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Tuesday, 7 April 2009

Stocks and Housing: Are They Putting in a Bottom?

by Ben Stein

As I write this, at the beginning of the second quarter of 2009, there are two contrary trends I am observing.

One is that the stock market and the housing market may be putting in a bottom. The stock market has put in a fierce four-week rally, but we have seen many false bottoms since this astounding stock market crash began in the fall of 2007. We do not yet know if we are facing another false bottom or a genuine rally.

Likewise, home sales are rebounding, albeit from a very low level. In some areas, prices are stabilizing, although, again, from extremely diminished metrics. Are we hitting a housing bottom? Maybe, but I would not look for a major housing rally for some years to come. Housing busts tend to hit bottom, then scuttle along the seabed for a few years before truly rebounding. When we do see a rebound, there is no telling how strong it will be. (I am mindful of the tale of my parents' house, a real beauty on a lovely street in suburban Silver Spring, Maryland. It cost my parents roughly $40,000 to build it in 1953. Twenty years later they sold it for about $77,000. Adjusted for inflation, they lost money. The same thing could happen again. There is no iron law that says real estate will always outpace inflation.)

The Contrary Trend

The contrary trend is that the economy generally seems to still be extremely weak. Unemployment, at 8.5 percent, is high by postwar standards. It would be surprising if it did not continue to rise. Almost all manufacturing and extractive industries are weak. While oil and gas have rallied sharply lately, commodities are generally anemic. Travel is moribund -- partly because of a misguided Treasury campaign against business travel. It is hard to find any private sector segments besides health care that are really strong. (The government is very strong at the federal level, homeopathic at state and local levels.)

The international picture is bleak indeed, with trade falling as fast as it ever has since records were kept. This augurs poorly for exports, to put it mildly.

So we may be sinking deeper into recession or depression, or we may be reviving little by little, if the stock and housing markets and durables are clues. In this situation, what do we do? More precisely, what do investors do?

A Simple Strategy

In the many books I wrote with my pal Phil DeMuth, we laid out a simple strategy: the so-called couch potato's portfolio. (We did not invent the title.) This entails buying the widest possible mix of U.S. equities for half of your portfolio and U.S. Treasury bonds for the other half.

This would have given the investor excellent protection in the 2007-2009 crash. While the stock part would have fallen by at least half, the treasuries area would have risen by roughly 10 per cent, giving us a loss of about 20 per cent. This is still painful, but it's a lot better than having everything in the stock market. If the market is indeed reviving, this portfolio will do well. If we have still more to fall, this portfolio's bonds will protect us somewhat. I wish I could say I have enough confidence in the markets to suggest having more stock and fewer bonds, but the market is still the plaything of speculators and short sellers, and we do not know what they will make the market do.

Also, we have to live in a more modest manner than we have been living. Low overhead is less of an option now and more of a necessity.

We might also want to diverge from our standard portfolio to put about 10 per cent into gold, the funds taken equally from stocks and bonds. I normally dislike the yellow metal as an investment because of its extreme volatility and long-term poor price performance. But if we have inflation as the result of the immensely aggressive actions of the Fed, gold may be a haven. But bear in mind that, adjusted for inflation, gold is still barely half of what it was in 1979.

The main idea is that, for most of us, labor is our primary means of livelihood. We are our primary investment and our primary capital. We must find work we enjoy, stay at it a long time, and be willing to guard our heath so that we will be able to keep working for as long as possible.

The economic future has become extremely cloudy, albeit with hints of sun. The government is doing what it can -- this is sometimes helpful, sometimes not. Your primary reliance, however, must be on yourself.
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