Business/Economic News for 4 Aug 09

Rock's Top Tip for Monday - August 3, 2009

Don't forget the always growing list of news headlines, be they business, economic, sports, military, world, etc., news at the always updating news site:

www.a1anews.com

Some of the headlines printing this morning over there:


Call to boycott products advertised on Glenn Beck's show

Will Obama Raise Taxes on Middle Class?

Microsoft Word, RIP: 1983 - 2009

American with cold misses ill-fated hike into Iran

Is Health Care Talk Toxic for Cable TV?

The Big Picture Blog: Dive Right In!

Metals, Oil, Stocks Advance as Chinese Manufacturing Expands

Rio flight diverted to Miami as 26 people injured from flight turbulence, 4 seriously

Post-Apocalyptic movies are all the rage as Hollywood destroys the world

Feds Want Apple and AT&T to Explain Google Voice Rejection

Tweeting, texting render avid users 'present yet absent'

Jobless NYC woman sues college for $70K in tuition

Housing Bottom? No, the Mother of All Head Fakes

Housing begins to reverse 3-year recession in every US region, but 2nd half looks rocky


www.a1anews.com

Business/Economic News for 3 Aug 09

Update On A Condo Using the O' Boyle's "Fast Dutch Auction" and News About Price Changes In The Past 2 Months

A few days ago, I laid a post here titled, "3 Key West Home Sellers Use The "Sally O' Boyle" Method To Try and Move Their Homes".

There are over a dozen comments on it already, and what really pleased me is Hal O' Boyle, husband of Sally O' Boyle, wrote a response in Key West the Newspaper also. (Click here to read Hal's online version in KWTN. Hal's piece is titled "Free OFMP, Get Yours Now")

The Fast Dutch Auction

Anyway, I finally have a name for what I called "The Sally O' Boyle" Method. This is the way to quickly develop interested buyers to call you about a property you are trying to sell. Hal calls it a "Fast Dutch Auction" and he gave props to local Real Estate muse, Curtis H. Wild, who drummed a great maxim into both Hal's and Sally's heads when they were learning Real Estate. That saying is,

"There is a price at which

that house will sell today"

Is there ever! And as Hal aptly explains in his column, "...that price, by definition, is the market price."

Hal is talking about a price that is not artificially propped up by appraiser fraud, loan fraud, government fraud, NAR manipulation of the MLS, government offices reporting "false data",etc.

The real market will tell all sellers who are still in denial what buyers will bear in these times of double digit unemployment, mushrooming foreclosures, tighter lending, new appraiser rules, growing "stealth inventory" on insolvent banks books, and so on.

The market does not lie. Government statistics lie. The NAR lies. Vested interests in the FIRE Economy lie. All this fraudulent interference artificially props up markets, but the market always wins out over time because of the moral hazards introduced and the unintended consequences of those moral hazards restore equilibrium by chopping off more heads the next go round of bubbles.

To get back to sanity, people are saving more than ever in the past decade and they are beginning to actually live below their means. And credit is tight right now, real tight, and it's going to get tighter. (I'll explain why credit from lenders is about to evaporate for many banks and how it's going to further affect housing later this coming weekend.)

That said, Hal (and I infer his wife Sally thinks the same way) and I and many an observer of Key West and Florida Keys Real Estate believe the "bottom" is not here.

If A Bottom Were Here, Would We Not Be Seeing A Rise On Most Price Changes For Real Estate?

Let me give you a stat right off the top of my Excel spreadsheet, and this is an eye-opening stat which is growing daily to the minus side, or devaluation side:

Out of 160 price changes on Lower Keys properties since the first week of June when I started my Excel Spreadsheet, only 3 of them were increases in price from the original listing price. The other 157 Price Changes were decreases in price from the original listing price!

And then there is all this "stealth inventory" on developers's and banks's books still being carried at "mark to fantasy" pricing which isn't factored into the hidden deleveraging by the high rollers. Nor does this stealth inventory show on the MLS. Yet every once in a while, a developer of lender has to offload one unit at what they consider and insane price, but a price which is really closer to what the market will bear at this time.

(There's a developer out here with a row of ultra-expensive condos which have not been lived in since 2005 when they were built. A friend of mine told me the developer recently filed for Chapter 11. His plan to come out of bankruptcy was to sell one of these units at a time at a devalued price and then take the money from the sale to keep current on his taxes, insurance, and carrying costs. The judge threw the filing out of the court telling the developer, "That ain't no plan. You're simply living on hope. File for Chapter 7." My bet is these condos will eventually auction off for less than what they cost the developer to build.)

When you got everybody in the FIRE Economy and the US Government using every trick in the book to keep prices artificially propped up, while Price Change after Price Change shows "lowering" of prices from the "listing price", well, you can say with assurance, housing has not bottomed in the Keys.

More proof that sellers are now in the panic mode

As Hal points out, I am noticing more people using the "Fast Dutch Auction" method just by observing my own Excel spreadsheet which is now 2 months old. (I haven't missed a day in two months of painstakingly typing in all the data.) The picture developing from my data not shared with buyers by the local NAR is getting oh so sharp and clear. And what I see is direct manipulation of the data by FIRE Economy teat suckers wanting to reinflate the Bubble.

You think the powers who control MLS data would list every price change of every house for "browsers" on all their online MLS search data bases? Dream on. Hell no, these are the same "advisors" who flogged people to buy homes during the maniacal buying panic of the last three years of the Housing Bubble. These people are trying to save some face. Another bad down year in Real Estate and we'll halve the Realtor Corps again in the Keys. The local NAR can't have that.

That's why I started my own Excel spreadsheet: to help citizens understand why housing is still too expensive and non-affordable. And by showing incremental price changes and the amount of price changes, tire kicking buyers can get the idea it makes way more sense to rent now and save money. I want to help people stay out a market which has not fully let out all its excess.

I'm not saying there aren't any deals out there. I am saying, however, the market for more than 95% of properties has a long way to go before reaching bottom

That said, I found one new Fast Dutch Auction type of deal today. I'll post about it next week.

What I want to do now is revisit the first of my examples from my post a few days ago. The exact words will be highlighted in violet. And then I'll add this week's price change:

Here are the original words I wrote for this Santa Clara condo unit . . .

Example 1

In our first example, a condo seller has been dropping his/her price by $5,000 every week. Here's the scoop:

MLS #111141

This is a 2 Br/1 Ba Santa Clara unit.

Listed 1st week of July, 2009 for $179,000

Price Change 7/9/09: $174,000

Price Change 7/15/09: $169,000

Price Change 7/21/09: $164,000

Price Change 7/27/09: $159,000

And by the way, the owner of this reverse auction unit paid $162,500 for it on 5/1/02 . . . so the seller is trying to sell at a lower price than what they paid for it seven years ago. We'll keep our eye on this one and see if it falls another $5,000 next week.

I printed all that just a few days ago on 28 July 09.

Here's the latest update, and as you can see, the seller did not even wait six days this time to make his/her next Price Change. Now the change has come only three days later:

Price Change 7/30/09: $154,000

This is a prime example of the O'Boyle's "Fast Dutch Auction". And trust me, I'm seeing this type of selling develop with high end stuff in the millions of dollars right here and now, not just low priced condos.

I see no bottom at this time. I don't forsee it next year. We're going to a place we've never been before in Real Estate, except for maybe the Florida Real Estate Crash of 1928. If you think prices can go no lower, take a chill pill. What's the rush to buy when 157 reductions are showing in the past two months with only 3 higher price changes in that same time. Oh by the way, 2 of those 3 price increases were for brand new "Affordable Housing" up on Stock Island. I kid you not.

Is this the crazy world of Arthur Brown ("Fire") or what?

Caveat Emptor,

Rock

Why I Didn't Lose Money During the Housing Crash, the Credit Crisis, and The Recent Market Crash

One of my investment thesis since I became aware of the Housing Bubble in 2002, which I was sure was going to lead to a Credit Crisis, has been to buy companies which supply necessities and which pay increasing dividends.

I also adhere to the thinking of Dr. Jeremy Siegel who advised investors in his latest book, The Future for Investors, to re-invest all dividends back into the solid companies I buy.

Here's a prime example of one of the companies I or my girlfriend invested in during the Housing Crash, the Credit Crisis and the recent most market crash:

Name of Company: Suburban Propane Partners, LP
NYSE Stock Symbol: SPH

As Suburban Propane supplies gas to more than 1/2 of Key West via bottled propane, I dug into their financials to see if I should buy "something I know" and something I figured would be a "necessity" during any major Recession or Depression.

On Jan. 17, 2008 I bought 100 shares for my girlfriend's Roth IRA. We paid $39.96 per share (and that's with the $9.95 trading fee figured in too.)

Now get ready. We're going to have another one of Rock's "The Beauty of Compounding" lessons in real life.

How Exponential Growth Works For You

Below, you will see a small table showing what those hundred shares are worth today without accounting for any dividends.

Date: 1/17/08

Amount of shares purchased: 100

Share Price: $39.96

Original cost for all 100 shares: $3,995.94

Value of same 100 shares at close of market yesterday: $4,588.00

Gain on 100 original shares: $592.06

Percentage gain: 14.82%

Okay, so the original 100 shares have gained 14.82% in just 18 months. I'll take that kind of gain anytime, especially when passbook savings across America are lucky to pay you 1/2% at this moment. (You might get 2% on your money if you can stash $10,000 in a CD).

Anyway, let's get back to what happened to these 100 shares of SPH with dividends paid out and reinvested (Our online brokers does not charge us to reinvest dividends).

Below, I list the $dollar amount of the dividends and that will be followed by the amount of fractional shares those dividends reinvested in . . .

You will see a slow exponential growth take place right before your eyes.

2/8/08 - $76.30 1.9210 fractional shares bought
5/13/08 - $78.99 1.9290 fractional shares bought
8/12/08 - $83.08 2.2280 fractional shares bought
11/10/08- $85.39 2.4440 fractional shares bought
2/10/09 - $87.90 2.2230 fractional shares bought
5/12/09 - $90.26 2.2500 fractional shares bought

Notice that the amount of the dividend increased every single quarter. One reason is the total amount of shares owned is increasing quarterly and compounding at an ever increasing rate due to exponential growth. Another reason is Suburban has been increasing its dividend quarterly (although by a half-cent for the past five dividends, still it all adds up) since it started trading on the NYSE a few years ago.

You might wonder, "Why was the largest odd lot of fractional shares bought in November of 2008? Should the fractional shares bought not be increasing every quarter?"

No. And the reason is this: On November 10, 2008, due to the market crash, Suburban Propane shares closed at $31.91 per share. Hence, the dividend paid had more "buying power" when it was reinvested.

For instance, on May 12, 2009, Suburban Propane shares closed at $41.50, or almost $9.50 higher than they were back in November. Hence, eventhough there was more dividend monies to buy fractional shares this past May, those fractional shares cost more money.

(If this doesn't make sense to you, leave comments below, and I'll help you out with basic dividend reinvestment investing.)

How We Doubled The 14.82% Gain By Reinvesting Dividends For 18 Months

That said, with all these "free" fractional shares taking an elevator to "Compounding Heaven", what do you think about this total gain on these original 100 shares of Suburban Propane?

1. The original 100 shares have grown to 112.9950 total shares owned

2. The original cost for these 100 shares was $3,995.94 (including trading fee)

3. Yesterday, SPH shares closed at $45.88 per share

4. In that my girlfriend owns 112.9950 shares, we multiply that by $45.88 per share to find out these shares are worth a total of $5,184.21.

5. Total gain at this time (were we to sell all 112.9950 shares) would be $1,188.27

6. Total percentage of the gain in just 18 months is 29.74%

Now, we might wake up Monday and find out a Black Swan event such as the CEO of Suburban Propane was photographed buggering children or snorting cocaine and the stock could take such a hit, we'd be out of all gains. But then again, another dividend period rolls around in August, and if the shares were cheaper, our 112.9950 shares would have more buying power. Meaning, once this hypothetical scandal passes, and Suburban started ascending the elevator again, our compounding would be all the more extraordinary.

Just remember this little lesson when people tell you you can't make money with Buy and Hold in the stock market any longer. That's a load of rubbish.

We're up 30% in the last 18 months on just this one stock. We have many others just like it. We diversified into "necessities" of life stocks.

And by the way, during those 18 months the Housing Bubble hit full tilt boogy, the Credit markets crashed, and the stock market almost lost 60% since its October 2007 highs.

And here we are. Invested in stocks which pay dividends, which have increased dividends yearly and sometimes quarterly for years, and invested in companies which supply necessities of life such as electricity, propane, pipeline shippers of oil and natural gas (I love these), consumer staples, etc.

You gotta eat. You gotta drink. You gotta shower. You gotta use electricity to read the Internet and turn on your lights.

Water, Oil, Gas, Electricity, Food, Razor Blades. You use them everyday in modern life. Why take chances with insolvent banks, satellite radio, tech companies, green companies, etc., when the tried and true is still outperforming those companies dependent on discretionary spending?

Simple macro-economic thinking has helped us beat the markets by wide margins. And when you toss in other hedges such as our 2003-2005 American Gold Eagle (Proof) coins, we have enough money to put down a sizable downpayment on a home somewhere other than here...hell, we could buy a house for cash in certain areas of this country. (On average, our real gold coins have gained more than 300% since 2003 to 2005, accounting for the rise in the price of gold and the numismatic ratings on these coins).

That's it for today's lesson. And oh by the way, when I discuss stocks here, know that these stocks we own are in Roth IRAs. None of the dividends are taxed. And whenever we wish to bring this money out in our retirement years, we do so with no taxes taken out for the gains.

On top of this, we can use any amount of our Roth IRA money for a downpayment on our first home purchase as long as the account was open for at least 5 years. (Both are). This downpayment money will not be taxed, nor is there any penalty. And unlike the normal Roth IRA distribution rule of legal withdrawals from age 59.5 years old, we could take out as much Roth IRA money as we need for a downpayment before we hit that age.

In that I do not believe we've seen the bottom of the Housing Crash, I will not be thinking about touching this Roth IRA money before I hit 59.5. I just hit 57 a few weeks ago. I'll just keep feathering my retirement account with $100 weekly. Same with my girlfriend.

That said, would we rather be in an upside down mortgage on a house decreasing by double digits for the past three years? Or would we rather be sleeping like babies, letting our money multiply faster and faster through dividend reinvestments in companies which won't be going out of business even in a Depression?

What do you think?

Caveat Emptor,

Rock Trueblood

p.s. Do I think the stock markets could go down hard from here? Absolutely. And I'd be surprised if they don't tank again. But I'm not selling. Read the following link to one of my favorite Jeremy Siegel articles of all time titled "Beware The Growth Trap". When markets go down and you are positioned in great "Orphans and Widows" stocks, it pays to let their dividend reinvesting compound even harder.

And while I'm at it, be sure to view the 8 part series I laid on here a few days ago titled "How Simple Arithmetic Shows Us Exponential Growth Cannot Be Perpetual Without Running Up Against Finite Resources." It is a brilliant look into the "Law of 72" which shows us how compounding exponentially works against us (such as when you borrow money from banks or credit card companies). But what isn't explained in this lecture is how to turn compounding around to favor you. And you do this by "saving" and "investing". End of story.

Business/Economic News for 31 July 09