest rate… so that you have some ‘skin in the game.’ You see the lender will want you to ‘Hunker-down’ and stay in the home in fear that you will lose your down payment if you sell or stop making payments. And while you pay down principle, and the market slowly recovers to the point where the home gains an inflation based value, the magic of equity will be created!

While Beanies Crashed in 1999 (makes you wonder if all that googly-eye stuffed bear money found it's way into real estate) you can still buy these culture spawn icons @ most stores-- I believe the price is up to $4.99 now.

And like Beanie Babies, people will again start buying homes... hopefully as a place to live and raise a family, not as a 12 month get-rich-quick investment.

Oh the circle of life... and the bubble is complete!