Archive for May, 2005

Housing Bubble

May 29, 2005

4 comments

There is even more discussion about the real estate bubble, especially since Fed Chair Alan Greenspan warned of housing “froth”. SmartMoney magazine recently ran a bull vs. bear debate on the topic. The bulls make the familiar argument of low interest rates, strong demand, low inventory levels, limited land supply etc. The bears, on the other hand, point out that when rates eventually rise, housing will be hard-hit.

The best discussion of the bubble I’ve seen so far is this SmartMoney column by James Stewart. He suggests that we should consider housing not as an investment, but as a consumer durable necessity. Of course, this only applies for owner-occupied homes and not to investment properties.

Take my own situation: We lived in our own home purchased more than two years ago. We have a significant equity in our house. If we sell now, we have to rent someplace and wait for the housing market to crash. That could take years or not happen at all. Meanwhile, we would be giving up a significant “imputed income” we derive from our current house and incur all the frictional costs of selling and then buying a house. So, we are staying put but staying away from any real estate investments.

IQ Trends Newsletter

May 27, 2005

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I learnt about the Investment Quality Trends stock newsletter from this Forbes magazine interview column. IQ Trends has a very interesting stock selection strategy. A stock is undervalued (and hence a buy) when its dividend yield is at the high end of its historical range. At the other extreme, a stock is overvalued and should be sold.

In the Forbes video interview, the newsletter’s editor mentions the following stocks:

  • Citigroup (C) – 3.54%
  • AIG (AIG) – 0.65%
  • Claire’s Stores (CLE) – 1.46%
  • Sigma-Aldrich (SIAL) – 1.20%
  • Bristol-Myers (BMY) – 4.38%

(Full Disclosure: I own shares in AIG)

AIG Dodges a Bullet

May 26, 2005

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I bought AIG for my retirement account last month, when New York Attorney General Eliot Spitzer indicated that he expects to reach a civil settlement with the company. Today, Mr. Spitzer filed a civil complaint against the company and AIG’s stock rallied 3% on optimism that former management seems to be the main target of the lawsuit. AIG still has a lot of headline-risk associated with it as it faces charges from other regulators. However, it is very encouraging that AIG seems to be fully co-operating with authorities and current management has taken steps to restore the company’s credibility. My original thesis for the investment still holds and I’m betting that AIG will turn out to be a winner over the long-term.