2012 has been an interesting year of a continued muddled through economy. With an annualized growth rate of less than 2% year to date, our economic engine is not exactly hitting on all cylinders. Many businesses and individuals are really somewhat frozen in their steps as we await many tax and economic issues that our government will be deciding on over the next 6 to 12 months. Truth be told, with uncertainty of which political party will be running the show going into the election and fears about taxation and healthcare -let alone additional regulation that our current socialistic administration wants to implement, we will continue to stagnate (if not fall) until clear decisions are made. That being said, you will note that I will consistently state that during times of stress and disruption is opportunity. Opportunity of prosperity and failure -It’s your research and decisions that will lead to increased odds of either.
“From John Mauldin’s recent newsletter: “A powerful analysis by President Barack Obama’s first Chair of his Council of Economic Advisers (CEA) indicates the President’s proposed tax increases would kill the economic recovery and throw nearly 1 million Americans out of work. Those are the extraordinary implications of academic research by Christina D. Romer, who chaired the CEA from January 28, 2009 – September 3, 2010. In a paper entitled “The Macrcoeconomic Effects of Tax Changes,” published by the prestigious American Economic Review in June 2010 (during her tenure at the White House), she stated: ‘In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output.’ She resigned as Chair shortly after publishing her work.”
Ok -so that’s enough of my political slant with regards to the economy.
If your into stock investments, we are in for real choppy waters from here till January, 2013. Being at all time highs (since 2007), I would state that as a whole, one could look for a 5 to 15% pullback in the DOW. With stock analysts calling for year over year 7-8% growth for the 3rd Qtr 2012 compared to 2011, we have appeared to over run our bounds with a GNP sputtering below 2%. Some 60% of S&P 500 companies missed their revenue estimates for the 2nd Quarter in 2012 versus 60% beating it in the 1st. Nothing has changed in the last two months as the unemployment figures continue to be under pressure.
You know I’m a big fan of Dividend Paying Stocks and the compounding of those dividends. Remember, the compounding of reinvested dividends will propel your returns by over 100% over the long term. That quote of Large Cap Stocks returning a 12% annualized return over the past 100 years –yup 7% is due to the reinvested dividends. I have set automatic limit purchase options on a slew of my favorites to purchase at 15 and 25% dips. Every year, I get a nice surprise from the over-reactions of others.
Now -you know I’m not a big gold fan; however, with the FEDS QE3 easing, the fuel for inflation has been poured all over the floor again. Coming off of $21oo/ounce highs to @$1600/ounce as of late -odds are the some hedging would be a good bet.
Bonds. Stay in Short Term Duration’s -odds are inflation will kick in at some point. And when it does it will be overnight. You could see overnight losses of 10-25% -literally. Now if your going to hold individual bonds and ladder due dates (not recommended unless you have large assets for diversification), consider Municipal’s for Tax Free Interest Income but only AAA and AA ratings as many municipalities are struggling under their own debt loads.
So how about REAL ESTATE?
The opportunities are everywhere in the World of Real Estate -with one exception. FOLKs -keep your grandmother’s money away from hedge funds and their real estate investing. What I am seeing Hedge Funds do -is what I call “Dumb Money”. Please, Please don’t invest in them. PLEASE. Hedge funds simply can’t manage single family homes with efficiency and in all truth it is the ‘day to day management’ that will grossly erode their ‘return on equity’ estimates. We will be buying their distressed liquidations in 3 to 5 years –mark your calendars.
What are the two greatest opportunities? Rehabbing to Sell Retail and Buy and Hold Rentals. Locally in Charlotte, North Carolina the available homes that are rehabbed in solidified area’s in Retail Pricing Ranges of $200 to $700k are at a minimum. Year over Year through June 30, 2012, available homes in the entire Charlotte Metropolitan Area is down 17.4% and available homes between $200-300k are down 23.3% with an overall month’s supply of housing at 9.3 months. I will tell you that the numbers have improved since then too. Now that’s the entire region -the healthy and the unhealthy neighborhood markets. Care to guess how it looks if your able to find that right location in a neighborhood where homes are selling within 30 days of listing?
My point? If you do your homework and know how to build appropriately for the price range and neighborhood in which your working, there is no reason to not effectively get your Rehab-to-Sell Retail Home to go Under Contract within 60 days. What does that mean? We have stability in our markets with an undocumented demand for fresh rehabbed homes. You see Buyers “want it their way”. They would much prefer a newly rehabbed home versus a homeowners tired rehab from 3, 5, 10 years ago. There is no competition. At least locally, the talk of large volumes of vacant housing that will hit the market appear overblown.
Rentals: There is opportunity in all market ranges. Preferably, jump on the working class, solidifying neighborhoods, and the high end emerging markets neighborhoods. Opportunities to buy at 97′ to 03′ pricing levels are out there. Personally, I have bought duplex’s in solidified neighborhoods at prices I have not seen since 1997 -and yes they cash flow. In fact (if you don’t have a high cash flow income from other resources) -every rental purchase needs to cash flow. Check out: Niche Markets. There is one market that most are turning there back to that is worth considering dipping your toe into. Care to guess? Yes -what I call Low-Income Stable. You see with no permenant investor financing and the higher management cost issues associated with low income, this market has become the biggest ‘don’t wanters’…., and real cheap buys are everywhere. I wouldn’t recommend this market for newbies, but if you have the mentality to oversee this supply of housing, buying the best of the best will multiply your wealth 3 to 4 times within the next 10 years.
Appreciate in real estate will be muted to single digits for at least the next 2-3 years as the unwinding of owner occupant housing dampens each increase as homeowners feel the ability to move is within reach. Focus on creating value in rehabs and rentals with at least 15% return on investement. Value oriented dividend paying stocks is another double hedge with both income and appreciation. Maintain liquidity for opportunities. These are my main goals in the world of investing.
In the near term (over the next 12 months), we have a far greater risk of continued market disruptions in all sectors of investing: stocks, bonds, currencies, gold, and real estate.
If you have read my thoughts in the past, I will repeat a Mantra that rings true: Do not fight the FED. Now -they are agressively fighting off an economic depression that quite frankly most don’t realize how vulnerable we are; however, I am not advocating a ‘the sky is falling mentality’. Don’t fall for people that want to sell you something or an excuse to continue doing nothing. We all have to eat and maintain a living -you won’t do that hiding in a bunker eating food out of can and sitting on a pile of gold.
Wealth is created in times of uncertainty. Do you agree that’s what we are in -UNCERTAINTY? Ok -then go outline a plan and take action.