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Thursday, July 29, 2010

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.

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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 30th, 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.

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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.

6 comments:

Pinals said...

Good to see your write up KKP.. After long time..!!!
Keep Posting & Sharing as and when possible..

Any update on US Bond Market behavier recently...???

shyam said...

Great Insight Karan. keep it up

Rsuvarna said...

Very simple and nice writing. I like your word ” bump up”. Yes, it is bump up indeed supported by multi dose of steroids administered by Bernanke & Co. And the question is how long it will continue and when he will run out of his ammunitions? The day it ends, things will slide down for sure. With much talked Debt traps of different nations and the related interest servicing burden coupled with recession, we have to be really watchful of future

As regards India is concerned there are two aspects, economy & stock market. While economy will continue to grow, may be some export business will get affected. But we are definitely in for a spin as far as stock market is concerned. Stock market is still dominated by FII’s. The moment something happens in West, FII’s will pull the money and market will go down fuelled further by panic mentality. Unless we take steps to broaden the investor base with more and more retail investors and pension/EPF funds and reduce the FII’ influence, the trend will continue in future also.

Thanks for the nice writeup...… keep writing.......

Titu said...

Hello Sir,

Thanks to you and Mr. Kiran Patel too, for providing us such a nice article, Thanks again!!

Few days back Mr. Rakesh Jhunjhunwala also aired the similar view about the market.

This time I want to check out that really stock market move 6 month forward to real economy Or not, in 2008 it didn't.

-titu

KKP Investor said...

Thanks for your comments.....

US Bonds are going to remain flat for rest of 2010 since the currency is going to stay in a narrow range, and demand for currency is going to be subdued. Also, Bernanke is going to keep his stance on short term rates, and the lingo he speaks to say inflation is tame and under control (in short IT and LT Bond market will remain flat).

The WLI is pointing to a 2nd recession and these guys have NEVER been wrong. If they go into recession, they will drag other economies down. Exports/Imports etc will slow down, and debt structures will get worse. Consumer spending will slow, and job loses will increase. I hope I am wrong about it, but I have been cashing out for a long time, and right now, I only have dividend paying instruments left in the US market.

So, more to come.....I have not seen/read the RJ article, but if he is bearish on US, then I have double the reason to be bearish now!!!!!

Thanks for your comments.

KKP

Pinals said...

Thanks KKp for your views.. Keep updating as and when possible. Thanks Dada to you also for publishing such articles.. Regards.