Snow!

It’s snowing here as I write this…actual flurries. We rarely get snow in Houston, so this is a fun time for us. The last time we had snow was Christmas eve, 2004. Prior to that it had been at least 10 years, so I’ll have to ask all of you that live in colder climates to bear with my reaction to the white stuff. We’ve been singing Bing Crosby’s “White Christmas” all evening around the Herriage household.

And hey, we had some fun on Wall Street today as well. Even though it was just a 70 point move higher, you’ve got to admit that it’s better than one of those down 500 days we’ve had so often over the last couple of months. And how about that move in gold today? I’ll take a $30 price increase here anytime.

The market rally should continue on the hopes and prayers that Obama’s $1 trillion infrastructure stimulus program will save the day. Don’t we all feel better?? All will once again be right with housing prices…employers will stop laying people off… and corporate profits, which are set to drop a whopping 50% year over year, will reverse course overnight and support stock prices at much higher levels. All we need are lots and lots of newly trained construction workers building roads and bridges that we all get to drive over. I don’t know the first thing about building a bridge, but I do know that it’s hard, tireless, mostly thankless work that NO ONE on Wall Street could ever do. I don’t think bridge builders get many $10 million Christmas bonuses, but after all, they haven’t taken their $100 billion investment firms into insolvency either.

The bottom line is that to understand investing is to understand psychology. Simply put, the stock market dropped by 50% and just got tired of going down…for now at least. We’re likely headed higher for a while, but it will be a very nervous rally for me. At any time the rug can be pulled out from under us, and when the next drop starts…likely in January…it will be fast and furious. This is no market for long term, buy and hold investors. Cheaper prices will be found in the future, but for now we’ll do our best to enjoy the break from all of the torrential selling.

On the first Friday of January we will get the December unemployment figures, and they will not be pretty. Januarys will be even worse, for obvious reasons. Unemployment rates will continue to rise as the recession gets more intense, which is what’s going to make this recovery such a very long ordeal.

I just read an interview in the Casey Report with a major commercial real estate player. His name is Andy Miller. Since he started his company, he's bought more than 30,000 apartment units, several million square feet of retail space, and large office projects all over the country. He also employs about 500 people.

Miller says, and this is very insightful for all of us, that many of his retail tenants are telling him that they're going to close their stores after Christmas. Christmas is the most profitable time of the year for retailers and if he’s right, they will sell everything they can by year end. Then, they will fire their staff and vacate their properties beginning January 1^st.

It's not just retail properties closing down and firing employees. Miller says there's a crisis coming in all commercial real estate. He says it feels like a slow-motion car wreck. "Whether it's apartments, shopping centers, office buildings, industrial properties, hotels, senior housing – operating incomes are eroding.

This is the crisis in commercial real estate that I have been warning about, and with it will come millions of job cuts. First we will see the occupancy rate drop in offices, then malls cut jobs, then construction companies cut workers, and so on. Once this begins we should anticipate some of the worst unemployment numbers since the Great Depression.

This means that we will also have plenty of additional stimulus programs from the Federal government. As Miller says “This phenomenon will last until the public realizes how damaging the Fed's stimulus is...this train wreck is going to happen and the actions we are taking now with trillions and trillions of taxpayers money will only make our future that much more difficult.

This is the deleveraging process that I have been writing and warning about for so long. I wrote my first article on the dangers of our addiction to debt in 2003, and at the time I said that when the house of cards begins to crumble the deleveraging process would take anywhere from 3-5 years to unwind. I stand by this estimate, and assuming that we started the process in late 2007, we’ve got anywhere from 2-4 years to go.

In the meantime, enjoy the Obama Christmas rally…looks like this one has some legs.

Kip Herriage, Editor, VRA

www.kipherriage.com

Comments

[Stacy]

Thanks Kip for the excellent information. I've been eagerly awaiting every post you make. However even with this great information, I find I am still quite confused as to the strategy to take. I am very new to stock trading. Do I hold tight or do I buy? Is there someplace better for my money than the rapidly inflating dollar?