The Debt Party is Winding Down...Opportunities Ahead!

In March of 2009 I declared the stock market bottom. Since 4-13-09 the S&P has returned 20%. On 4-13-09 I recommended to buy USB which has outperformed the S&P. Take the profit - Sell USB for a 24% (adjusted for dividend) profit.

I cannot abide with a shrinking market and continued increases in "bad debt" projections, particularly in commercial real estate, which arrived late to the party, now beginning a spectacular meltdown on the front porch. Even boring old Uncle FDIC needs to be "stabilized" with more funding.

Today, I am declaring the bottom of the housing market.

If you are in the market for a home...you've just missed the bottom. Don't despair, as of June 2009, home prices are at the same level as early 2003. With low mortgage rates and an $8,000 tax credit currently available, the market is ripe for buyers... don't delay...

Real estate values are always local. For example, this somewhat nondescript river town (Rockford MN) actually reported in July an increase of 26% in median home sale prices from 2008 to 2009 due to proximity to Minneapolis and relative affordability compared to upscale communities along the "55 corridor".

Of course, those of you aware of the "Lake Woebegon Effect" would understand the residents nodding their collective heads and attributing this success to various factors: "I'm not surprised prices are up...I've always felt this town is just a cut above the rest...We do have a picturesque little community here... :)

To see how other TC Metro locales fared click here and select your city.

To see national housing prices by Case Shiller click here.

Am I recommending to buy a house? Yes! Let me emphasize... YES!! For more than a couple years there have been more sellers than buyers, putting downward pressure on prices. This trend reversed in Q2 2009 and because of the low barriers to entry in purchasing a housing asset (as compared to say purchasing a bank that goes bust or purchasing Reader's Digest out of Chapter 11) prices will adjust relatively fast.

How does one value a house? This is a rough formula but it works. To calculate the "rent yield" take the annual rent cost for a house/condo and divide by the price of a house/condo unit. If the result is greater than mortgage interest rates - The House is Undervalued*! For example, if rent is $1,000 / month and the house costs $100,000 the result is 12%. If interest rates are at 6% the house is a buy. Overtime the market must equalize. There are only three possibilities:

1) The rent must go down. (This has happened already on a minor scale but housing is a non discretionary expense! Seize the captive market - you personally will always demand housing)

2) Interest rates must go up (This will also likely happen but you can fix your rate)

3) The house price must go up. (End of story. I recommend buying things that will go up.)

*Alternate Example"

What could the "rent yield" tell you about the market back in 2006? Back then rent was still a $1,000 / month, the house costed $240,000 and the result was 5%. Interest rates were 7%. Bingo! The House Was Overvalued.

Stocks and Funky Cats

Get this: The other day I was surfing the net and I saw a link on an official government site "How the Fed Works in Plain English". So I click. "Page cannot be displayed". Ha! I thought so. Which begs the question... When you actually start looking into the massive Federal government who really knows whats going on in the world's largest financial enterprise? Including the politicians.

Anyway, I don't want to beat the dead horse. Onto a real topic.

What ever your goals may be...picking stocks or operating a business, ask yourself this important question: Am I waiting for an improvement in the economy? The hard eyed realist approach to the world is highly appropriate at this time and will continue, as necessary, to be the recurring theme. For example: Have you ever seen a skinny chef that produces a great plate? Ha! Didn't think so.

Buy PNRA (Panera Bread) where the entire management and executive staff eat extensively off the menu prior to roll-out of new offerings. If it doesn't taste like a $12 salad (actual cost $8) ...it's back to the drawing board. Panera has it all, continued sales and profit growth, simple stable non-technical business and no debt to service. I was going to refrain from any reference to the increasing pain in the commercial real estate business... but I can't resist when its comes to taking advantage! Panera is planning to open another 50+ stores this year and they will be driving an ultra hard bargain for those premium sites.

Did you know according to economic research firm Spending Pulse there was only one category of American consumer spending to increase from 2007 to 2008? Restaurants. And not the high end ones.

Buy MCD. I know this is a high saturated fat menu but follow the logic. While Panera continues to conquer the "above median income" consumer, Mcdonalds will take the "below median income" market (which happens to also include 95% of the world's population). I almost forgot the newly unveiled secret. The Angus Burger. This is a formidable weapon. The burger is recession proof. Ask Warren Buffet about burgers. He loves 'em. Good enough for me.
You may look at these stock prices and conclude they have already had their run. Americans will not give up restaurants. And they will demand more value than ever. Restaurants that offer a value proposition, courtesy of a finely tuned supply chain, will flourish.

A note on today's small business. Any business that cannot survive the current economic condition was probably born too late. The fat '90s would have been a better time for "fat" businesses. If you want to see an animal that personifies a business model fit for today's business environment, check out Paivi Lee's cat's new look:

Note: This is only Paivi's cat's "Look". Actual picture to follow as long as it fits my investment theme.

Yes, there will be an end to this recession, but there are clear cut long term implications. Traditional expensive marketing methods are becoming obsolete (witness the latest in a long line of crumbling media moguls Readers Digest filing bankruptcy), online is the future of marketing and it is inexpensive. I do not comment on the potential value of internet related stocks such as Google etc except to say "not interested". Yes, they are the future, but there is considerable question as to which models can be converted to a recurring cash flow stream.

P.S. Don't forget to utilize the poll.