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After last week’s sell-off I would expect to see some buying opportunities this coming week, especially if you’re looking to invest for the long-term and not just a quick trade. It may be a while before the indices climb back up to their record levels seen earlier this month.

On Friday, August 3rd, the unemployment rate and nonfarm payroll data will be released by the Commerce Department. I’m expecting the results to be in line with the market expectations. If the unemployment rate comes in even slightly lower you will probably see a brief end-of-the-week rally on Friday due to last week’s sell-off.

Investors will be willing to shrug off short-term concerns of subprime mortgage woes if the unemployment rate is declining and therefore the economy is actually doing better. Those subprime borrowers are still employed in the aggregate sense if the unemployment rate is dropping! If the unemployment rate comes in higher than expected, which I doubt will be the case, you will see another repeat of last Friday… more selling despite an otherwise healthy economy.

With all the news about the real estate market not expected to rebound until 2008 or even 2009, the sluggish real estate market and its affect on homebuilders, big box retailers like Home Depot, and durable goods manufacturers like Whirlpool should all have those concerns already priced into the stock. Therefore you can only stand to profit if the real estate market stages a come back prior to 2009. I don’t want to be misleading though, if 2008 and 2009 are down years for real estate again, these same stocks could have farther to fall.

As always, I welcome your feedback and comments… have a great week!

Oh how far we’ve fallen… the Dow closed the week at 13,265. On Friday the advances were outnumbered by the declines by more than 2 to 1 on both the NASDAQ and the NYSE exchanges.

Despite some companies posting better than expected results, the dark clouds hovering over the real estate market and likewise the concern about possible sub-prime loans defaulting by the truck load kept the investors from hitting the buy button.

With such a dismal ending to a week I feel it’s best to cap my summary there and look forward to The Week Ahead, both literally and my upcoming blog topic that I expect to post sometime tomorrow.

On a side note: I have been contemplating a change in my website and I want some opinions from my regular readers. If you could, please take a moment and email me any thoughts you have on what you like and don’t like about my current layout, content, etc. I would greatly appreciate it. I am considering combining my Week in Review and my Week Ahead blog postings to make it easier to visit one time and get the recap as well as the upcoming events in the market. This would be a combined entry on either a Saturday or Sunday. It is my goal to then use the time during the week to highlight individual stocks that I feel are noteworthy as well as other interesting things going on in real estate or insurance related topics. Let me know what you think…

As always, I appreciate your feedback and comments…

The housing slump has undoubtedly put some home sellers in a bind. And even those not currently in the market to buy or sell can be affected by a rise in mortgage interest rates, just ask the homeowners with Interest-only mortgages or those with ARMs (see the last blog posting from yesterday, July 26th for more discussion on these types of loans).

The overall market was sent reeling again yesterday amid reports that the housing sector only continues to get much worse. The Dow fell more than 300 points yesterday (at one point being down more than 400) mainly because of investors jittery over the slowing housing market and therefore perceived lack of consumer confidence.

Think about this: everyone knows that real estate is in a slump right now, yet not many buyers are using this opportunity as a time to buy. It’s easily understandable that buyers are worried. They don’t want to buy a house only to see the prices fall further. But it’s a dangerous game to play when you try to predict the bottom - this is true in housing just as it is in stocks. More homebuilders and mortgage companies are coming out and publicly saying that the bottom (which was expected in early 2008) may now even be extended into 2009! Even companies like Whirlpool are blaming the housing market on slowing sales (see my July 22nd blog entry about Whirlpool’s earnings announcement).

It seems the media only fuels the consumer sentiment in either direction. When the Dow was breaking 14,000 just a week and a half ago on July 17th, that’s all you could read about it seems. Then investors started pulling money out. And the bad news came with the existing home sales, quickly followed by similar bad news on the new construction homes. It all adds up to investors feeling too uncertain about the future and seeing the markets at or near all-time highs and deciding now is the time to take some profits.

Given the current skid in the local real estate market as described in the Cincinnati Enquirer on July 25th, it will be interesting to see if investors start to look for buying opportunities in real estate now that the real estate market has softened and the stock market is beginning to look over priced. (Adobe PDF version of the Cincinnati Enquirer article).

Even if investors don’t pull money from stocks and pour it into buying land and homes, the investors can help the real estate economy by moving money from stocks to bonds. Putting more money in Treasuries and mortgage-backed securities will help balance out the load and make banks more happy to write more mortgages.

How so? you ask… Well, since there will be investors pushing the price of the Treasuries up through the additional purchasing, they yield on the Treasuries will fall and the mortgage rates will start to move downward as it will cost the banks less to borrow money… therefore driving down the mortgage rates. Meanwhile investors, if they are also buying mortgage-backed securities, will add liquidity to the market thus giving banks added funds to loan out in the form of mortgages. As if this wasn’t just the icing on the cake, the banks existing loan portfolios will be worth more to investors as their existing loans will carry higher interest rates than the new loans they are writing at the lower rates. So the bank benefits by writing new loans at lower rates and selling the old loans with the higher rates to investors.

Let’s hope the real estate market and the stock market both rebound! However it’s more likely that only one will bouce back sooner than the other… and my bets are on the stock market right now! Real estate is a much longer-term play than the stocks and I think it will therefore have a longer tail end to the slowdown than a slump in the stock market would. As always, I welcome your comments and feedback…

In yesterday’s online edition of The Cincinnati Enquirer there was a story about the various local real estate markets throughout the U.S. that are most susceptible to seeing their markets collapse. Cincinnati ranked # 8 in the nation for having the riskiest housing market according to Forbes magazine based on the extent to which most homeowners are leveraged (via the loan to value ratio).

The article points out that Cincinnati has not only a higher than average number of adjustable rate mortgages (ARMs) in use in its market but it also has the 5th highest mortgage loan to home value amount in the 40 largest metropolitan markets throughout the country. The combination of the greater use of ARMs and the more-leveraged homeowner could make it difficult for the area to regain any momentum in improving local sales of new and existing homes.

Although I see some validity in Forbes‘ study, there is more to consider than just how much people borrow to buy a home and how many of those people use ARMs to do so. In fact, a better indicator than ARMs might be a study that considers the number of people using Interest Only loans to buy properties. These are the individuals that stand to be squeezed the hardest as interest rates climb.

ARMs come in varying terms - say 3 year ARM, 5 year ARM, 7 year ARM, and so forth. Therefore you have the number of people facing an interest rate increase with ARMs spread out over several years. Also, there is a max. amount that an ARM can increase in any given year (usually 2% increase in the interest rate) as well as a max. increase for the life of the loan. If someone had taken out a 5 year ARM in 2002 that was due to increase this year, they would most likely face a 2% increase in interest rate.

Considering interest rates in 2002 were around the 40 year lows, these ARMs may have even been done at 4% or even less! So to think that the market is going to get destroyed by people losing their shirts when the interest rates on their loans is going up from 4% to 6%… well, let’s just say I’m not expecting to trade in my real estate license for an auctioneer’s license in the near future. Cincinnati is a pretty modest market, with the overall appreciation over the past few years more closely resembling an inflation factor of about 3%. We certainly didn’t see the run up in prices that some markets did, like Miami, FL that topped the Forbes list for the most risky market in the U.S.

I don’t have hard figures on this, but just knowing the culture of this city leads me to think the real estate market here is more stable. A lot of Cincinnatians, especially those on the west side, tend to stay in the city for long periods of time… many are even “lifers”. While this can make it difficult to come into town and adapt, it does create stability in the marketplace. Also, the city is not exactly tied to a volatile industry (i.e. high tech in Silicon Valley circa 2000 & 2001). This city is home to some staple consumer goods that some would even say are recession proof… Procter & Gamble comes to mind first thing, as does the grocery chain Krogers. There are also a lot of steady, conservative financial companies… like insurer’s Great American, Western Southern, Ohio Casualty, Cincinnati Financial, and Union Central. Fifth Third Bank is headquartered here and the Federal Reserve has an arm of the Cleveland branch in downtown as well. It would be interesting to see the proportion of people who are born here and also stay here after college or well into their careers (home buying years).

In case the link to the above Cincinnati Enquirer doesn’t work, I am attaching a copy of the article in Adobe PDF format that you can read in your Internet browser or download to your desktop. For more information on companies with headquarters or a strong presence in the Greater Cincinnati area, please visit CincinnatiUSA.org

As always, I welcome your comments and feedback…

Yesterday I went on at length about how real estate in Ohio could be adversely affected by a rise in foreclosures. While yesterday’s comments are certainly true, I think it’s best to present a balanced picture. I can’t preach gloom and doom when the climate in Cincinnati and Dayton, Ohio is far better than other parts of the country where real estate was once hot as little as a year or two ago.

In fact, the local market is even doing better than northeast Ohio (namely Cleveland and Youngstown, Ohio areas), where it was noted yesterday that Cleveland leads the nations in the foreclosure rate based on zip code.

Just as CNNMoney.com has ranked the highest 500 zip codes for foreclosure activity, Money Magazine has published its annual report of top 100 cities to live in. Two greater Cincinnati and Dayton towns made the list: Mason, Ohio and Beavercreek, Ohio. Mason is a northeast suburb of Cincinnati while Beavercreak is a southeast suburb of Dayton. Mason came in ranking 81 out of 100 while Beavercreek was close behind at # 84.

Certainly these two areas are deserving of their inclusion in the list. So while Ohio may be one of the worst states for foreclosure activity, there remains a relatively stable economy with modest job growth and a decent real estate market given the overall trend nationwide. Much of Ohio has seen less decrease in price than other major markets, especially those hit hardest such as California and Florida.

In Ohio I expect to see a soft landing rather than a complete crash.

As always, I welcome your comments and feedback…

CNN.com, in partnership with Money magazine (via the CNNMoney website), recently published a list of the 500 top foreclosure areas based on zip code and the number of foreclosures in those zip codes. Not surprisingly there were several Ohio cities that made the list. It’s been no secret that Ohio is one of the nation’s leaders in foreclosures. Cleveland, Ohio had the most foreclosures in the nation.

Also on the list, and hitting closer to home in the Cincinnati and Dayton, Ohio real estate markets, was Middletown, Ohio zip code 45044. The rise in foreclosures in this zip code can be attributed to the year-long strike that the AK Steel (NYSE:AKS) union workers went through in their contract negotiations. Many of those employees faced a difficult year in 2006 with very little income and the fixed monthly bills associated with supporting a family.

While the local real estate markets throughout Ohio have not seen a tremendous decrease in prices, the increased level of foreclosures is worrysome because it will undoubtedly affect what consumers in the state will pay for a mortgage. If banks have a higher default rate in a particular state, they will most likely want to charge higher rates and/or have stricter requirements for qualifying for a mortgage in that state.

Higher mortgage costs mean less buying power for Ohioans. It also may drive some residents out of the market that would otherwise qualify for a loan. Some residents that live near a state border, such as those in Cincinnati that live near northern Kentucky, may even find it beneficial to move to the other side of the river to save money on a loan and therefore enable themselves to purchase more house for their money (lower interest = lower monthly house payment at every sales price level!)… I don’t think we’re to that point yet, the mortgage rates are still much more closely tied to the T-Bill and interest rates as a whole. But it’s worth noting.

The banks won’t participate in any kind of rate setting practice that could be construed as red-lining, an illegal practice where banks set higher rates in a particular area - historically done to subversively oppress minority homebuyers. But if they reduce their appetite for loans across the board for the entire state, the price for a loan will be higher given a fixed level of demand for the mortgage product. Likewise, if the rates charged are increased uniformly across the entire state, it would not be considered red-lining; rather, just an increased cost of doing business in that particular state. The banks would be charging those borrowers who actually pay their bills more to subsidize those who default. (Nothing like penalizing those people who are ACTUALLY YOUR GOOD CUSTOMERS!!!) But that’s no different than what happens when you buy a car or use your credit cards. The interest rate charged reflects a certain default rate (risk) given your credit score.

The rise in foreclosures also brings about an increase in supply of homes on the market as banks look to re-sell the foreclosed property to recoup the outstanding loans. These homes often sell at discounts as homeowners who are in default are less likely than those in good standing to maintain and improve their home. Think about it, would you take your car to get an oil change in you knew the repo man was cruising the block and coming to get it?! No, you wouldn’t spend money fixing something if you weren’t able to pay to keep it anyway!

Hopefully Ohio is only suffering a short-term setback in the way of foreclosures. Only time will tell. In the meantime we just have to pay the monthly mortgage and hope our neighbors and fellow Ohioans are able to do the same. As always, I welcome your comments and feedback…

The start of another week is upon us and there’s plenty of upcoming activity to consider. Existing home sales will be reported July 25th, with new home sales being reported the following day. Expect another monthly report of sluggish home sales.

Durable goods orders are also expected to be reported on the 26th. I would expect to see these orders down slightly following Whirlpool’s earnings announcement last week that the slow housing market is driving down demand for new washers, dryers, and other household appliances.

There are more companies expected to report earnings as well. The list for Monday alone is over 90 companies so I won’t go into great detail. If there’s a particular company that interests you I would encourage you to go to Yahoo! Finance or Bloomberg and check to see when they report their earnings. If you follow the market as a whole, say through an ETF or index-based mutual fund, I would encourage you to look up when the 30 stocks in the Dow post their earnings. Texas Instruments (symbol TXN) and Halliburton (HAL) are two of the stocks reporting quarterly earnings tomorrow. Also, Thomas Group (TGIS) is expected to report tomorrow as well… I have absolutely no affiliation with the company and actually do not follow the stock, I just liked the name so I thought I would point it out!

Here’s looking to the week ahead! As always, I welcome your comments and feedback…

Was it something I said?!

The markets were sent reeling yesterday as the Dow have back all that it had gained during the entire week and then some! The Dow finished the week at 13,851 after falling 149 points (1.07%) on Friday, well off Thursday’s record and lower than it started the week.

The other major indices followed suit… the NASDAQ was down 1.19% on Friday and the S&P 500 was down 1.22%.

Disappointing earnings were much to blame but perhaps there was some profit-taking in there, too. Everytime the market breaks a “pyschological barrier” as it did when the Dow broke 14,000 there are people out there who are locking in some profits… for instance, if someone had been investing in a mutual fund or Exchange Traded Fund (ETF) that tracks one of the market indices, if the investor had dumped a bunch of money in around 13,000 they would be happy to sell at the 14,000 level that it reached on Thursday. It would not have taken long to lock in these kind of returns either. If you purchased a fund that tracks the Dow on April 30th when the Dow closed at 13,062.91 you would have locked in a return of around 7% in just under 4 months. Do that kind of return in a quarter and if you’re able to do it a few quarters in a row and you’re on your way to a healthy 21-28% return for the year… but most investors can’t consistently do it every quarter. Hence, when we do see those profits, we like to lock them in.

Think I’m full of it? Think I’m crazy?! There’s actually a lot of research and studies that have been predicated on this notion that most people will lock in when the see profits and likewise will hold on to a stock too long when they’re losing money because they’re hoping to regain it. It’s the same pyschological factors at play in compulsive gamblers; they think they can win it back. Of course, compulsive gamblers don’t typically cash out when they’re up… I guess that’s the difference. A smart gambler will take some off the table, for instance the amount they started with, and just play with the winnings. Alas, I digress. I didn’t mean for this to become a poker or gambling discussion. My point being I could see where a lot of people used this past week as an opportunity to cash in a nice gain.

And a lot of people get caught up in their daily lives and don’t pay attention (at least not too closely) to the daily changes in their investments. With the Dow setting a record and that being news worthy, even the investors that normally don’t pay close attention to their investments would be thinking about them when they opened the morning newspaper on Friday or when they listened to the news on the radio or in the car. When a major index breaks a milestone, it gets media attention. In turn it gets more attention from the general public, and that can either send it screaming to even further heights as we saw in the Dot Com Era or it can bring it down like it did yesterday.

Here’s looking forward to The Week Ahead. As always, I welcome your comments and feedback…

Well, it’s not the first time the Dow hit 14,000 but today marks the first time that the Dow advanced above the milestone and stayed there. The market closed at 14,000 exactly today.

It will be interesting to see if there is some profit-taking tomorrow to round out the week and put some downward pressure on the indices, namely to push the Dow back down below 14,000 to close the week just off the record.

The record close comes despite warnings from Yahoo! that future quarters’ earnings growth may be tough to achieve and the expectations may need to be revised downward. Google also posted disappointing numbers.

If we end the week on a positive note of more announcements of solid earnings and investors continue to push the Dow higher you may see some selling early next week. Even if the Dow drops tomorrow it will still most likely end the week up from where it was last Friday. It would have to drop nearly 100 points (about 93 actually) to finish where it was on Friday, July 13th… the Friday the 13th that turned out to be a good day for the bulls!

Here’s looking forward to another week being put in the books. I hope you all have a great Friday and weekend. As always, I welcome your comments and feedback…

Well, yesterday the Dow Jones Industrial Average (DJIA) crossed the 14,000 mile marker to set another all-time high as well as eclipse another pyschological barrier. It seems like any time the DJIA gets close to another 1,000 we hear the same talk re-hashed on the news about “How high can it go?” and “what will it do next?”

I wonder what the news commentaries sounded like back when the DJIA was trying to break 5,000 or 1,000. It would probably be comical to go back and listen to them actually. Imagine some market pundit on the screen being scoffed and laughed at for even suggesting DOW 10,000. Now for us to see DOW 10,000 we would have to have a major economic pull back. I mean, that would be shaving nearly 1/3 of the value off of the average at this point!

So, where does it go from here? Is it more likely to head higher? Or lower? Rather than focus on which “mile marker” (as defined by the 1,000 intervals that we now follow), let’s make it a little more short term and easier to follow. Will it be 13,500 or 14,500 that we see the Dow hit next? Who knows… anyone could make a good case for either one. Some say equities are over priced now, it’s time to pull some off of the table. Others proclaim the market has hit a nice stride and the economy is humming along nicely so enjoy the bull market and prosper from it.

So what exactly is causing this tremendous run-up? If you look at the chart for the past year it is a steady climb (minus a short downturn in or around March 2007) from 11,000 to 14,000 for the Dow.

China’s economy grew at an annualized rate of 11.9% for the second quarter this year according to Bloomberg.com. Perhaps that had something to do with it. I’m quite sure it did. With global companies like Procter & Gamble, Wal-Mart, and Coca Cola already doing business in China, it’s hard to imagine this large country’s growth NOT having an impact in some way.

It may also be that more and more people are buying stock because they feel they can earn a decent return on it relative to other investments. This is especially true when you look at it comparatively with the recent problems in the residential real estate market in many areas of the country. Also, if people feel they can earn 10-15% or more by putting their money in the stock market instead of paying off car loans at say 0-7% or home loans ranging from 6-8% then you can bet more people are staying in debt to invest their money and make a bigger return. Essentially they are using the power of leverage to generate higher returns with greater risk. The greater risk being that they still owe that money even if they lose it in the stock market… similar situation if more people are buying on margin.

Since we can’t get in every investor’s head we can only speculate. But we have to act rationally with our own investment decisions during a big run up in the market like this. Is now a good time to take a little off the table and lock in some gains? If you’ve been holding a steadily growing Dow component or other well-performing stock for the last year or more I would have to say yes it is. The long term capital gains tax and the trading costs shouldn’t eat away your return. A short term capital game might not be the best move unless you were buying in that small down turn that we mentioned in the first few months of the year.

Regardless when you bought or when you decide to buy or sell, use your head. Look at the P/E ratios. Look at the price you’re paying for those future earnings and make the call… do you think it’s sustained? Do you think it’s worth paying however much for those future earnings and dividends? Make an informed decision and remember that it’s ok to take profits. Here’s to Dow 15,000. Stay tuned!

As always, I welcome your comments and feedback…