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Last year Barbara and I were sitting in my cousin Van's condo down in Sebastian, Fla., when he told us there was going to be a big, big bust in the real estate market. Van has been investing in real-estate for years. He's no Donald Trump, but he has made a nice living investing in houses, apartments and small commercial properties.
"Van, how can you say that?" I asked. "All the homebuilders are going gangbusters, and mortgage lenders are booking record-level profits. This is one of the best real-estate markets ever."
He responded: "Housing prices are just too high. People can only afford to pay so much in rent or mortgage payments. Rental prices are inelastic and right now I can't buy a house, finance it and make a profit off of what people can afford to pay in rent. The numbers just don't work. Housing prices will come down between 20% and 30% and soon!"
I laughed as we left his condo, but six months later he's been proved right. The numbers just didn't work and he saw that before anyone else did. Why didn't I listen and short all the homebuilders and real-estate lenders? The signs were there; I just failed to believe them.
So what are the signs now? What do I see for the next six months? Right now lenders are not lending. We read that in articles over and over again. U.S. businesses are run on financing, not equity.
Many good, solid businesses are poised to expand but need financing to do that. Where will they get the money to expand when the lenders aren't taking on new exposure? Most businesses either floor plan their inventory or use a revolving line of credit to finance their work in process. Lenders will lower their exposure so businesses will have to shrink their inventories.
Over the next six months to a year it will take more than a good business plan and solid execution to succeed. Without financing, companies can't grow and expand.
Many profitable, stable companies will either have their loans not renewed or their floor plans and revolving credit lines lowered -- not because they are bad risks but because the lenders are lowering their exposure.
Companies that can restructure their debt will survive; those that can't either will go under or will be put up for sale.
The growth industries for the next six months to a year will be merger, acquisition and workout specialists, debt collection agencies and bankruptcy attorneys.
The numbers just don't work.
Personal disclaimer: The stocks selected here should not be taken as buy/sell recommendations for anyone else. The stocks were selected by my stock-screening process, and then each was analyzed before being added to or subtracted from the portfolio. Do not concentrate on the stocks I name; learn the selection process.
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