First of all, a thousand apologies for getting this out to you so late today.
As you know, we are working furiously to upgrade all the IDE services and that begins with this e-letter. Yesterday, Michael Masterson announced that nothing could leave the building without its going through both my and his desk. That slowed things down a bit because we are both pretty tough editors.
I hope you will notice the difference today. Our plan is not to rehash the very questionable news you get from the Wall Street Journal and CNN. The investment articles you will be getting on a daily basis from IDE from now on will have to pass three demanding tests:
- They must give you a useful investment or wealth-building idea
- That idea has to fit into our overall concept of smart investing today
- Any claims we make must be adequately proven
- It must be easy to read quickly
- It must be fun to read
So please judge this and subsequent issues by those standards. Give us your feedback. We know the only way we can sell you our investment products is to prove to you that we have better, fresher and more useful wealth-building ideas than you'll get anywhere else.
You have to hand it to the real estate industry. They must be some of the most optimistic people on the face of the earth.
Last July, in the middle of one of the worst housing markets in history, the National Association of Realtors said that they expected home prices to fall only 6% in 2008. This year they said home values will rise by 4.3%.
What happened?
Median home prices have fallen 15% since then.
The main reason for this decline was the glut of foreclosures that came onto the market. But the ever the optimist (or shill for the industry, if you prefer), Lawrence Yun, the Chief Economist for the NAR believes foreclosures are nothing to worry about. He told the major media that foreclosures will not put any "additional downward pressure on home prices".
Apparently Larry doesn't know about (or isn't counting) the vast number of foreclosures that aren't being re-listed by the banks. At some point, the banks are going to have to let go of this "shadow inventory". And when that happens, prices may decline even more.
There are currently over 15 million mortgages that are under water. Our guess is that 10 million of these will be defaulted on.
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But that doesn't mean you can't make money in real estate today.
Michael Masterson, consulting editor of Investor's Daily Edge owns tens of millions of dollars in real estate. He stopped buying (and told his readers to stop buying) in 2007. Now he's buying again.
"I'm not doing it because I think the market will rebound any time soon," he says. "On the contrary," he says. "I don't expect to see 2004 prices for another 10 years."
In the meantime, he insists, there is plenty of value out there to take advantage of. . Here's what Michael told me last night at Joe's Cigar Bar about his most recent acquisition:
"Peter, my real estate partner in Florida, and I bought another rental property today. It's a large three-bedroom house with a terrace and an oversized garage. It was entirely renovated and expanded three years ago. It would have sold easily then for $350,000. We paid $120,000.
I've been buying properties in South Florida since 1983. And the prices I'm seeing on select houses are at that level. It's amazing.
Will prices continue to drop? I'm not sure. There are probably 10 million Americans who are upside down on their mortgages right now. But I'm not trying to time the bottom of the market. I'm buying because the fundamentals are so good.
This is a property we will be able to rent, easily, for $1,300 a month. That means we will be making somewhere between 10 percent and 15 percent on our investment, cash on cash. And that's assuming no appreciation. If we get 2 percent -- which is possible -- our ROI will jump into the 29 percent to 25 percent range."
At our Boot camp this October, Michael will share with everyone how me makes his buying decisions. He'll also give you the guidelines he uses to determine whether a particular property is worth getting into.
But real estate, of course, is not the main item on the conference agenda. We've challenged the top experts in Internet marketing, copywriting, search engine optimization, social media, and more to teach you the tactics that are making them millions per month. Find out more about Boot camp, and the gentleman's wager we're making with attendees, here.
Speaking of real estate, the latest government bailout program has a real-estate component that you should pay close attention to. If passed, it will definitely change your life.
It will change your life even if you don't want it to. IDE is here to announce that our government will being bringing something new and exciting into your neighborhood.
Will it be a new paved road?
No, that's not the plan.
Will it be better sewage system?
No, that's not the plan either.
What will be coming to your neighborhood if this provision of the bail out program is passed is….are you ready?
A crack house!
Yes, Part of the proposed $4.25 billion plan is a provision that will create tens of thousands of federal housing units.
The money will be buying up foreclosed properties and building low-rise rental apartments (otherwise known as housing projects) on them.
Federally designed and run rental housing. What a novel idea!
I don't know about you, but when I hear that happy phrase I can't help but picture some of the housing project "amenities" I've seen in the past:
- Ominous buildings surrounded by weeds and rusted cars.
- Laundry hanging from windows that can't close.
- Toilet paper and milk cartons tossed onto nearby trees because running garbage down six flights of stairs is too much trouble.
I'm not making any of this up. Come visit Agora's headquarters in Baltimore and we can take you on a tour.
Even more terrifying however, is that part of the money would be used for the "purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates."
You read that correctly. Government sponsored Section 8 housing may be coming to your own, tranquil neighborhood very soon. One has to wonder what this will to do your property values.
On the bright side, however, no more long car rides to the inner city to score your next nickel bag. It will be just an easy stroll down the block.
The SEC and FINRA are finally admitting what we told you months ago…
We've been warning IDE readers about leveraged ETF's months. Finally, the SEC and the Financial Industry Regulatory Authority (FINRA) have jumped on the bandwagon.
They have just released a report called, "Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors." It explains why these highly popular investments hardly ever work. When people talk about the returns they get from leveraged ETFs, they are talking about results from daily transactions that are annualized to give you a picture of what might happen if those daily results could be repeated 365 times in a row.
This, of course, is pie-in-the-sky economics.
Here's the problem with leveraged ETF's…
Let's assume that you expected the financial sector to fall in 2008. That would have been a great bet. Financial companies performed horribly last year. The Dow Jones U.S. Financials Index (DJUSFN) was down 51%.
The ProShares UltraShort Financials (SKF) is designed to generate returns that are 2x the opposite of the market. So with the market down 51%, you should have made 102%.
But that's not what happened. The price of the SKF was $104 at the start of 2008. One year later, it was trading at $103… a loss of a dollar per share.
And the ProShares UltraShort Financials is not the only leveraged ETF with a correlation that breaks down over time. Most of them do.
Leveraged ETFs can be very powerful and profitable tools if you use them properly.
At IDE we are not opposed to leveraging ETFs. But only if you know what you are doing. And most of the so-called investment experts out there touting them today are either severely naïve or outright bandits.
You can use ETFs to hedge your portfolio by playing the market short of long.
But doing so takes a great deal of skill. And an equal amount of caution. In truth, this kind of investing should not even be called investing. Leveraged ETFs are short-term speculations, not investments meant to be held for months or years.
When we leverage ETFs we do so when the odds are heavily on our side. And we set stop losses. And we get in and out very fast.
If you are a conservative investor looking for higher-than-market results, don't even think about leveraged ETFs. Consider corporate bonds instead. The reasons are very clear…
- They have a 99.7% success rate
- You know how much you will make before you buy them
- The average long-term return is actually higher than you get from stocks.
So why did Steve McDonald issue recommendations to sell nine different bonds this week?
"We are doing great," he says. "We've seen returns as high as 55% and 78% in these boring, super-safe bonds."
"I take profits not because I have lost faith in the investment," he explains, "but because I know that the market is fundamentally irrational. When I get big gains I sometimes like to lock them in. My readers appreciate my conservative approach. And I appreciate it when they renew their subscriptions."
Steve selected nine of the 60+ bonds in his portfolio for liquidation last week. None of those bonds were below investment grade.
By any measure, the returns we've been seeing in our portfolio have to be categorized as "huge," he says. "They are simply blowing through all the old expectations."
If you're interested in making stock market returns, without taking stock market risk, take a few minutes to consider Steve's research. You can learn more about The Bond Trader here.
If you listen to the financial media, the last place you might consider investing is in the car companies. But according to Andrew Gordon, that's becoming a very attractive market for savvy, contrarian investors.
When it comes to cars, all you hear about are falling demand, overcapacity, rising gas prices and the stupid, government-appointed car czar. "But that's the time to buy," Andy says. "When people are focused on all the bad stuff happening in the industry.
Andy believes there is a much brighter future ahead for the car business.
"Like so many other industries, the future for cars depends on China."
Consider these facts:
- The Chinese auto market is growing at 25% per year.
- China just surpassed Japan as the world's second biggest car market.
- They did it with less than 2% of the population owning cars!
"Even poorly run companies like Ford and GM will make billions of dollars from China in the coming decade," says Andy.
"If I were actively investing in the industry right now," he said, "I'd be looking at Japanese auto companies." They have so many advantages. They are simply the safest bet."
Andrew is currently studying the Japanese manufacturers as a possible recommendation to his readers and we will keep you informed of the outcome.
Good Investing,
Bob Irish Investment Director
Investor's Daily Edge
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