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4th Quarter, 2012 – Bi-Annual Markets and Investment Review
How to read our Review –
Quick read – The first 4 pages will give you a quick overview—our Executive
Summary, a high-level comparison on different investments and potential financial
life actions, and our “Take Action” section, which tells you more specifically what to
do, given your unique profile.
Full read –Our review is set up to give you what you need upfront, with a more full
discussion and analysis following, if you want to understand more about the
“Financial and Investing Landscape” behind or ideas and recommendations. You
might also want to use this section to make some independent decisions about your
investments. The discussion focuses on all major types of investments, the global
economy, the pricing of investments, and how the market is currently behaving.
EXECUTIVE SUMMARY
In our Executive Summary, we give you a snapshot of the issues regarding each
type of investment, and our recommendation on whether your ownership of that
investment should be neutral to, over weighted or underweighted to a model
portfolio designed for your risk profile and the number of years until your
projected retirement. The possible ratings are:
Strong Underweight – will underperform historical and/or projected performance, and your
holdings should be significantly less than the model portfolio
Underweight – could underperform historical and/or projected performance, and your holdings
should be somewhat less than the model portfolio
Neutral – will neither under- or over perform historical and/or projected performance, and your
holdings should roughly equal those of the model portfolio
Overweight – could over perform historical and/or projected performance, and your holdings
should be somewhat more than the model portfolio
Strong Overweight - will over perform historical and/or projected performance, and your holdings
should be significantly more than the model portfolio
Asset Classes
I)
II)
III)
US Stocks – After a strong 12 months, US stock markets could experience
much higher volatility during Q4 of 2012 and Q1 of 2013 with the
uncertainty on how the US government will handle yet another debt
ceiling debate and the fiscal cliff (more detail in the following pages.
We don’t believe, like others, that these issues are already factored into
the market, especially after the significant rise in US equities, and a poor
result could have a meaningful impact on volatility and stock values.
There are also serious headwinds to achieve these US stock earnings
estimates. The continued de-leveraging of the US banks and US
consumers is inhibiting both the supply and demand of bank lending and
corporate investment. Unemployment remains painfully high, and
incomes are moving downward.
Furthermore, US corporate profits, currently at 11% of GDP, are the
highest they have been since the statistics were first collected in 1947,
thanks to aggressive Federal Reserve Bank expansion and a bad job
market that has allowed companies to slash jobs and wages. Once the
market starts to recover, profit margins should come under pressure.
European Stocks – while they did not perform nearly as well as the US
markets during the same period, European stocks are up over 10%
during the last 12 months. The German Supreme Court decision on the
ESM has given a boost to stocks in the region and paved the way for ESM
implementation, but recession is a reality. Europe’s structural banking
issues will take years to resolve, but European stock prices, however, are
at temptingly low levels, and we will be looking for the right time to
reenter this asset class.
Emerging Markets Stocks –after a marked deceleration of economic
growth in emerging markets (led by the BRIC countries) and a rough first
six months of the year, these stocks are up between 9% and 11% in the
last 3 months. These markets will be a key component to long-term
growth for your portfolios, so we must be patient with the inherent
short-term volatility. We will be looking for other areas of the
IV)
V)
VI)
emerging world to invest in, as we try to take advantage of global trends.
We also see more challenges and risks to be larger in Asia than in the
Latin American emerging markets.
Debt Markets – While we are most likely at the end of a 30-year bond
bull market we are not ready to run from bonds as a part of our
portfolios. However, the next move will most likely be negative, so we
keep a close eye on Federal Reserve policy in the US and Central Bank
policy in other parts of the world, and look for real yield value wherever
it exists. While the aggressive implementation of “Quantitative Easing
– Phase III” (“QE3”) by the Federal Reserve will most likely speed up the
decrease in bond values over time, the same Federal Reserve has been
consistent over the last few several quarters in predicting no increase in
interest rates for at least another year (more details on QE3 and its
impact later in the update).
US Residential Real Estate Market – Residential real estate continues to
be an attractive long-term investment for our clients, with historically
low interest rates, an increased willingness by US banks to lend 90% to
value, and increasing rents across the country. The stock markets are
not the only place to put your money, and real estate has a unique benefit
and unique place in your portfolio. We believe, based on housing data,
that most residential real estate markets in the US hit bottom
approximately 9 months ago.
Alternative Investments (Commodities/Oil/Gold) – Commodities are
great hedges against inflation and often provide good diversification to
stocks and bonds. With global growth slowing, commodity prices often
drop, and prices did decrease dramatically during the March-June
timeframe. Prices rebounded fully during the July-September period,
however and are up over the past 12 months. If sluggish global growth
continues, commodity prices do not represent a big upside in the short
term. That being said, Gold and Oil represent opportunities to hedge
short term volatility of political issues in the US markets in the next 6
months or if Mideast tensions rise in light of Arab unrest and the
Israeli/Iran tensions rise.
Table I
Short- and Long-Term Outlooks for Investments
Investment
Short-Term
Outlook (1-2
years)
Long-Term
Outlook (2-10
years)
US Stocks
Neutral
Neutral
European and Asian
Developed Stocks
Underweight
Neutral
Emerging Market Stocks
Neutral
Overweight
US Real Estate Markets
Overweight
Overweight
Debt Markets
Alternative Investments
(emphasize larger,
multinational dividendpaying stocks)
Neutral
(emphasize investmentgrade corporate and
emerging market bonds)
Neutral
Underweight
(emphasize investmentgrade corporate and
emerging market bonds)
Neutral
In summary, the last 12 months have been good to most of our asset values, with an
almost universal increase in value, led by US equities. The next twelve months,
however, are dependent on political outcomes in the US and Europe, the rate of
global economic growth, and the ability for US and foreign companies to grow
profits, now that prices are up due to healthy stock market increases. CoPilot
believes that long term investors should be cautiously optimistic, and not look to
restructure allocations in a meaningful way. Instead, we should look for the best
sectors and regions in the equities and bond markets, and keep an eye on interest
rates and inflation long term. A close reading of the history of severe financial crises
suggests that it will take more than five years (perhaps as many as 10 (2018) to
find a way back to more predictable, sustained economic growth. In the
meantime, we will consider the potential impacts of different risks and keep our
balanced, global approach.
It is with this back drop that we make the following recommendations to our
customers -
Table II
Investment Portfolio and Financial Life Recommendations
Type of Investment
Recommended
Profile
Notes/Comments
(based on short-term
outlook (1-2 years)
Stocks
Maintain Holdings
Bonds
Reduce Holdings
Commercial/Industrial Real
Estate (REITS)
Increase Holdings
US Investment Residential
Real Estates (first home,
upgrade home, or vacation
home)
Cash in Investment Portfolio
Positive Outlook
Investment Alternatives
(currencies/commodities)
Systematic Investment
Purchases (monthly or
quarterly contribution into
index fund)
Refinance Mortgage Debt
Maintain
Holdings
Maintain Holdings
Large Company
US stocks
Yes
Lighten overall holdings in US stocks,
but hold US Large company/dividend
stocks. Look for opportunities in
Emerging Markets and European
large company stocks
Emphasize investment-grade
corporate and emerging market
bonds
We will look to add more commercial
real estate holdings to our residential
holdings
Historically low interest rates and
stabilizing prices in many markets
suggest that we have passed the
bottom of the cycle
Mortgage rates are at historic lows,
but the refinancing decision should
be based on current rates, costs of
Reduce Mortgage Debt
No
Emergency Cash fund
Maintain
refinancing, and years before sale of
the home
Mortgage rates are at historic lows
and money can be better deployed
elsewhere. Reducing debt might
make sense if a reduction could lead
to a favorable refinance
Discussion and Analysis of the Financial and Investment
Landscape
Slowing global growth as some risks fade and some recycle
“The more things change the more they stay the same .
– 19th Century French Proverb
.
“
A year ago, we looked at the markets with hope, but were preoccupied with
European banking risks, low bond yields, US tax uncertainty, US fiscal policy
instability, and tenuous global economic growth. Today, we are concerned about
the same things! In the meantime, however, the S&P 500 is up over 20% during
the past 12 months, and large European stocks are up 10%! But it is important to
put the changes into context – and the changes yet to come.
INVESTMENT FUNDAMENTALS and ECONOMIC INDICATORS
Fundamentals and leading economic indicators are important because they talk
about the fundamental quality, stability, and growth potential of a security in the
short, medium, and, on occasion, the longer term.
Another Debt Ceiling Circus??
Since the government typically borrows between $100 billion and $125 billion a
month, that means it's on track to hit the ceiling sometime in December. But the
Treasury Department will likely be able to use "extraordinary measures" to keep
the debt just below the legal limit for a couple of months.
Bottom line: Congress
will likely need to raise the ceiling in early 2013 or Treasury will risk defaulting on
the country's legal obligations by failing to pay all of its bills in full and on time.
If the past is any guide, lawmakers will wait until the last possible moment to do so.
House Speaker John Boehner warned in the spring that Republicans would not
approve another increase to the debt ceiling if it wasn't matched by a greater
amount in spending cuts. Hold onto your hats! For those of you who would like
to play this volatility, we will revisit our VIXY strategy in short order.
Trade Opportunity - VIXY is now trading at $18/share. During the height of the
debt ceiling debate last year (mid-August through November), VIXY traded at an
average price of $90/share and touched a high of $120. We are not predicting
that kind of spike in volatility, and we do not recommend this trade to everyone,
but if you are willing to watch it closely and respond to our instructions quickly,
this might be a nice way to take advantage of the volatility. Stay tuned.
Election Year and the US Stock Market
A lot of information about how well the stock market does with a Democratic or
Republican President in office is fun, but not very predictive (in our opinion). What
we think is more predictive and interesting is how the stock markets do based on
the composition of legislative and Executive branches of government—
The performance of the S&P 500 from 1900 until this year under three scenarios is
interesting:
1) Total Unity (one party controlling the House, Senate, and White House);
2) Partial Gridlock (one party controlling both houses of Congress and the
other controlling the White House); and
3) Total Gridlock (a divided Congress)
Over all years, the S&P rose at a 6.8 percent annual pace. During times of total
unity, 67 of the 111 years analyzed, it increased at a 7.6% annual pace.
During
times of partial gridlock, accounting for 32 years, it gained 6.8%/year. And
during the 12 years of a gridlocked Congress, the S&P gained just 2 percent per
year. This pattern holds during more recent years as well (since 1945).
So – how will things fall out in November? If forecasts and probabilities hold,
President Obama will win re-election, the Republicans will hold the House, and the
Democrats should retain the Senate, but that is lower probability than the
Republicans holding the House. This would result in Total Gridlock, similar to
what we have now. We will watch these developments, and if we think there is a
predictive quality to this composition or if the polls are not accurate, we will advise
our clients accordingly.
The “Fiscal Cliff”
“Efficient Stock Market” theorists argue that the potential effects of a combination
of tax increases and spending cuts that could come to pass at the end of the year –
known commonly as the “Fiscal Cliff” - is already baked into prices, but we disagree.
Given that no one really knows 1) how the congress will respond to last year’s selfimposed Super Committee constraints, and 2) how the combination of tax increases
and spending cuts will affect the economy, we believe that both volatility and a
material effect on stock prices could result.
While the combination of higher taxes and spending cuts would reduce the deficit
by an estimated $560 billion, it is very difficult to estimate not only what exactly
will happen re: taxes and spending, it is difficult to gauge the effect on the economy
at any level of higher taxes and spending cuts. Amid an already-fragile recovery
and elevated unemployment, the economy is not in a position to absorb any
material shock.
This risk is also exacerbated by political stalemate and dysfunction. The cost of
indecision could have an effect on the economy before 2013 even begins.
Households and businesses begin to begin change their spending in anticipation of
the changes, possible reducing GDP in the second half of 2012.
We think the political realities and last year’s precedent suggest the potential that
Congress fails to reach agreement in addressing the fiscal cliff is greater than what
many analysts seem to believe.
If the Congress won’t do anything, the Fed Will – Quantitative Easing 3 (“QE3”)
The Federal Reserve Board of Governors announced in September that it was
launching a third round of "quantitative easing," a technique aimed at spurring
lending and economic activity by purchasing bonds from banks. Unlike the two
previous rounds, however, the Fed put no time or dollar limit on QE3. Instead, it
plans to buy $40 billion worth of "agency mortgage-backed securities" (packages of
loans created by Fannie Mae and Freddie Mac) each month, along with about $45
billion in monthly exchanges of shorter-term debt for longer-term debt, until the
employment situation improves "substantially."
There appears to be no precedent for such an open-ended commitment to inject
money into the economy. But as Fed Chairman Ben Bernanke has noted several
times in the last two years, Congress isn't doing anything to help matters. The Fed
is on its own, and it's already pushed short-term interest rates effectively to zero.
As we mentioned in our Executive Summary, this action, especially if the Fed
pursues it aggressively and until unemployment decreases “substantially”, could be
a big help in driving economic recovery more quickly. It could, however, have the
unwanted (or “lesser of two evils”) effect of increasing the chance of long-term
inflation, since the action is essentially deploying printed money. Given this, we
will maintain our investments in gold and commodities as a hedge, and watch
signals for interest rate movement very carefully.
Euro Zone –Coordinated Action and German Supreme Court Rulings
Germany's Supreme Court ruled two weeks ago that the nation can participate in a
permanent European bailout fund, giving the go-ahead for a key element of
European leaders' strategy for combating the continent's long-running debt crisis.
The legal decision served to avert an international economic crisis that was likely to
erupt if Germany was constitutionally blocked from participating in the $640billion fund known as the European Stability Mechanism (ESM). At the same time,
the court placed conditions on Germany's role in the fund, setting as a cap the
government's agreed-upon contribution of 190 billion Euros, or about $243 billion.
But the strings it attached to its endorsement of the ESM and a separate European
pact on budget rules were less onerous than many had feared. The euro shot up to a
four month high against the dollar and global stocks rose to a five month peak.
"This is a good day for Germany and a good day for Europe," German Chancellor
Angela Merkel said in a speech to parliament.
European Central Bank (ECB) President Mario Draghi announced plans last week to
buy "unlimited" amounts of government bonds issued by stricken euro states like
Spain and Italy in order to reduce their borrowing costs. German Finance
Minister Wolfgang Schaeuble said he expected the rescue fund to be operational
within weeks.
The ESM is expected to have an authorized capital of 640 billion Euros of which 80
billion is paid-in capital, and the remaining 560 billion -if needed- will be lent
through the issuance of some special ESM obligations to the capital markets. The
ESM treaty foresees a payment of the capital in five annual installments, but the
Euro group stated on 30 March 30, 2012 that capital payments shall be accelerated
and all the capital paid by the first half of 2014.
Could this be the beginning of the end of the euro zone's crisis? Unfortunately, the
answer is "probably not." The crisis has been allowed to fester so long that the
economic problem may now be too big to be addressed within the shrinking
political space available. To emerge once and for all from the Euro crisis, three
things would be necessary: stronger intervention by the ECB to limit possible shortterm damage, credible economic growth strategies for crisis-hit countries, and a
longer-term plan that provides for macroeconomic adjustment and reforms to the
functioning of the Euro zone. Europe has one-and-a-half out of three at best.
We will monitor progress on the 3 points above, the health and recapitalization of
Euro Zone banks, and prices of Euro zone equities, re-entering this investment
when we feel the price: growth potential is advantageous for our clients.
Emerging Markets – slowing growth, but there are opportunities
Emerging Market Stocks
The engine of BRIC economies is slowing and sputtering a bit, and initial hopes that
the economies could withstand the pressure of an economic slowdown are fading
away. Due to structural problems, and the countries' inability (as of now) to kick
start domestic consumption to make up for lost growth, rates of growth are slowing
materially. But prices are rebounding now that the “new reality” of growth is
being understood, and Emerging Market economies are still growing at more than
double the percentage rate of many developed economies.
We are looking at other emerging markets investments that may bring more
potential for short-term and long term growth, including what is now called the
“MIST” countries – Mexico, Indonesia, South Korea and Turkey.
Emerging Market Bonds
The average debt-to-GDP ratio for developed world nations averages 100%. In the
United States, the ratio is close to 105% when one includes debt that is held in
government accounts. The average debt-to-GDP ratio in emerging market
countries? Typically, it is less than 40%. Without question, from a perspective of
country credit, these markets are far more capable of paying back the money that
they borrow.
Yet old habits are hard to break. In the market weakness of May and June
investors dumped emerging market assets of all types, opting for the perceived
safety of U.S. treasuries and the U.S. dollar. But both stocks and bonds have been
coming back. Why? Not only do they represent the same or less default risk,
the yields on emerging market bonds are +4.5%, versus 5- year US Treasury yields
of 0.6%. Now that is a great risk-adjusted return!
We are recommending that clients de-emphasize US government bonds and focus
more of their bond portfolio on US dollar based Emerging Market Bonds (ticker:
EMB - yield 4.45%) and intermediate-term US corporate bonds (ticker: CFT - 3.44%
yield).
PRICES AND YIELDS ON INVESTMENTS
Prices and yields on investments are important in comparing cost to the quality and
growth potential of an investment. Broad pricing information also allows us to
compare prices between different types of investments and compare historical pricing
of those investments – can we identify bargains? Can we spot investments that
might be overpriced and at risk of decline?
We look at the pricing of 3 different broad investment types – stocks, incomeproducing investments, and residential real estate – in evaluating investment prices.
The below table offers a comprehensive view of the values placed by the market on
US real estate, as well as stock and bond values throughout the world. This table
offers two stock valuation methods – the price of the stock divided by the projected
annual earnings of each share of stock (P/E ratio) and the price of the stock divided
by the projected cash generated by each share of stock (Price/Cash Flow).
Table III
Pricing of Global Investments, September 2012
Ticker
Description
Investment
Class
Price/Earning
s Ratio
Price/Cash Dividend
Flow Ratio
STOCKS & REAL
ESTATE
SPY
S&P 500
Large Cap
Blend
14.06
7.00
1.91%
AAXJ
Asia Emerging
Markets
LatAm
Emerging
Large Cap
Blend
Large Cap
Value
11.38
5.74
1.69%
EFA
ILF
International
Large stocks
Large Cap
Blend
11.41
12.53
3.57
5.65
3.33%
3.13%
IYR
BONDS
Ticker
AGG
HYG
EMB
ITR
Markets
US Real Estate
Mortgages &
REIT
29.73*
15.32*
3.39%
Description
Investment
Class
Interest
Sensitivity
Quality
Yield
Corporate
Bonds
High Yield
Corporate
Bonds
Extensive
Low
6.96%
US Aggregate
bond index
Government
bonds
Intermediateterm bonds
5-10 year
bonds
Emerging
Market Bonds
Corporate
Bonds
Moderate
Extensive
Moderate
Medium
Low
Medium
2.41%
4.45%
3.21%
Comparing prices to historical levels
Stocks – US stocks close to historical levels; International Developed stocks are
cheap compared to historical levels, especially based on cash flow (Price is 3.57
times cash flow).
Bonds—bond yields across the boards are at 30 year lows, reflecting high prices
and high relative risk, given the low probability of interest rates dropping further.
The only condition mitigating this risk is a global commitment to liquidity and poor
global growth prospects in the near term.
Real Estate – IYR prices (US REITs with mortgage influence) is still trading well
below Real Estate Investment Trust category averages (average P/E is 38.68 and
average P/CF is 18.02)
Bonds and other interest-bearing investments
The below table highlights the current yield of many different investments, and
how those yields have changed over the last 12 months.
Table V
Yields and yield changes for major interest-bearing investments, 2011-2012
0.525%
Increase/(Decrease)
in Yields, 2011 v
2012 (%)
-166.67%
1.914%
3.48%
-4.27%
-3.61%
3.59%
4.45%
-23.99%
-11.34%
6.96%
-3.72%
Current Yield (coupon
Type of Bond
US Government
Treasuries
(average of 3-and
5-year)
S&P 500
Investment Grade
Corporate Bonds
US Real Estate
Index
Emerging Market
Bonds
High Yield
Corporate Bond
payment divided by bond
price
Source: Yahoo! Finance, Federal Reserve
We have bolded the income-producing investments that we like for our clients.
Investment Grade and High Yield Corporate Bonds: we see reasonable value
and risk in these investments, given the solid financial condition of most
corporations and the stable interest rate environment
Emerging Market Bonds: for reasons previously discussed
Special Note: S&P 500 – we favor the high-dividend, non-financial stocks of the S&P
500 and large international stocks than to the S&P 500, given their stability in times
of economic uncertainty.
Special Note: US Real Estate Index – we are still positive on real estate investments.
Yields are down primarily because the underlying asset has appreciated
approximately 7% in the last 6 months, not because the investment is paying less.
Residential Home Prices (for purchase and investment) and Rents
Pricing of residential homes is important for future or current owners, since
real estate prices can be quite cyclical, and their price drives a huge budget line
item for most families.
Buying a primary or vacation home
While we don’t expect a rapid rebound in pricing, we think a family buying a home
for the first time or looking for a long-term real estate investment would be wellserved by acting now, given interest rate levels and increasing price stability. For
those who are considering real estate as an investment, be sure that your cash flow
(rent minus mortgage, taxes, and other expenses) is break-even or better while you
wait for prices to increase on a sustained basis. This will vary from region to
region, but could take years to happen.
In past residential real estate cycles most rapid drops are followed by a slowing in
the rate of price decreases (where we are now), and then followed by a few years of
low or no growth or decline before pricing begins to increase again. The last US
real estate bubble (1989-90) lasted until 1997 before prices reached 1989 levels –
8 years. We are now 5 years from the 2007 peak, and this cycle is looking very
similar in pattern. If history plays out again, we should have passed the bottom of
the market in most areas.
In short – buying now wouldn’t be a bad idea at all, but you shouldn’t expect to see
home prices appreciate in the near future. If you can’t purchase now, don’t worry
– home prices typically flatten out before they head up – you will probably have at
least a few more years to buy at low prices.
The following table explains price movements of the regional real estate markets
from June 2011 to June 2012, and also explains how current prices compare to the
peak in residential pricing, which occurred almost universally in April of 2006.
Table VI
Residential Real Estate Price changes by Metropolitan Area, 2011
Metropolitan Area
San Francisco
Los Angeles
Chicago
Residential Price
Change (June 2011 –
June 2012)
3.0%
0.7%
-1.8%
Atlanta
Miami
-12.2%
4.4%
Dallas
Seattle
3.6%
1.7%
Las Vegas
Phoenix
Minneapolis
Boston
Charlotte
20-City Composite
Source:
-1.8%
13.9%
5.6%
0.0%
0.8%
0.5%
S&P/Case-Schiller Home Price Indices (June 2012)
Residential Price
Change (since peak
of April 2006)
-37.2%
-38.4%
-32.6%
-32.6%
-47.4%
-60.0%
-49.7%
-31.9%
-4.1%
-20.1%
-15.2%
-9.0%
-32.6%
The table reveals recent price movements and value deficits from the high of 2006
differ significantly by region, but all but one market (Atlanta) has either stabilized
or is growing compared to the summer of 2011.
Each region/city tells a
different story, and we are happy to discuss them in some detail with our CoPilot
360 clients.
Buying a residential investment property
When buying a home for investment purposes, especially when home appreciation
does not appear to be imminent, it is important to be sure that rent will exceed
expenses. Even with historically low mortgage rates, a positive cash flow is not
possible in all markets. Price doesn’t independently determine whether the
investment is attractive, without knowing what the real estate can demand in rent.
The below table highlights the important investment ratio of the price of the home
v. the annual rent the home could bring. In most cases, the lower the ratio, the
better (some very low ratio areas could look attractive, but could have underlying
issues around home value and appreciation potential).
Let’s look at an example –
Location: Miami/Ft. Lauderdale
•
•
•
•
Price: Rent ratio: 7.6
Home price: $200,000
20% down payment/borrow 80% at 4% fixed for 30 years
Property taxes of 1% annually, maintenance (10% of rent) and property
mgmt (10% of rent)
Monthly rent = $200,000, divided by 7.6, divided by 12 = $2,200
Mortgage/Taxes/Maintenance/Management Fee = $763+$167+220+220 = $1,370
Monthly positive cash flow = $2,200 - $1,370 = $830 = 5% annual return on asset
worth $200,000
The below price-rent ratios from select markets around the country are ranked in
order of attractiveness for investment. Those colored green would be considered
cash flow-neutral to positive, based on the assumptions and calculations of the
previous example. Those colored red would be considered cash flow-negative.
Table VII
Price -Rent Ratios – July 2012
Location
Price-Rent Ratio
Miami-Fort Lauderdale, FL
Tampa, FL
7.6
7.8
Las Vegas, NV
8.5
Atlanta, GA
Dallas, TX
Chicago, IL
Reno, NV
Fresno, CA
8.1
8.1
8.7
9.7
9.8
Charlotte, NC
Tucson, AZ
9.9
10.1
Los Angeles, CA
Santa Barbara, CA
14.2
14.5
Phoenix, AZ
San Diego, CA
Truckee, CA (Lake Tahoe)
San Francisco, CA
Santa Cruz, CA
San Jose, CA
Lowest Price-Rent Ratio (Detroit, MI)
Highest Price-Rent Ratio (San Jose, CA)
Source: Zillow Real Estate Research (July 2012)
10.3
14.0
14.5
16.0
18.6
18.9
6.0
18.9
Given the assumptions that we made above, the break-even Price-Rent ratio is 14.2.
Since a good percentage of our clients are in the San Francisco/Oakland/San Jose
metropolitan area, we would recommend buying investment homes outside of our
immediate area. This is not as difficult as you might think – if you are a Copilot
360 customer, give us a call to discuss your goals and preferences if you want to
consider residential real estate as an investment.
HOW ARE THE MARKETS BEHAVING?
“Technical Analysis” – the study of how markets move and behave, is an important part of
making good investment decisions. Technical analysis can confirm or question the inputs we
get from fundamental/economic analysis and price analysis. Sometimes, like in the case of
the Financial Crisis of 2008, technical analysis can be a warning signal for markets that
otherwise appear healthy.
Our review of market action does not provide any actionable information. We are
only concerned with Technical analysis if it conflicts with fundamental analysis,
suggesting that the market might know something that would suggest conditions
are better or worse than economic information might suggest.
A brief summary of our findings are below.
General Indicators –neither positive nor negative
Relative Strength Index – (neutral) NASDAQ is neither leading or lagging the
growth of the Dow Industrials
Monetary Index – (slightly positive) Interest rates continue to trend down,
making stocks attractive relative to bonds, but there is no room for this to be a
positive driver of the market in the future.
Moving Averages (50-day and 200-day) – Averages for the US markets appear fine
(perhaps suggesting a slight overvaluation), European stocks are showing a 200-day
average that is heading up for the first time (positive sign).