Obi-Wan Kenobi
/ 178.36.6.* / 2010-03-17 22:17
If this were a normal cycle, then there would be a ‘clean’ 5-6 months’ supply of homes on the market, not the 21 months overhanging as is the case now when all the shadow inventory is included from the foreclosure pipeline.
If this were a normal cycle, then the funds rate would not be near zero and one in six Americans would not be either unemployed or underemployed.
If this were a normal cycle, then mortgage applications for new home purchases would not be down 13.9% year-over-year (just reported for the week of March 12) on top of the already depressing 29.4% detonating trend of a year ago.
But the perception that this is turning out to be a normal sustainable expansion is strong and pervasive, although the reality is that this is just a brief statistical bounce aided and abetted by unprecedented government bailouts and intervention.
While we are inundated with that old refrain about “not fighting the tape”, in our view, this is just a glib excuse to stay long the market because of the herd effect, and to be honest, we heard that same trite rhetoric over and over again back in the spring and summer of 2007.
This is not the time to live in the moment but to plan for the future. It is a time to reflect not what the talking heads have to say on bubble-vision but on what history teaches us in the aftermath of a busted asset and credit cycle. The Nikkei enjoyed 260,000 rally points during its post-bubble era and yet the market is still down 70% from the peak; the rallies were to be rented, not owned.
The Dow in the 1930s saw no fewer than 30,000 rally points that would get investors periodically juiced up that the post-bubble economy was heading back on track from the New Deal stimulus. But go back and you will see that the next bull market did not begin until 1954 even if the ultimate lows in the Dow were turned in 22 years earlier. It was a multi-year tumultuous period that was racked by volatility and manic market performance. The key to success over the long haul was to immunize the portfolio from the massive ups-and-downs, ensure that you were getting paid to take on risk as opposed to paying for taking on risk, and a pervasive focus on capital preservation, dividend yield and dividend growth among blue-chip stable cash flow companies, and income-generating securities, including corporate bonds for those entities that had the capacity to survive.