Tabell’s Market Letter – November 30, 1990

,, TABELL'S MARKET LETTER 600 ALEXANDER ROAD, CN 5209, PRINCETON, NEW JERSEY 08543-5209 MEM8ER NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC (6091 987-2300 November 30, 1990 ;nAs forecar,!, we arE! wrollg often enough to be allowed, on occasion, to beg our readers' indulgence for rilco-tinting instance-where we -were right -(iiortofY;- Back in July -1982, this space contained a discussion of the residential real estate market, and, in discussing that market, we used the following language Let us consider a process which has emerged from time to time in almost all markets in which assets are traded. (1) The price of the asset in question rises sharply for a protracted period. (2) It gradually becomes the general expectation that this price rise will continue into the indefinite future. (3) Advancing prices continue to the point where there is absolutely no economic jUstification for purchase of the asset on an investment basis other than the expectation that it can be later sold at a higher price (the greater-fool theory). (4) Increasing willingness to finance the purchase of the asset with borrowed money becomes manifest. (5) The interest rate for said borrowed money eventually reaches astronomical figures. tiThe above series of descriptions, applied on a widespread, pervasive, and nationwide basis, fit two markets that come readily to mind — common stocks in 1929 and residential real estate in the late 1970's. Now the reason we qualified the correctness of the forecast above is that it was, to say the least, a tad early. The real estate market has been slow for some years now, but, even at current prices, the Census Bureau Price Index for new homes remains some 28 above its level at the time the forecast was made, which means. of course, that housing prices in many areas have more than doubled. Nonetheless, weakness is now sufficiently widespread to have reached the front page of the Wall Street Journal which, this Wednesday, discussed falling prices for houses in California—a market, where, we noted back in 1982, the housing market rivalled Disneyland in exhibiting fantasy. The most amusing sentence in the Journal article noted that buyers in a recent development now allege that the builder has a 'moral obligation' to make sure they don't lose money on their homes. Those of us familiar with markets do not find this' attitude surprising, having, many times, – — confrontetlinvestors -whoseemea-to IeelTJiaCtneyposseSSed- a–GOagiverrMglit-to -becomerich-by mean-s – of the stock market. The entire history of the market for housing was, up until a couple of years ago, one of gradually rising expectations which inevitably, at their peak, became unrealistic. The important thing to note here is that we are looking at a market phenomenon, an example of collective, not individual, action. This, it seems to us, is especially important to recall when considering the Savings & Loan crisis which, we noted last week, is, essentially, a real estate phenomenon. It is certainly true that the S & L debacle produced its quota of rogues and scoundrels, but the phenomenon of financiers bribing legislators is at least as old as the South Sea Bubble. The stories in the press about individual swindlers may serve to sell newspapers, but the basic S & L problem was a universal, collective expectation that real estate prices would continue to rise and inflated loan values were therefore appropriate. The key question, of course, is Where do we go from here Those of us involved with the stock market are familiar with what happened when a credit-fueled expansion in equities was taken apart in 1930-1932. It is worth noting here that the real estate market is quite different from the stock market, in, at least, the respect that one cannot live in a stock certificate. The ultimate unwinding of the recent price inflation will probably manifest itself, not in the collapse of prices under forced liquidation, but in a contraction of activity such as we have already begun to experience. We thus see housing starts now down to the lowest level since (interestingly) 1982. We have not changed the opinion we expressed in 1982 that the eventual resolution to an over-priced real estate market will not take the form of price collapse, but of contraction of future price increases to a rate probably not in excess of inflation. Inevitably there will be those who, as the weaker real estate market continues, will want to project this weakness onto the economy as a whole and, of course, onto the stock market. It is this sort of pessimism that we discussed in last week's letter, noting the fact that the technical stock market outlook was, if not exciting, not all that disastrous. We concluded our piece eight years ago with the statement, It is furthermore a truism that none of the descriptions applied to real estate .are currently applicable to equities — they have not been rising; they are historically cheap; there exists no universal expectation of significantly higher prices; and their holding is financed only to a limited extent by borrowed money. The long-term investment implications, it seems to us, are obvious. Despite the equity price rise of the 1980's that description remains today, we think, not too far off the mark. Dow Jones Industrials (1200) S & P 500 (12 00) Cumulative Index (11/29/90) AWTth 2518.32 315.94 4155.29 ANTHONY W. TAB ELL DELAFIELD, HARVEY, TABELL IN C. No Slalement or expression of opinion or any other matter herein contained IS, or IS to be deemed to be, directly or Indirectly, an offer or the solicitation of an offerlc buy or sell any security referred to or mentioned The matter IS presented merely for the convenience of the subsCriber While we believe the sources of our Information to be rehable, we In no way represent or guarantee the accuracy thereof nor of the statements made herem Any action 10 be taken by the subSCriber should be based on hiS own Investlgallon and mformaliOn Delafield, Harvey, labelllnc, as a corporation and Its officers or employees. may now have, or may later take, posllIOns or trades In respect to any secufilies mentioned In thiS or any future Issue, and such pOSition may be different from any views now or hereafter expressed In thiS or any other Issue Delaffeld, Harvey, Tabelllnc, which IS registered wrth the SEC as an Investment advisor, may give adVice to ItS Investment adVISOry and other customers Independently of any statements made In thiS or In any other Issue Further Informabon on any setUrity mentioned herein IS available on request