Thursday, March 12, 2009

The Chicken or The Egg?

How do we get out of this mess?  There seems to be a consensus view that the economy, and the stock market, can't bottom until housing prices stop declining.  After all, weak housing prices equal mortgage defaults, which decimate structured credit securities (aka "toxic assets") which then destroy the capital base of banks, which leads to a host of other evils.  The bears tell us that housing prices have another 15% to fall before the bottom (interestingly, they've been using the "down 15% target" for about a year.  No matter how much housing prices fall, they still predict another 15% decline.  They've been right so far, but they won't be right at the bottom).

I predict that stocks will bottom before housing.  Think about it:  if you're in the market for a home, you almost certainly feel the negative wealth effect of the stock market.  Let's assume that it's your first house, or that your personal economic situation has so far rendered you somewhat immune to the disaster that's visited the rest of the country.  If I've got lots of cash and want a house, no way I'm going to grab for that falling knife of housing prices.  I'm watching my 401k disintegrate every week, and the stock market weakness makes me feel poorer.  Most people with enough assets to be able to afford a house have at least some exposure to the stock market, and they're suffering from a severely negative wealth effect.  Think about it:  what would you do?

On the other hand, a stronger stock market can work wonders.  It tells home buyers that the worst is over.  It also makes them feel wealthier.   It alleviates the worst fears of depression.   Even if they don't follow every tick of the market, they feel better when the news is no longer dominated by depressing news.

Ask your local real estate agent.  I'd bet that there's a pretty good correlation, but I'll bet that the stock market leads.  Assuming that tomorrow's market action continues or at least supports the recent trend, it should be a good weekend for house hunting.

Portfolio update

Today's news about Google Voice is another in a series of amazing developments from this company.  Google is going to take over the world.  While analysts twist themselves up predicting attach rates, and cost-per-click, search query growth, GOOG is attacking dozens of traditional industries with a long-term strategy that doesn't lend itself to P/E estimates or quarterly reports.  Read about Voice and ask yourself: why do you need AT&T or Verizon?  Read about Chrome and Gmail and Docs and ask why you need Microsoft (yeah, the operating system's coming too... gOS anyone?).  How about healthcare-- 23andMe is mapping your DNA, Google Health maintains your medical records... Finance, Video, Books... all "free."  They've got the proverbial camel's nose under lots of tents.  Eventually you'll carry a GOOG card in your wallet to access everything from banking to travel to entertainment.  Not that that's bad... for now.

Call me crazy, but I just don't think that most investors realize the importance of the internet, or the dominant position that GOOG is carving out.  Eventually they'll be broken up in an antitrust action like AT&T in the early 1980s.  However, there's plenty of money to be made in the stock before that happens.


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