“Wall St. gains from housing slump – Many worry about how housing slowdown is hitting the economy, but investors pulling out of housing are pumping money into stocks. “

Ok. This one can make you cry. Really? Now the Stock Market is gaining from Housing? It’s actually sad. Let me explain briefly why this can’t be correct. However in order to understand the markets properly we must first understand who funds them.

The secret of the wealthy that everyone knows. One of the basics of making money, as anyone will tell you, is “Buy Low, Sell High”. Not everyone does that, only the few that get in when the investment is completely out of style, and get out at the hype of all hysteria.

How do they know? They don’t need to listen to the news on the hour, nor waste their time surfing every financial website on the Blogosphere. They just look at the cold facts.

That brings us to the fallacy of the above statement.

1. The Real Estate Boom/Mess that we find ourselves in today started, unsurprisingly, right before the stock market meltdown beginning in January of 2000. Investors needed a place to reinvest their spoils of war. Housing was quiet, Interest Rates were at one of the lowest levels in history, Real Estate was always known as an extremely stable and secure market…It was perfect.

The problem was that 6 years later were standing at the top of one of the most dangerous bull ever enticed in our day. Between common speculators bidding up houses as second homes, condo flippers quitting their jobs to become Brokers, Mortgage lenders offering outrageous “bargains” such as ARM’s and every other type of perk you can imagine. In other words, liquidity has been sucked dry out of every piece of property these speculators could get their hands on. This doesn’t even touch the fact that this “Bull” has pushed buyers to worthless swamp land in Florida to $20,000 lots in cemeteries! It sounds not that very different from the E-Traders and IPO-bidders of the Tech Boom…Just a few years ago.

They say “Investors (or so they call themselves) are like voters. Nobody remembers more than 4 years back”.

2.There is a general rule that anyone who’s invested for decades knows best. Prices Correct. Especially if they have been bid up with Billions of dollars of wasted capital that is thrown at the feet of the ever-growing-corporations that seem to always have something new coming that “will change the way we live” or “will revolutionize the world similar to the way the internet has”.

The simple dilemma is that we have been ushered into an age of immediate reacting medications, high speed internet connections and a world that has seemed to surpass even time itself. But many don’t realize that the dust must settle. The weary Bulls lead back into their dens for the night and for the Markets to continue wondering if P/E (price per earnings) Ratios of 15, or even 10, are a thing of the past.

I guess only time will tell.

(I’ve included two charts. Chart A shows the rise in average home prices since 1890. Chart B shows the actual prices for the DJIA from 1900-2004, with the P/E ratios on bottom.)


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