A Stressed Economy Yields Opportunity-Part II

Last week, I discussed the fallout resulting from the subprime debacle which first surfaced last summer.  We reached a financial and economic tipping point earlier this year and only decisive action by Congress and the Federal Reserve averted a crisis.  Noting that we are not out of the woods yet and things may get worse before they get better, is there anything you can do to turn the lemons of the current situation into lemonade of financial gains?  For the few brave souls who are willing to swim against the current, consider the following possibilities:


Buy stocks in beaten down sectors such as the financial sector.  Many bank stocks are down 40% or more from their recent highs and are paying very attractive dividends.  There are risks that the banking industry will worsen and additional banks will be forced to cut their dividends like Wachovia and Citigroup recently did.  But the banks will weather this storm and you could see attractive profits in the next 36 months and collect nice yields to boot.  Examples of banks that we currently hold are Regions (RF) yielding 6.8%; BB&T (BBT) yielding 5.1%.; US Bancorp (USB) yielding 4.8%; and Wells Fargo (WFC) yielding 4%.



With oil prices recently eclipsing $119 a barrel and consumption around the world on the rise, coupled with rising food costs, inflation seems like one of the surest bets.  For conservative investors, you might want to consider Treasury Inflation-Protected Securities otherwise known as TIPS.  With TIPS, your principal increases with inflation (or decreases with deflation) based on changes to the Consumer Price Index (CPI).  The semi-annual interest paid on TIPS is based on a fixed rate established when the bond is issued.  However, this fixed interest rate is applied to the ‘adjusted’ principal so that payments will rise with inflation or fall with deflation.  At maturity, you will receive the higher of the adjusted principal value or the original principal.  For more information, go to the ‘Resource Center‘ at www.welchgroup.com and click on ‘TIPS Bonds’. 


Real Estate

There will probably never be a better time to buy investment residential real estate.  Many financial institutions have massive numbers of properties in some stage of foreclosure and are under tremendous pressure to get the bad loans off their balance sheets.  You’ll be able to buy properties at a 20% to 50% discount from their former selling price.  Combine this with large numbers of people needing to rent homes and you have a perfect combination.  You can contact the banks directly and will likely be directed to their real estate agent in charge of their foreclosure properties.  An alternative is to go directly to homeowners where foreclosure proceedings have already begun.  These will be listed in the local legal listings of the newspaper.  In many cases you can help these homeowners avoid foreclosure; reduce their credit damage; keep them as a tenant; get a good deal on an investment property and have a possible future home buyer all in one transaction.  Plan to hold your investment properties for three to five years until the current slump moves into the next robust cycle.


If you are considering buying a newly built home, this is an excellent time to do so.  There is a tremendous amount of inventory to choose from and builders are anxious to accommodate you with attractive pricing and personal customization.