Cottonfield Market Update

By: Roy Darphin | Sat, Sep 2, 2006
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The U.S. Real Estate Market and its implications on Stock Markets

The most recent numbers from the U.S. show that the real estate market is about to correct. While until recently it was not entirely clear whether the correction would happen in the form of a soft or a hard landing, the latest figures released point rather to a hard landing. The risk adverse investor is well advised to mentally consider possible implications related to such a scenario now and to decide on possible actions. Following we shall attempt to just do this for you and to guide you in the evaluation of possible actions.

To tune into the topic ...
Lon Witter (Barron's, Aug. 21, 2006) argues that there has not been a housing bubble but a lending bubble. Look at this data:

Whether lending or housing bubble the effects of a hard landing of the real estate market may be significant. Fact is that real residential investment in the U.S. fell in Quarter 2, 2006 at an annualized rate of 6.4%. For the 3rd and 4th quarter, it is assumed that the housing sector will contract at an even faster rate with estimates reaching 10-15%. Homebuilder Toll Brothers said the current slump in residential construction is unlike any it has seen in 40 years as it became the latest to warn of a glut in new homes for sale and a slowdown in the closely watched real estate market. (, Aug. 9, 2006)

We foresee that a hard landing may trigger 5 Effects:

What are possible chains of events from the Effects? From the U.S. perspective we imagine the following to happen:

When will this possible process start to "move"? One answer may be found in the NAHB homebuilders' index that leads the S&P 500 by 12 months and with a near 80% correlation.

So far, investors do not seem to have factored the "housing scenario" into their decisions. What we are apprehensive about is that when they do, then the above lag of 12 months may be cut short and this fast. This would result in a U.S. recession with global implications. Interest rates in the U.S. and elsewhere will level or be reduced again, resulting in a USD weakening against currencies with relative stronger economies.

Conclusions and Recommendations:
As to the outlook for the stock markets, we conclude that the air for further upside potential is getting thinner. We recommend increasing the cash portion while staying invested in selected stocks. After a long drought in bonds, it may now be worthwhile again to consider buying medium-term paper.

With or after a market correction, there should be excellent if not extraordinary buying opportunities for the cautious investor with a high cash quote. While for the risk taker there may still remain some upside potential in the current markets ... do not miss the exit on time! Remember: Making up capital losses is difficult.



Author: Roy Darphin

Roy Darphin, Partner
Cottonfield Family and Investment Office
Zurich / Switzerland

Specific investment advice and -recommendations is reserved for our clients. Cottonfield Family Office AG is an asset management company and member of the AQUILA Investment AG. Among our clients we count Swiss and international high net worth individuals as well as institutional clients. We are located in Zurich, Switzerland. Previous Market Updates can be received upon request. Other information please revert to

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