Embracing Information

How can the individual investor find and interpret the best sources of information?  The Internet is rich with material.  Is it too rich?

Investors have so much information that they cannot read it all.  Suppose you are an individual investor, encouraged by television advertising to make your own decisions.  You look at the list of the leading financial blogs and start reading.  Many of the sources highlight each new data point, encouraging the investor to make decisions on this basis.

This is fine if the investor has a perspective on fundamentals –forward earnings of stocks compared to the principal alternatives — bonds and real estate.  Lacking this perspective, the potential investor in stocks gets a plethora of repetitive information about what is wrong.  Not all economic indicators are reflected.

Most readers do not follow the LINQCRED method that we recommend.  They read headlines and interpretation without doing their own analysis.  They also do not question the expertise of those interpreting for them.

A Case in Point

Last week we met with a potential investor, typical of many with whom we talk.  We discussed our  programs — one based on fundamentals and the other based on system trading.  Both have strong records versus the S&P 500 for our history of nearly ten years.

The potential investor likes to read things online, and made a revealing comment.  He said, "I like to keep track of the things I should be worried about."

This is the key.  The investor is not looking for opportunity when everyone is worried.  He is joining the worry.  Those reading Internet information must have a framework for analysis or they will certainly go wrong.

An Objective Source on Housing

Anyone paying attention knows about housing problems. The Bearish Broadcasting Network, which we
recently spoofed, makes sure that each new data point gets plenty of attention.

 A source that is on our featured list of blogs, Matthew Padilla, is writing from Orange County, the epicenter of these issues.  We like to read his work because of the consistently objective focus on data and the helpful orientation of the columns.  Some entries have been quite negative.  The following recent stories are more hopeful:

  • A story on foreclosure trends.  The headline is that month-over-month there is a 5% decline.  Foreclosures are still up 469% over last  year.  Take a look at the table in the article.  Which view provides new information?
  • A story on the decline in ARM mortgages.  There are plenty of resets to come, but this is still new information.  Once again, look at the helpful chart.
  • A story on the improved credit profile of Orange County residents.  This means that there are qualified buyers, when and if the credit freeze-up gets improved.
  • A story on the decline in mortgage rates.  This will help those trying to refinance or to afford new purchases.

Conclusion

There are potential buyers for homes.  They may not qualify for the same level of loans that they did a year ago, but the bidders are there.  Prices need to decline to clear the  market.  This will happen — gradually — as mortgage lending conditions improve and sellers make realistic offers.

Everyone understands that there is a housing problem.  The questions are how quickly it will be resolved and what needs to happen to get there.  When businesses have a high inventory, they clear it by reducing price.  The process of price discovery in housing will eventually happen.

Meanwhile, the information on the impacts for investments in stocks seems heavily tilted, reflected in the heavy discount of stocks compared to bonds or cash.

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5 comments

  • RB October 25, 2007  

    At prices around 250X rent down from about 275X over the last one year and median debt-to-income ratio in the neighborhood of 50%, the psychology has changed. In aggregate, it is about affordability (which is more extended than at the peak of the last cycle in 1991) and plenty of qualified buyers including yours truly and many of his friends are on the sidelines. The recent credit crunch has definitely sharply affected sales over the last month because of the widespread usage of jumbo loans. That situation should ease soon, probably as Malpass says “with some sand in the credit gears”. Assuming the usual sticky nature of home prices, Orange County’s cycle bottom in nominal terms though could quite possibly be in the 2010-2012 timeframe. Some information from the past, although OFHEO may not be the best index for OC due to large usage of jumbo loans:
    http://www.housedata.info/CA/SantaAna.Anaheim.Irvine/

  • Bill aka NO DooDahs! October 25, 2007  

    Gee, Texas is a big state, and Dallas, FW, and Houston are big metro areas. I wonder what their data looks like?

  • RB October 26, 2007  

    The LINQCRED folks concur with puny me that it’s all about affordability http://www.businesscycle.com/news/press/1299/
    I still don’t understand why stocks appear to need rate cut rumors to rally.

  • Tim October 28, 2007  

    I do love the “keeping track of what to be worried about”! My internet readings and searches are for things to be excited about. Does the old saw “the market climbs a wall of worry” still apply.
    To housing, those claiming there will be no bottom this time will miss it. Those looking for the bottom will miss it. Suddenly one day we will all wake up and realize the bottom was a year earlier.

  • Jeff Miller October 29, 2007  

    Tim – You have a much wiser and more effective method than most. Many average investors have missed out on a multi-year rally, perhaps by too much confidence in the wrong sources.
    At this point there is a question: Do such investors want confirmation of their past wisdom or information about the future?
    Thanks for (another) wise comment.
    Jeff