Wednesday, May 18, 2005

Bill Cara: Capital Markets & Social Equity

John is way off the mark. I am surprised that Bill agrees with him. The premise is that a recession is near and will be caused by continued interest rate increase by Greenspan to pop the real estate bubble. John believes that we will be facing deflation in real estate prices within 12 months; poppycock--bah humbug--no way.

Barring a war or terrorist hit, real estate prices will be higher in 12 months. The comparison that John makes to Japan's real estate bubble is weak at best. The Japanese paid a billion dollars for Pebble Beach! Five percent interest on a billion dollars is 50 million dollars. Can you imagine a golf course with annual revenues of half that amount? Myrtle Beach has over 100 golf courses and I suspect that a billion dollars would buy them all. Beach condos have jumped in value but I have seen none of the "big deals" like Pebble Beach or Rockefeller Center.

John implies that the FOMC has tightened excessively. The reality is that the FOMC stayed overly loose long enough to avoid the problem of deflation; exactly the opposite of John's point. Even the modest increases have exposed stress in other areas; GM, Ford, Hedge Funds and a bankrupt auto parts company to name a few. There is no way the fed can target real estate with short term rate increases. The irony is that by raising short rates, the FOMC has lowered long rates which is part of the drive behind real estate prices. Again, the action is almost the opposite of John's point.

The article concludes with a comment about the spendthrift consumer problem, again all wrong. Consumer spending as a percent of disposable income is modest. Personal income is growing faster than spending. Average family wealth is at an all time high.

John is enjoying solid returns in his long strips and TLT but he is taking a beating on total return when you add in the cash returns and the returns on the defensive stock sectors. John is positioned for a recession but the action in technology indicates a robust economy. We are no where near a recession; I believe John is about 4 years early!

Buy the big bull. The frogs are getting boiled!