| Posted on Friday, February 29, 2008, 12:00AM I'm generally what people call a "permabull," in the sense that I think investors should patiently accumulate more stocks in bad times than in good. And, as readers know, I've often said that trying to time the real estate market is a waste of time unless you're in the real estate business. That said, a few warnings are in order so that your expectations aren't too high. The High and the Low First, as I see it (and I'm often mistaken), the real estate market still has some serious falling to do. I base this on the fact that real estate in some of the most overpriced markets -- like Manhattan and the west side of Los Angeles -- have yet to fall dramatically. I, your humble servant, have been looking for a condo here in L.A. for my son, and I've been floored by how high the asking prices are for these dwellings. Yes, they've fallen, but they're still far higher than they were four or even five years ago. Keeping asking prices high may make sellers feel good, but it won't sell their homes. Consider this: On one hand, brokers tell me that prices haven't fallen much, and that they think that's a good sign. On the other hand, they complain that sales volume is way down. Both Sides Now Well, friends, the former has a lot to do with the latter. Volume isn't going to pick up until prices fall to accommodate the fact that we're in the midst of a real estate collapse. And buyers aren't going to step up to the plate in large numbers until it's clear that prices have fallen to reflect the new realities of the real estate market. This means that if you're a seller, don't count on selling unless you have a price that makes sense in early 2008. Prices that made sense in early 2006 just aren't going to fly. If you're a buyer, my advice is to still try to buy the house of your dreams, because they come along so rarely. But try to drive the hardest bargain you can; sellers should be very flexible. I would even say that if a seller isn't flexible, wait for a better mood to strike him or her. Again, the real estate collapse has a long way to run yet, and it'll end when sellers get realistic. That could take four years, and maybe longer. But if you need to sell, there's no shame in asking a sensible price. Hail to the Chief? As for stocks, there are more serious cautions. It looks possible and even likely that Senator Barack Obama will be the next president. He's promised that he'll raise taxes in various ways. One will be to end the limit of Social Security taxation, so that all income, without limit, will be taxed for Social Security. And, although Obama hasn't explicitly called for it, he could also raise the taxation of capital gains and dividends. This will without a doubt make stocks less valuable to own -- it simply can't be any other way. If you take a bigger chunk of income from stocks away from the owners, and if you take a bigger slice out of capital gains when profitable stocks are sold, stocks become less valuable. In the long run, stocks still wildly outperform bonds and real estate. But the one-time hit to stocks from such legislation could be substantial, and the effect could last a long time. I'm not taking political sides here, since I think taxes do have to go up unless government can cut spending. And government apparently can't cut spending. Rise and Fall Finally, corporate profits as a percentage of the total national income have risen dramatically in the past six years. This rise has been historically unprecedented, except for the 1920s. If corporate profits return to their historical ratio to the GDP, they could fall -- or at least not rise -- for some time to come. Obviously, we won't know about that for months or even years. But the time to start recalculating your expectations is now. We may well have several years of serious difficulties in corporate stock gains. Is this a reason to shun stocks? No, but it's a reason to be realistic. In the long run, you'll do fine if you stay in and be patient. But over a few years, there could be some serious pain. A Notable Passing Alas, a sad note. The best friend the free enterprise system had in the postwar period (besides Milton Friedman), the inimitable and indomitable William F. Buckley, passed away last Wednesday. The loss is devastating. We'll literally never see his kind again, and we'll be the poorer for it. Buckley stood unashamedly for everything great about liberty, patriotism, and free markets. He contributed to the freedom of hundreds of millions around the globe, and to the triumph of what freedom we have left in the United States. God bless him; I hope he's now happily in the arms of his beloved Patricia.
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