2007 Year in Review

2007 was a very satisfactory year for me.

I generated significant market out-performance, and that came mostly by avoiding the things that did badly this year.

After waiting since 2004, this was finally the year when the mortgage bankers, mortgage insurers, bond insurers and other financial institutions reaped the consequences of their poor business practices. Although I did not short these investments, I was able to generate significant out-performance simply by avoiding the group.

Unfortunately, several of the Real Estate Investment Trusts (REITs) I invested in were also taken to the woodshed this year. In each case, I think the REITs I’ve chosen are the babies getting thrown out with the bathwater, and will almost certainly be market out-performers in the years to come.

I look forward eagerly to 2008 and beyond, when I think my out-performance will be generated not just by avoiding bad investments, but also because I’ve chosen great investments.

I believe 2008 will be another volatile year, as uncertainty about the economy and slowing corporate profits will lead to significant market moves both up and down. It should be a good year to be a bottom-up stock picker.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Recession storm-clouds gathering

Although the latest GDP report showed the US economy grew at a blazing 4.9% in the 3rd quarter, the data looking forward is looking increasingly weak.

The Index of Leading Economic Indicators (LEI) has gone into negative territory. Our economy has gone into a recession every time the LEI has gone negative, except for once in the late 1960’s.

The credit crunch, brought on by lax lending standards to subprime borrowers, is spreading to every credit market. Banks are taking HUGE write-offs, and being forced to make fewer loans as they rebuild their balance sheets.

The employment market looks to be rolling over. The four-week moving average of initial jobless claims has risen to 343,000, the highest since June 2004 (except for the spike due to Hurricane Katrina). In June 2004, it was on the way down after the 2001 recession. It’s currently on the way up.

Retail sales are looking to be worse Christmas season since the last recession.

Volatility in the bond and stock market has risen dramatically.

Copper prices have been falling.

UPS and Fedex have announced disappointing results looking forward, and the Dow Jones Transportation Average has been diving.

Financial indexes have been tanking, and in a finance-based economy like ours, that’s a bad sign.

The one big thing that hasn’t confirmed all these dark clouds is the stock market. Either stock investors are more prescient and no recession will occur, or they are deluding themselves into believing things will be okay or the recession won’t last long.

My guess is that most stock investors are being overly optimistic, and aren’t looking at coming earnings shortfalls.

When companies begin to report earnings next January, I think investors will get an initial shock. Over time, more information will pour out that the economy is in a recession. By the time this evidence is conclusive, the economy will probably be recovering.

Most investors will be scared when they should be greedy. In other words, by the time investors are scared about a recession, stock prices will be low, and it will be a great time to invest.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

You can’t get something for nothing

The market seems to be absolutely focused on the Fed.

Everyone seems to think the Fed has the power to make or break the economy, get lending moving again, support the dollar, etc.

The fact is, the Fed doesn’t have that much power. If you don’t believe me, go read John Hussman’s article on the subject, or read any of his recent weekly commentaries that address the issue.

The thing that surprises me is how many people believe the Fed can take action with no seeming repercussions. As if the Fed could move interest rates, or lend money to banks without any adverse reaction.

The reality is that the Fed can only take action with consequences, just like the rest of us mortals.

When the Fed offers liquidity, they are printing money and creating inflation.

In the long run, the Fed doesn’t matter much, although they do have a short term psychological impact on the market.

Even worse than that, the Fed’s actions almost always come with some downside, and that long term impact can be profited from by smart investors.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.