Shooting The Messenger

Don’t blame me. It isn’t my fault your home price is plummeting, your 401K is getting rocked and your bank is in trouble. I’m just a student of financial history and saw things differently than the bubble-heads on CNBC. I still have a lot to learn and I’m often wrong (oil). However, it is starting to look like I got three things right.

  1. Real Estate Price Correction – I sold my house and went into the rental market.
  2. Bear Stock Market – Exited long positions. Moved 401K to a self-directed account with Ameritrade. Bought into bear funds and ultra short ETFs. Was a bit early, but all positions are now clearly in the green.
  3. Banks Would Fail – Was a customer of IndyMAC. Researched their stability and came to the conclusion they would fail. Pulled money out in March. Although the money was insured, I was not one of the people inconvenienced. If the “W bank” falls under their Capital Requirement, a lot of people here in Seattle will be inconvenienced and if they have more than 100K, they will be screwed.

Now what?

The real estate market still has further to fall. There is simply too much inventory and pricing still reflects the easy credit financing which is now gone. The Big Picture reports today that the Mortgage Insurance Industry is saying that 70% of Previous Buyers Don’t Qualify. Prices will fall to the historical levels of three times income with a 20% down payment. It may take 3 years to get there. If you are renting, save your money. Cash will be King in a tight lending environment. There is no dishonor in renting.

I see the S&P 500 dropping to 1000 by the end of the year. The P/E ratio is still too high as corporate profits are declining. I plan on staying short until this target is reached. At which point, I’ll lock some gains and move to fixed income.

Every few months I will confirm my bank still has a good rating with Safe and Sound. If it falls, I’ll move my money. I spent hours on the phone with IndyMAC back in March closing out my CD. I can only imagine the hell their current customers are going through right now.

I am a long term bull on the American economy, but right now we have to deal with the hangover of partying too hard with easy credit.

UPDATE (7/27/08): Turns out Safe and Sound may not have updated and accurate data on the health of a bank. Don’t Count On The “Safe & Sound” Rating Of Bankrate.Com

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MAS

Critical MAS is the blog for Michael Allen Smith of Seattle, Washington. My interests include traditional food, fitness, economics, and web development.