The Rude Awakening
Wall Street, New York
Tuesday, March 01, 2005 ------------------------- The Rude Awakening PRESENTS: An overconfident cabbie in
South Beach thinks house prices there can never fall. After
10 years of real estate investing in Turkey, this guy has
finally decided to sell his properties and move the
proceeds into Florida's booming market. It's a recipe for
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------------------------- THE SOUTH BEACH DIARY
By Eric J. Fry After spending one week immersed in the heat and hedonism
of Miami's South Beach, your New York editor feels as if
most of his brain cells are still languishing in some sort
of tropical torpor. These lethargic cells seem to have forgotten that more is
required of them than simply instructing your editor's
right arm to lift a Mojito cocktail to his lips. But we are
not the only individual to suffer a partial loss of
cerebral function in South Beach…so have many of the
area's property buyers… Your editor sojourned to South Beach last week to
participate in a private annual meeting of hedge fund
managers, most of whom specialize in short-selling.
Unfortunately for the readers of the Rude Awakening, the
host of this select gathering insists that "whatever
happens in South Beach, stays in South Beach"…or
something like that. In other words, your editor is not at liberty to discuss
any investment ideas from the meeting. But suffice to say that the professional investors in
attendance continue to be unnerved by many of the same
anxieties that trouble non-professional investors: Will the
dollar's weakness continue? Will higher energy prices begin
to squeeze businesses and consumers? Will rising interest
rates rattle the housing market? On the final question, fortunately, a South Beach cab
driver provided a definitive answer… "Real estate ALWAYS goes up," the cabbie explained, without
the slightest trace of sarcasm in his voice. "You can't
lose with real estate. It always goes up," he emphasized a
second time. "Ummm…really?" your editor replied politely. "Does it
really always go up?" "Here in South Beach, yes, you can't lose," the cabbie
insisted. "Every year it's up, up, up." "Yeah, I know that's what has been happening lately. But I
think I remember a time down here when prices didn't go up
every year. Maybe that will happen again." "No, I don't think so," replied the confident cabbie. "Let
me tell you something. I'm from Turkey…and in my country
I bought two apartments about 10 years ago - one for
$30,000 and one for $35,000. Today, those apartments are
worth only a little bit more than what I paid for them. But
if I had taken that money and made a down payment on
something around here, I would have made at least 10 times
my money. I made a big mistake." "Yeah, well it's hard to know these things in advance,"
your editor consoled him. "Yes, but now I know," the cab driver concluded. "So I'm
gonna sell those places in Turkey and buy a place here in
South Beach. Here is much, much better." "Okay, well good luck to you," said your editor, as he
exited the cab in front a posh, beachfront high-rise, the
Miami residence of a close acquaintance. Once inside the acquaintance's condo, 20 floors above the
beach below, your editor found himself listening to another
disconcerting real estate story. It seems that this
particular oceanfront condominium complex includes a
handful of deeded beach cabanas, each of which is no bigger
than a small walk-in closet. One of these beachfront
closets recently changed hands for $850,000. "It's absolutely amazing," the source of this anecdote
gaped. "Almost a million bucks for a tiny little cabana on
the beach. Things are getting pretty crazy down here." But even while beach cabanas in South Beach are selling
swiftly at ever-higher prices, spiffy new houses throughout
the rest of the land have begun to sell slowly, at ever-
lower prices. New home sales for the month of January fell 4%,
seasonally-adjusted, from last year's total, while dropping
9% compared to December's pace. The sales slowdown caused
the inventory of new homes to swell 17% from last year, and
2% above last month's total. On a months-supply basis,
therefore, this month's reading stood at 5.2 months,
compared to 3.5 months last year, and to the five-year
average of 4.1 months. "This is the highest level of inventory on a months-supply
basis since June 1996," observes homebuilding analyst Rick
Murray, of Raymond James & Associates. "While…the
absolute new home inventory number surpassed its all-time
historical high this month. Furthermore, the completed
inventory of homes available for sale has breached the
levels that have generally signaled trouble (100,000+) in
the past." Meanwhile, prices are slipping. The median price of a home
fell 13.2% to $199,400, the lowest level since December
2003. "This was the first time since 1991," says Murray,
"that the median price declined by more than 3%." So there you have it, dear investor, we may not yet have
reached the peak of the housing market, but we are
certainly very far from the bottom. [Ed. Note: Here's more evidence that, in some areas, real
estate prices are falling… Homes Lose Value
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------------------------- Did You Notice…?
By Eric J. Fry Yesterday's harrowing trading action in the energy stock
sector terrified bulls and bears alike. Most energy stocks rallied sharply at the start of trading,
then plunged around midday, before recovering somewhat
during the afternoon. What does it all mean? What should we
investors deduce from the volatile trading action? Your editor does not know the answer, but he has observed
that bull markets rarely proceed without bouts of stomach-
churning volatility. From all outward appearances, the
energy markets seem to be in a bull market. As the nearby
chart illustrates, the S&P Oil stock sub-group of the S&P
500 has soared nearly 70% since the end of the 2004, while
the S&P 500 itself (without the benefit of its energy
stocks) has gained less than 10%. One day's volatility does
not usually reverse a trend of this magnitude. 
"We've been buying every major sell-off in the oil stock
sector over the last two years," a very successful hedge
fund manager informed your editor yesterday. "You should be
buying into these sell-offs, not contributing to them." Your editor does not doubt the hedge fund manager's wisdom,
but buying into volatile markets is easiest in hindsight. So the timorous oil bulls among us might want to consider
limiting our risk by buying long-dated, near-the-money call
options on selected oil stocks. In yesterday's issue of
Barron's, option's trader Meyer Eisner, says the out-of-the
money call options on stocks like Encana, Anadarko and
Apache "look juicy." We'd tend to agree. [Ed. Note: If you would like to participate in the energy
bull market, but don't have the time for the due diligence,
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other natural resources… He just closed out his 16th consecutive winning trade…! We're offering a steep discount on Kevin's service for
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http://www.agora-inc.com/reports/RTA/WRTAF325 ------------------------- And the Markets… | Monday | Friday | This week | Year-to-Date | DOW | 10,766 | 10,842 | -75 | -0.2% | S&P | 1,204 | 1,211 | -8 | -0.7% | NASDAQ | 2,052 | 2,065 | -14 | -5.7% | 10-year Treasury | 4.38% | 4.27% | 0.10 | 0.16 | 30-year Treasury | 4.72% | 4.64% | 0.08 | -0.10 | Russell 2000 | 634 | 638 | -3 | -2.7% | Gold | $435.65 | $435.20 | $0.45 | -0.4% | Silver | $7.33 | $7.28 | $0.05 | 7.6% | CRB | 305.00 | 300.23 | 4.77 | 7.4% | WTI NYMEX CRUDE | $51.75 | $51.49 | $0.26 | 19.1% | Yen (YEN/USD) | JPY 104.55 | JPY 105.21 | 0.66 | -1.9% | Dollar (USD/EUR) | $1.3243 | $1.3243 | 0 | 2.3% | Dollar (USD/GBP) | $1.9223 | $1.9192 | -31 | -0.2% |
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