Thursday, October 09, 2008


The average closed end equity fund is now available for at a discount of 14% to its calculated value. These are the times that value investors such as Warren Buffet love. While I must admit that Warren still has powder dry, he has been making some incredibly good deals.


There are many ways to try to determine when this crunch is over. We know that history does not really repeat itself, but we know it does rhyme with itself. The following is an interesting rhyme. The information was gleaned from Mark Perry of Carpe Diem fame.

There have now been three times in recorded history when the number of miles driven by Americans took significant down turns. The first was an 11 month downturn from December 1973 until October of 1974. This was in the middle of a market meltdown greater than the present one. More than 25,000 savings and loans went bankrupt during this real estate recession. By October of 74, the average number of miles driving per month had fallen by 2.12%. In November of 74, the market shot up like a July 4th firework.

The second occasion was from May 1979 to May 1980. In this case, inflation rates were out of control. Nominal stock prices went up significantly during the driving slowdown. The driving down turn lasted 12 months. The stock market was a good place to be in 1980 but the high inflation rates caught up to the market in 1981 and a very tough market lasted all the way until September of 1982.

The third case is the current one. Miles driven in the 9 months through July fell at about the same annual rate as in 1973. As in 73, there is a real estate recession in progress. This time, the decline in miles driven seems to have accelerated in the past three months. We are now in our 12th consecutive month of declines but prices are falling rapidly. The relief of $2.50 gas is going to cause a number of people to take at least a joy ride or two.

With history as our guide, driving reductions have not lasted more than a year. The sharp decline in prices (gas is selling for $2.68 in much of Oklahoma) is going to provided a long awaited psychological relief. Plus, it will offer real pocketbook relief. The first $30 savings may feel good but the second and the third will see an accumulation of money in consumers pockets.

Beach houses are on sale, many at 65% discounts to 2005 prices. It has been 18.3 years since better deals were available at the beach. Assets available for 35 cents on the dollar. The average real estate cycle is 18.3 years. The bottom is here.