Debt. Load Me Up?!?

I was talking with a very good friend of mine. He's buying his first house and he told me that the advise he has been getting form friends and family is: take on as much debt as you can, now is the time to buy and make money. Real estate is cheap.

I say: Bullshit!

We might be the most highly evolved species on the planet, but the part of our brain that handles risk probably got stalled out at the reptile stage. How else can you explain how it is that the average investor's concept of financial history seems to only go back 7 years.

Like all assets classes, real estate is cyclical. There is nothing mythical about it. It does not always go up. A young guy like my friend, just starting out loading up on debt. Copuld he make a killing? Sure: overload on anything and you stand to score big if you choose right. But this is wrong for two reasons. First, just because the price is low does not mean it can't go lower. Even if this is the bottom, the market could remain flat while exposing him to substantial interest rate risk as he finances the big debt. Second, this is not a good president for the financial habits. Heavy leverage is like gambling. As long as your streak of luck holds you are golden. One wrong turn though and you can see all of you winnings go back to the house.

The bottom line: who knows exactly where this economy is going. No one can seay with cerainty. The solution: average in. What my frioend should do is not over extend himself on credit but get only take what he needs to finance the home. If he still wants more, he should wait until the economy starts to show it's hand as to where it is going. Once an uptrend is confirmed he could them use proxies for the large home investment. This could take the form of ETFs or shares linkled to home builders. It's not the same but it us a way of him managing his risk in a mature fashion yet still participating in his expected increase in home prices.

The End of the End of the World?

I am calling it. I am calling the bottom of this market cycle on the S&P 500. In my view the technicals are there for the market to at least flatten, if not continue on their recent upward turn.

The technical picture for continued mayhem has started to deteriorate in my opinion. It's not so much that the bears are dead. Its just that the bearmobile may have just run out of gas.