HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
Let’s do an easy one first. It is a general principle the asset that had the greatest bubble experiences the greatest bust. The NASDAQ is still down almost 50% from its early 2000 peak. The Japanese Nikkei is still down almost 75% from its peak more than 2 decades ago (buy and hold forever is a myth). Some things, such as tulips, never recover.
Real estate will recover—eventually—and the recovery will be tepid. It is far better to give up the first 5-10% of any major move than to jump in too early and experience years of dead money or even further losses. Wait for the turn to be obvious. It could easily be several years. Be patient.
Last week I spoke to local real estate agent John John. At least in Columbia, residential real estate is so-so. In general, the less expensive the home; the better. He said commercial real estate is completely moribund; only distressed sales are going through.
Today’s Barron’s. RealtyTrac predicts the housing market might not begin to bottom until 2014.
The time-honored metric of value in real estate is a 10% return. Say you purchase a piece of property for $120K. The rent is $1,100 per month. After expenses of maintenance, insurance, management, etc, you have an NOI (Net Operating Income) of $1,000. This is $12K per year; a 10% return on your investment.
To show you the degree of speculation in our real estate market at the peak in 2005, (apparently) sophisticated investors were accepting capitalization rates (essentially the return) of as low as 6%.
In Interim Bulletin #129A (11/3/10), I noted that in 2000 the mortgage debt in the US was $6T and that in 2009 it was $15T. I said the $9T difference would be a shorthand way of estimating the final real estate losses. Last Thursday it was reported that real estate was down $1.7T in 2010 and the losses from the peak were $9T.
For perspective, the Federal Reserve reported that the net worth of all of the households in the US is about $55T. Think of it: the recent real estate debacle cost US households 20% of their entire net worth. Real estate=real pain.
Interest Rates
Fed Chairman Ben Bernanke says that interest rates will stay low for the foreseeable future. It is solid advice “not to fight the Fed”. But note that Federal Reserve policies have their greatest effect on the short end of the interest rate curve (ex, the 2-year Note).
Interest rates on the long end have been rising. See chart of the 30-year T-Bond below.
Rising interest rates hurt bonds. Keep the maturity short.
The Stock Market
I really don’t know what the market will do, but there are two important points.
1) By historical standards, the market is expensive. Over the Twentieth Century, the avg. dividend yield of the S&P 500 was about 4.5%. It is currently about 1.8%. At the final secular bear market lows (1932, 1949, 1982), the yield is 5% or higher.
2) The market will continue to lose value in comparison to gold. In 1999, with the DJIA above 11K and gold at $255 per ounce, it took 43 ounces of gold to buy the DJIA. By this metric, financial assets were their most expensive ever and gold the cheapest. It now takes about 8 oz of gold to buy the DJIA. Over the last 11 years, the DJIA has lost 80% of its value in comparison to gold. History shows that when this bear market in financial assets and bull market in hard assets is over it will take less than two, and maybe as little as one, ounce of gold to buy the Dow. Just plug in whatever number you want for the Dow to see where gold will be
In the next issue, I will discuss the precious metals, collectables, the importance of the portability of your wealth and where it is domiciled, and how government will increasingly interfere in your life.
RMD
Wall Street Journal, 12/8/10. Last Tuesday, an original 4-volume edition of Audubon’s “Birds of America” sold for $11.5M. Sotheby’s called it a record for the sale of a printed book at auction.
RMD comment; Really wealthy people are trading their depreciating paper money for hard assets, including quality (portable) collectables.
Last week I spoke at the 37th Williamsburg Cardiology Conf., under the direction of Dr. William C. Roberts, Ed of the American Journal of Cardiology. The conference starts the first Sunday (Illumination Weekend) in December, and runs through Tuesday. I again recommend this conference to you; it is as good as any in the country.
Two points of note. First is that more and more people are interested in gold. Many asked how to purchase physical gold. I recommend Stephen Davidson, 1-888-830-2646- at Blanchard & Co in New Orleans (I receive no compensation for this recommendation. Blanchard has been in business for decades and Stephen has given me good service).
Second is that I was talking with a physician from the Detroit area. Ford took no bailout money and made it on their own. People are proud of them, are behind them, and are “buying Ford”. Compare this to General Motors and Chrysler, and so many other companies, who “went cryin’ home to their mama” for a government bailout because of their mismanagement.
My dad was a Chrysler man. I always bought GM. Ford is sounding pretty good.
When we were growing up, my mom put a poster from Ladies Home Journal about the US Presidents on the wall above the desk in our bedroom. You look up from the book and all you saw was this chart. I knew everything about the Presidents: who was elected when, their Vice President, who they defeated, the electoral vote count, and major facts about them. I can still name (in less than 20 seconds) the Presidents in order.
We went into the William and Mary bookstore in Wmsburg. They have placemats with the signers of the Constitution (1787, 39 people) and “The Unanimous Declaration of the thirteen united States of America” (the Declaration of Independence, 1776, 56 people).
Only 6 signed both: 1) George Clymer (Penn), 2) Benj. Franklin (Penn), 3) Robert. Morris (Penn), 4) George Read (Delaware), 5) Roger Sherman (Conn), and 6) James Wilson (Penn).
Only two signed the Declaration, the Constitution, and the Articles of Confederation (1777, 48 signatures): Robert Morris and Roger Sherman. The Preamble to the Articles begins: “To All to Whom (these Presents shall come)”.
RMD comment: Seriously: How many people today would you consider worthy to decide such issues? Very possibly none who currently hold political office.
If you just keep your eyes open and talk to people, you will discover there is financial information all around you, to help you make your own investment decisions.
1) I’ve found that two of the best judges of general business conditions are bartenders and cabbies. On the ride from the Norfolk airport to Wmsburg, the cabby, who had been there since 1969 (ex-Navy), said it was about as rough as he has ever seen it.
2) We were at my Lake Ozark condo this last weekend. Many more storefronts were vacant and I didn’t see anything that looked like new business.
Friend Diane had a colonoscopy. I was her driver: I dropped her off and picked her up. After the nurse called me that she was ready to go, she said to Diane “I’m really glad Dr. Doroghazi didn’t wait for you, he would have been pacing the whole time”.
RMD comment: I’ve been retired for 5 years. No matter what you think, people know you very accurately. Ex: In the Olympics, there are how-ever-many judges. They drop out the highest and the lowest; the outliers. The judges in the middle are always very
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