More Fallout...

Many items related to the credit crunch/housing bubble have been written about and discussed ad nauseaum (including here), but surprising little has been mentioned about how to make money from it. Perhaps everyone has become too politically correct to discuss this, afraid of offending anyone, even those that made poor financial decisions. The reality is that opportunities abound in markets like this. Frankly, there more attractive investment options now than there were one year or even six months ago. Are the markets more inherently risky than six months ago? Probably not, but investors perceptions of the risk is much greater than then. These risks have manifested themselves in higher volatility measurements like the VIX index.

On TV, the answer on everyone's lips is twofold. Either buy tech stocks or invest internationally is the cry. Both strategies as a general rule have probably run their course. Where were these people a year ago, when both ideas were much more attractive than they are now on a valuation basis, especially international investing (I beat my brains out for years trying to get people to put there money in foreign currencies, to little avail). Certainly there have to be better options out there now than putting money into appreciated assets of perceived safety and immunity. It is understandable that Treasuries and other credit risk-free assets have benefited from a flight to quality, but the others may just be the next cycle in the fallout. It is time to look at other assets and overlooked areas for investment ideas.

The first thing I am not going to write is buy financials, but it stands to reason that the entire financial system isn't going away. Most of the sector has gotten beaten up badly. However, not being an equity analyst I'll leave those calls to them. The investment grade corporate bond market has not been a participant in this rally, however, with some notable exceptions, absolute yields haven't changed much either, pushing spreads back to '02 levels. High yield bonds and preferreds have done worse, mainly due to a fear-induced buyers strike. However, this is a baby with the bathwater situation. Here again, not everyone (and perhaps not anyone) is going out of business. It is time to start looking and locking in yields at the currently available levels. Remember, many corporate bonds today are trading at a discount, so a significant component to yield will be derived from price appreciation.

The other item I wish to touch on is real estate. All real estate is local, so you need to know well the market being considered. There may be significant price declines before stabilization. Also, real estate isn't very liquid and transaction and other costs are relatively high. However, here are two methods to keep in mind: foreclosures and bank sales. Foreclosures occur generally occur in a method not seen much any more, an open outcry auction usually handled by a county sheriff. It can be a cheap way of getting a hold of a property, but keep in mind that few properties ever make it foreclosure as both parties come to some agreement beforehand. Bank sales come about after a bank forecloses on a property it hold the mortgage on. They are usually "motivated sellers" as banks don't want to tie up capital in real estate. Contact banks for lists of property they may have for sale. The final item is tax liens. While this segment hasn't grown due to market fallout, by this time next year tax liens should be more plentiful as property owners fall behind on the taxes. A tax lien is created when someone is delinquent on their property taxes/other fees the owe to a governmental entity. The government wants its money, so it sells the right to collect that tax in the form of a lien to the highest bidder. Each state has its own method of doing this, so it is important to find out the rules well in advance. You may be able to foreclose on the lien and end up owning the property for practically nothing, but the real benefit here is the rate of interest you can charge the property owner. As it is a tax lien, your priority claim on the property comes right after the IRS. Again, the liquidity here is fairly low, so be prepared for the long term.