Déjà Vu All Over Again
I am on record as having made this prediction well over a year before it actually occurred, and more recently made a similar prediction with respect to home builders, who are now competing with their own customers in a race to unload properties. Just like the telecommunications equipment makers, the home builders made the mistake of selling products to buyers who really could not afford them or were likely to re-sell them.
In both telecom and housing, demand was artificially enhanced. In the telecom sector, products were sold to cash rich start-ups that were merely burning through IPO proceeds. In the case of housing, demand was artificially pumped up by lax lending standards (such as zero down, interest-only, no doc, and negative amortization loans) and a widespread belief that the housing boom would last forever. As lending standards return and speculators become sellers, artificial demand will no longer exist. The result will be a glut of supply, as previously sold inventory comes back on the market.
The problems will be compounded as the builders continue to over-build even as it is obvious that demand is faltering. This self-serving strategy is necessary to maintain the illusion of future earnings so that insiders can exercise stock options and unload their shares, the prices of which have already been cut in half since their January highs. Unfortunately for investors, Wall Street keeps taking the bait hook, line and sinker.
Over the last few years of the real estate mania, builders used various tactics to help keep prices rising. By acquiring smaller competitors they gained a better control over distribution and maintained a firmer grip on pricing. Also, by introducing new developments in stages, and imposing lock-up periods on buyers, they could guide prices higher, maintaining the illusion of appreciation and thereby attracting more speculators into the market. But now that they are competing with their former customers they are losing control over pricing. Ultimately they will lead prices lower as they attempt to move inventory ahead of their over-leveraged former customers.
However, there are some key
differences between the situation faced by telecommunications
equipment makers of 2001 and homebuilders of 2006. Telecom equipment
quickly becomes obsolete, which in turn allows demand for newer,
more innovative equipment to return within a few years. However,
a three-year old house is just as good as a new one, especially
if it has never been occupied. As a result, companies like Toll
Brothers, Pulte, and Lennar will likely fare far worse during
the downturn than did Cisco, Lucent, and Nortel.
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange