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Pop Goes The Real Estate Bubble: What's Next for the Stock MarketPosted by securities on: 2006-12-12 13:35:27
Pop Goes The Real Estate Bubble: What's Next for the Stock Market By Todd Klimson How To Eliminate Market Risk & Make Sure You Don�t Outlive Your Retirement Funds. Plus: 7 Reasons Why You Should Consider Safe-Alternatives To Stocks, Bonds, Variable Annuities, And Mutual Funds Now. Introduction You are about to learn about 7 powerful facts that will likely cause you to re-evaluate and re-think your current portfolio status. What you�re about to hear represents a significant departure from conventional thinking, something you will not hear on T.V., the radio, or from the news media. We will challenge you with new ideas today, and we invite you to be open-minded and to really think as we discuss them with you. These ideas will make sense and you�ll intuitively know that they�re true. In the late nineties we saw unprecedented wealth created in the stock market. We witnessed companies� that were generating $5 million a year in revenue that had stocks trading like they were doing $400 million a year in revenue. After the bubble burst we saw unprecedented wealth created in the real estate market. Existing homes were being sold for over $1000 a square foot! Recently in September 2006, the commerce department reported that the median price for a new home plunged 9.7%, the largest drop in more than 35 years. Last year we had sent out a report to our clients warning of the downturn in the real estate market. Yale professor and real estate expert Robert Schiller told our readers that he expected the housing market correction to result in prices plunging downwards of 40 percent. And, unfortunately, it looks like his prediction will be right on. Decades of real estate and stock market history prove this to be true. Long-term peaks bring in the greatest number of people, even as long-term lows bring in the fewest. They buy high and sell low� again, and again, and again. -- Elliot Wave International (11/01/2006) Today economic volatility has dominated the headlines. Value in the stock market is very difficult to find. In this guide we will offer an urgent warning to those investors who are buying stocks again with no value and no earnings just like they did in the late 90�s. More importantly, you will learn a fact about U.S. debt levels that is so staggering, you will want to move your money out of the stock market today!! So where are the savvy investors parking their money? You will learn where Warren Buffett is putting his money. You will also find out about the little-known strategy that will eliminate market risk, reduce your tax burden dramatically, make sure you never run out of money, and provide you with the income you need for the rest of your life. This is why "discipline" is usually the first word out of the mouths of consistently successful investors when they're asked how they managed to succeed. They know that while the market is a formidable foe, undisciplined investors face a far more lethal enemy -- namely their own emotions, and the emotional impulse to follow others. -- Elliot Wave International (11/01/2006) So, please keep reading and discover the 7 reasons why you should move your money to safe alternatives NOW! 7 Reasons Why You Should Consider Safe-Alternatives To Stocks, Bonds, Variable Annuities, And Mutual Funds Now. With 17 straight interest rate hikes over the past few years the economy slowed down to its worst level in 3 years. According to the commerce department the GDP grew at a paltry 1.6% rate in the 3rd quarter this year. Analysts were predicting 2.2% GDP. With the economy in peril and the stock market struggling to provide value, more and more investors are turning to safe-alternatives to stay ahead of inflation and provide stable income in a chaotic investing environment. "I am sitting on cash because I believe the market is overvalued and will slide. In the future I will buy stocks cheap." -- Warren Buffett (Sept 2006) Reason #1: A U.S. recession is likely The Federal Reserve has raised interest rates 17 times in the past few years. As this trend continues the potential for a downturn in the stock market is likely. How does that impact stock prices? Simple. When interest rates rise, financial stocks, for example, will suffer because rising rates are bad news for lending institutions. Higher rates also impact key industries like manufacturing, as economic growth is choked off in higher rate environments. In fact, according to a recent survey conducted by The American Bankruptcy Institute (July 2006), 70% of the restructuring pros polled predict that bankruptcies in this country are likely to increase within the next 12 � 18 months. These pros included attorneys, debt-buyers, investment bankers, financial advisors, and lenders. The survey participants differ on the most likely trigger for the next wave of bankruptcies. But 48 percent predict that it will be interest rates. "We don't think the general ownership of equities is going to be very exciting over the next 10 to 15 years." - Warren Buffett, Shareholders Meeting, April 2000 Those who hold fixed income positions with guarantees, in their portfolios will be among the few left without significant losses. On the next page you will learn facts about U.S. debt levels that are so staggering you may want to think twice about investing in the stock market. Reason #2: Unprecedented debt levels For decades, Americans have been told by the government, by Wall Street and by the mass media that the economy is just fine, even as the cancer grows beneath the surface. This cancer is government debt and consumer debt. U.S. Government debt has exceeded the $7 trillion mark. Credit is the driver of speculative manias. Today, the typical debt carried by the average middle-class family in America is between $10,000 and $13,000 in credit card debt and a minimum 10 times that amount in home mortgages! Credit has fueled our recent mania. In fact, according to the Fed, home mortgage debt overall is $10 trillion dollars. Consumer credit is a little over $2 trillion. Consider the late 90�s. Credit was extended to too many marginal companies, namely Internet and Telecom. When credit growth slowed to these companies, the Fed stepped in to ease the monetary and credit conditions further. What resulted was a mortgage bubble. For the first time in history consumers took on more debt during a recession. The greater the credit growth, the wilder the speculation. URGENT WARNING: Today�s overall debt as a percentage of GDP is 312%, exceeding the levels prior to the great depression for the first time. Take a look at Chart No. 1 CHART I �The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.� Allen Greenspan wrote that statement in �The Objectivist� newsletter in 1966 to explain what had happened in 1929. Will someone make that statement in the future about the early 2000�s? "Bulls of 1929 - like their 1990s counterparts - had their eyes glued on improving profits and stock valuations. Not a thought was given to the fact that the rising tide of money deluging the stock market came from financial leverage and not from savings." - Dr. Kurt Richebacher "Better to go to bed supperless, than wake up in debt." - Benjamin Franklin Reason #3: Stocks have followed housing We can all debate whether the economic implications of the housing bubble will be a hard or soft landing. But if you take a look at chart 2 there is no doubt the housing market will have a hard landing. In fact, we believe the worst is yet to come. In November 2006, one of the largest homebuilder�s in the country, Toll Brothers, commented that, �We continue to look for signs that a recovery is imminent but can�t yet say that one is in sight.� And from another large company, Beazer�s CEO, Ian McCarthy, iterated similar comments, �Despite recent references to signs of a bottoming or even the beginning of a recovery, we have not yet seen any meaningful evidence to suggest that a rebound in the housing market is imminent." That has implications for equity investors as well as homeowners. As you can see in the unnerving graph on the next page (Chart 3) over the last decade there has been a remarkably tight connection between the Housing Market Index, a measure of confidence among homebuilders, and the S&P 500® one year later. Before 1994, the two measures were much less correlated. However, if the recent pattern continues, the graph suggests a potentially significant downside for equity investors. CHART III And what about consumer spending? Take a look at exhibit 1. It is clear that when housing takes a hit so does consumer spending, which, in turn, will affect earnings. "Every previous major bear market has been accompanied by a bear market in home prices? A home price decline of as little as 20% would put a lot of people in bankruptcy."- John Templeton, Equities Magazine, July 2003 Reason #4: Low dividend yields Dividend yields have also been trending downward. In 2001, average dividend payouts hovered around 4%. Today, those average payouts have dropped to about 1%. This contrast is framed nicely in the July 14 issue of "The New York Sun." The paper quotes James Melcher, president of Balestra Capital, a $200 million New York hedge fund. He says that, "stocks are by no means cheap, based on historical standards." Melcher points out that in 1982, a year of great buying opportunities, the big Dow stocks were selling at six to eight times earnings; dividend yields were around 5%; and profit margins had been destroyed. Today, on the other hand, P/E ratios are in the mid-to-upper teens, the dividend yield on the S&P 500 is 1.87%; and profit margins are very high. "The name of the game in the stock market is to buy low and sell high, not the other way around," Melcher concludes. Most investors will by high and sell low. Why? Consider this article which was taken from The Elliot Wave International website: Mountains of hard evidence notwithstanding, it's still common to see some academic get good press for conducting a "groundbreaking experiment" in crowd behavior. To wit, the piece earlier this year on the ABC News' "Primetime" show, which demonstrated the test results of a professor of psychiatry at a prestigious university in Atlanta. Here's the short version. A group of people takes a test together, with each person privately writing the answers. Then, the same group takes a similar test, though each person reads their answers aloud to the group. The outcome? Hearing the answers of others "profoundly altered" the test results. Many individuals would get high scores on the written test, only to get low scores on the verbal test after hearing the answers of others. Each person in the group was also hooked up to a machine that measures brain activity. The one interesting (if not surprising) revelation was the brain activity of people whose verbal test scores were not influenced by the answers of others -- their brains "lit up" in the amygdala, which is "the fear center of the brain." In other words, going against the group raised the fear level in these individuals, but they were disciplined enough to make independent (and rational) decisions. Again, none of this is surprising -- this one test in an artificial environment is a weak echo of what real-world markets have long proven. There are safe-alternatives that are yielding 5-7%, without the volatility of the stock market. So we are urging our readers to stand-alone from the pack, and take a conservative approach without undue risk. You�re a few pages away from discovering what these safe-alternatives are and we will explain how they will reduce or perhaps eliminate your risk. Reason #5: Rising Inflation There is little doubt that rising inflation has caused the Fed to be bolder about continuing to raise interest rates and extend rate hikes through 2006. And the more Ben Bernanke and company raise interest rates, the higher the potential for a negative economy and lousy earnings. And, as we've already pointed out, the stock market has reacted negatively to rising inflation and higher interest rates. How does that impact stock prices? Simple. Consider construction-industry stocks. With higher rates, fewer people buy homes or build them. That hurts construction companies that may be forced to lay off workers, further sending the economy into a downward spiral. With the Federal Reserve reacting to higher interest rates some 17 times during the past two years, investors are more favorably inclined toward safe-alternative yields of up to 8%. The lesson? As long as inflation looms, the Fed will raise rates. And when the Fed continues to raise interest rates, safe-alternatives are really the best place to be. Consider what the Fed said in October of this year: "All members agreed that the risks to achieving the anticipated reduction in inflation remained of greatest concern," minutes of the Fed's policy-setting Federal Open Market Committee Oct. 24-25 meeting said. So where is the smart money going these days? Consider Warren Buffett, who has $40 billion of Berkshire Hathaway parked in cash and cash equivalents these days. Oh, and by the way, Warren Buffett has outperformed the S&P 500 by an astonishing 190,194% (not a misprint). He did not achieve that number by speculation and chasing dot.com stocks. He did it by prudent, conservative investing. Here's his recent baseball analogy for sitting on cash and safe-alternatives; "It's better not to invest-or swing-at bad pitches in today's market. You may not hit a home run, but you won't strike out either. And you'll still get to first base." He also once said, "As far as I am concerned, the stock market does not exist. It is there only as a reference to see if anybody is offering to do anything foolish." �Opportunity is rare, and a wise man will never let it go by him� --Bayard Taylor Reason #6: The Impending Dollar Crisis It is no secret that Warren Buffet has been rather bearish on the dollar for quite some time. The dollar began its downslide in 2002 and Buffett capitalized when he made a $21 Billion bet against it. The dollar saw a modest recovery in 2004 but in 2006 it had reversed course and reached new lows against the euro. He is now warning of an impending dollar crisis that could last for years. �Our country�s net worth so to speak, is now being transferred abroad at an alarming rate,� he said. �In effect,� he warned, �our country has been behaving like an extraordinary rich family that possesses an immense farm. In order to consume 4% more than we produce � that�s the trade deficit � we have day by day, been both selling pieces of the farm and increase the mortgage on what we still own.� But how far will the dollar fall? Foreign investors own $10 trillion of our country, $3 trillion net, meaning the U.S. owns $7 trillion in foreign assets. With debt soaring in the U.S., there will come a time when these foreign investors try to leave. They may find other currencies more attractive. They may find precious metals more attractive. The problem is they may not be able to get through the door and panic will set in, driving the dollar to new lows. Peter Drucker writing in �The National Interest� says, �The persistent U.S. deficit creates a persistent deficit in the U.S. balance of payments, which make both the U.S. economy and the government increasingly dependent on massive injections of short-term and panic-prone money from abroad.� Buffett is betting on a further dollar decline. Are you willing to bet against someone who has outperformed the S & P by 190,000%? "It's only when the tide goes out that you learn who's been swimming naked. " -- Warren Buffett If you take a look at the chart below you will see the U.S. Dollar Index currently trading in the mid 80�s. If the dollar index breaks below 80 it will be in uncharted territory with no bottom in sight. As Buffett recently commented, �Nevertheless, I am crying wolf again and this time backing it with Berkshire Hathaway's money. Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in -- and today holds -- several currencies. I won't give you particulars; in fact, it is largely irrelevant which currencies they are. What does matter is the underlying point: To hold other currencies is to believe that the dollar will decline.� Reason #7: Baby Boomers Cashing Out Between 1943 and 1964 over 80 million people were born in the U.S. They are commonly known as �Baby Boomers�. They flooded the job market in the 1970�s. In the 80�s and 90�s they built large amounts of wealth and flooded the stock market with massive capital inflows. 8000 Baby Boomers turn 60 every day. In just a few short years they will begin to cash out of their pensions and 401(k)�s, moving their investments to fixed-income strategies that guarantee their principal. As Boomers start leaving the spending party, they will begin to shift their focus to generating income and preserving retirement assets. The growth and peak of the market and earnings and investment power of the boomers are no coincidence. Neither will the yanking of assets from the world equity markets. We may see a steady decline in the stock market for years to come as this mass exodus takes place. This generation certainly can�t rely on Social Security, so stocks will be sold for cash and invested in safe-alternatives. On the next page we will discuss a little-known strategy that can alleviate market risk. It is not to be assumed that we are suggesting that you run to broker today and sell your securities. What we are suggesting is to be cautious and do not get caught up in the hype. The facts and figures mentioned above do suggest that you need to develop a plan of action to avoid market risk and make certain you never run out of money. The Solution Let�s face it; people who are close to retiring or are retired do not have time to wait for the stock market to climb back after a decline. Making certain you don�t run out of money in retirement is perhaps the single most important issue to address in retirement. It is imperative that you develop a strategy that encompasses four main goals: 1) Making sure you don�t lose your money 2) Making sure you don�t run out of money 3) Making sure you reduce your tax burden 4) Making sure you have a sufficient level of income in retirement. This strategy we are about to tell you about accomplishes these four main goals. Ask yourself these three questions: 1) Would I like more income? 2) Would I like to pay less in taxes? 3) Would I like to make sure I never run out of money? If you answered yes to these three questions please read further. By restructuring your assets (It can be any amount that you wish to invest) into mathematical buckets and investing those buckets in fixed income strategies, and then liquidate them in sequence, you never run out of money! Let�s say you invest your money mathematically into four separate fixed income strategies (called buckets). You liquidate bucket #1 for a given value for five years, and in five years bucket #2 grew to a certain value and you liquidate bucket #2 over five years, in ten years bucket #3 grew to a certain value and you liquidate bucket #3 over five years for a certain value, and while you have been liquidating buckets #1 through #3 over a 15 year time-frame, leg #4 grew back to your original investment. And these assets can be taken off your 1040 � and thus dramatically reduce your tax burden. Although we just briefly explained a simple solution to protect your assets we have also ended your fears of running out of money. We can create a strategy from $50,000 to several million using non-qualified assets, TSA and IRA assets, Roth IRA assets, 401(k) and other pension assets. But you must make an appointment! When you come to our office we can design a basic strategy for you based upon how many dollars you would like to move. It will be designed for your situation and needs and will come with complete instructions, so you will be in complete control over you retirement assets! If you want to increase your monthly income, reduce your taxes, and make sure you are protected from the coming market catastrophe, then call us and make an appointment! MONEYTIMES NETWORK, LLC. 1970 MAIN ST. STE 201 SARASOTA, FL 34236 (941) 306-2535 Article Source: http://EzineArticles.com/?expert=Todd_Klimson |
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