Notes from the USA (July 2010) – a guest post

I have been writing a weekly technical analysis of the Dow Jones (DJIA) index for some time. Most of the information sources for those posts have been ‘second-hand’, viz. data available on the Internet and from magazines.

Kiran Patel has been working and investing in the USA for a long time. He is also a regular participant in various investment group discussions. Here are his first-hand, ground zero views about the US economy and investment opportunities.

Hopefully, these posts will appear every month – depending on how much time Kiran can spare from his busy schedule. Readers are requested to encourage and motivate him by leaving your comments and questions.

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Is the US Economy Recovering?

There are many who are enjoying the thought of recovery, others who are hoping for a recovery and still others who are asking everyone ‘what recovery’! So, what is the real truth when it comes to the US? This is a ground zero view from the US.

Recovery of an economy really should translate to job growth, consumer spending, corporate spending and most importantly, reduction in unemployment benefits. Well, none of these factors reported by the US Government show a real recovery. So, where is the recovery and why the sudden feeling that things are OK? The only recovery that one sees is the comparison of quarterly earnings of corporations between 2010 and 2009. Last year’s earnings were so weak that any improvement in this year’s earnings is giving a false impression of recovery in comparison with a much lower base.

Obama had offered a special incentive of $8000 to first time home buyers who have a signed contract by Apr 30, 2010, and do the ‘closing’ (execute the purchase) by Sep 30^th, 2010. There is a huge backlog of deals in the works that is in the process of ‘closing’. All of this has created a temporary bump up in economic activity, reduced the inventory of homes, but at the end of the day, I still call this ‘artificial’. It is artificial since it was created by a stimulus injection, and now that the effects of that stimulus injection have worn off, housing sales have slumped since May 2010. Inventory of homes is increasing, and homes that did not sell are coming back to the market place at reduced prices.

Why are investors like me buying? Home is where the heart is. Everyone needs a home, whether it is small, medium or big. People who have lost their homes due to non-payment of mortgage, bankruptcy, foreclosure, short sale or any other fancy word used today in the US, need a place to live. So, my deal is to buy deeply undervalued homes (30c to a dollar), fix them up, and rent them out to some of the large population of people who have to rent since they cannot afford to buy, or do not have the credit to purchase a home (with a mortgage). Inventory for homes that fit my ‘buy profile’ is a bit depleted due to the Obama incentive, but since May-June, it is starting to go back up. As winter approaches starting from Nov, these deals will get mouthwatering once again. In the meantime, investors are making offers to purchase these deeply undervalued homes from the banks, who own them today (reclaimed from the original home owners who could not pay their mortgages) and are pricing it way below market prices.

So, recovery? A bump up might be the closest thing it can be called, but we will probably see a dip back down to a soft-landing or a double dip recession in the next 6-9 months (starting this winter). Manufacturing activity (ISM report), Leading Economic Indicator (LEI report), and other internal indicators are pointing to this upcoming dip. The best of the best is the WLI – Weekly Leading Index Growth Indicator (created by an Indian Scholar along with 3 other partners) is pointing downward. That means the US economy is about to turn back down, since the WLI is a leading indicator.

Are the BRICs (Brazil, Russia, India and China) ready to withstand this bruising from the potential double dip recession? Are they going to have their own corrections, once again showing that each of those markets is still co-related and inter-dependent on the US? I think so. What do you think, dear reader?

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.