BawldGuy Axiom: In the long run the investor who doesn’t use all available strategies when creating and executing their Purposeful Plan pays a bigger price for inferior results.

The following are just a few of the questions to be answered when discussing taxes/tax shelter and real estate investing. First though, let’s agree on a layman’s definition of depreciation.

It’s what many call a ‘paper loss’ which allows for the aging and physical deterioration from usage, obsolescence, passage of time, or just simple wear and tear. There is no actual loss of money — which is why it’s commonly called a paper loss.

How do you assimilate the tax shelter aspects of investment into your Plan?

Why can some folks ‘write off’ much of their job income while others are disallowed the same perk?

What happens to depreciation I haven’t used? Have I lost it?

How does tax shelter fit into the big picture as it relates to my retirement?

What happens to depreciation when I sell or exchange the property?

Why is there a tax on tax shelter? Are ya makin’ that up?!

What is ‘cost segregation’?

Let’s deal with one or two of the above questions.

The integration of tax shelter into your Purposeful Plan is far more important than most realize. Common wisdom says investment real estate comes with X amount of depreciation, which will ‘give them’ some annual tax shelter — in other words they’ll pay less taxes. True enough as far as it goes, but for the serious investor it barely scratches the surface of what’s possible.

First thing outa da box is the answer to the question — Are ya going for capital growth or cash flow? The strategies are hugely different depending upon your answer. Sometimes investors realize, sadly after the fact, that their ‘really cool’ cash flowing property doesn’t have enough tax shelter to keep most of the cash flow out of the rain so to speak. High cash flow properties are, in many instances, the punch line to a good news/bad news joke.

The good news? Whoopee! There’s a boatload of cash flow. The bad news? Uh oh, there’s a boatload of taxable cash flow. Oops. The problem was avoidable in most cases if PLANNED for in advance using the tools available. Fortunately for those finding themselves in that position, I can come in after the fact and show you how to shelter all that cash flow so it can stay in your pocket instead of so much being diverted to your favorite Uncle.

What about when capital growth is the agenda? The same principle of Planning applies, just a different section of the playbook, commonly called the Internal Revenue Code. Since yer gonna get tax shelter from income properties whether ya want it or not, ya might as well use to to maximize its benefits to your side of the table, right?

You must first assess your family’s job income — is it over or under $100,000 a year? If it’s appreciably more, you take the left fork in the road. If it’s less ya take the right fork. Betcha didn’t know that. The IRC discriminates against earners making more than six figures at work. They won’t even allow you in the depreciation club when your income exceeds $150,000 annually. The paradox is however, that even if you earn over the magic amount, in my experience yer almost better off in the long run.

I’ve written about it here a few times before. Here are a few things you have at your disposal as it relates to depreciation — what you should know.

1. Understand — a property’s depreciation first covers any cash flow. Only then, if there’s any left can it be used to offset some of your job (ordinary) income, subject to the above mentioned limitations.

2. Regardless of how much depreciation you have? Only $25,000 a year can be used against your job income. Many investors are unaware of that little gem until their CPA explains it to them on their first tax return. Brutal discovery.

3. Unused depreciation doesn’t disappear. It can be used to offset a capital gain in some future year. Yep, ya might even be able to avoid a tax deferred exchange if there’s enough of the stuff accumulated. Pretty cool, eh?

4. Caveat — when ya sell, the universal law saying ‘Whatever the IRS gives, it eventually takes away’ applies just as mean spiritedly to ‘used deprecation’ as it does to a capital gain. Just so ya know. In fact, it’s taxed at a higher rate. Hence, the use of IRC Section 1031 to defer said tax. (Unless you executed #3 )

5. An investor can include in his Plan the ability to sell a significantly high equity property around retirement time without paying taxes. No, really, ya can. But it’s gotta be on Purpose. Nothin’ like grabbin’ a quick million bucks or so at retirement.

See a trend developing here?

Seriously, I’m merely uncovering a few layers of what’s possible for you when you incorporate Purposeful Planning as you invest for retirement. It’s akin to what Grandpa told me about fishin’. “Ya can’t catch any trout son, if ya don’t know where they are.”

Knowing all the tools available to you while setting up a long term Purposeful Plan for real estate investment almost always turns out to be THE difference.

Call me at 619 889-7100 so we can chat about your Plan. Have a good one.

It’s that rate of return, which when discounted back to Day 0 equals the original amount invested. (In ‘analyst speak’ that means Net Present Value (NPV) = 0.)

The court accepted the data I was given was correct in those cases, since most of it came from escrow closing statements, CPA’s, management company reports, bank statements and the like — they were relatively reliable numbers.

In one case I was grilled for over 20 minutes about holding periods. It was literally one of the dumbest 20 minutes the judge ever had to endure going by his facial expressions. For me though it was live entertainment.

I won’t bore ya with the details, but the issue of holding periods, at least according to one of the parties, was a big deal. Why? Cuz their decisions were largely based upon the returns for different properties which were compared to each other — so far so good. But then the various holding periods were shown to impact the IRR. Can we have a giant Duh! from the congregation for that one?

True enough, holding periods do indeed impact the return on your investments. The false assumption though in decision making at the front end is in the reliance on a predicted period of time for which you’ll be in the investment property. There are plenty enough factors having an impact on an income property’s return — and should be included in any serious analysis.

For example, interest rate, length of loan amortization, down payment size, tax shelter, and a bunch more, will influence the final after tax return number. The difference though is that with say, interest rate, it’s 6% when escrow closes, and it’ll be 6% a decade later. You know that. Same goes for the equity gained by principal reduction, how much you put down, annual depreciation, and the like.

Back to the courtroom grilling.

The folks who hired me asked me point blank if making decisions consistently based upon specific holding periods, and the ‘predicted’ returns based on said periods was prudent. I answered with a question that made them smile.

What’s the real estate market gonna be like, exactly, over the proposed holding period?

And there’s the rub.

BawldGuy Axiom: Though investors must to an extent buy in to a particular future, using factors to predict that future created outa whole cloth is foolhardy at best, and guaranteed disaster at worst.

Look, after tax cash flow analysis by it’s very nature requires the analyst to make certain assumptions. Future income & expenses for one. Whether or not there’ll be any appreciation, and if so, how much. Those can be at least approached in a manifestly conservative manner. For instance, even though I can empirically demonstrate rents in a region have increased recently, I might opt to do the analysis keeping the scheduled income static over the entire holding period. It’ll give me a feel for performance in a stagnant economic atmosphere.

Holding periods, in my professional opinion, should never be the deciding factor in the acquisition of income property. There are very rare exceptions, but they only prove the rule. Here’s why.

The market tells us when the holding period is over. I’ve been wrong as often as I’ve been right, maybe more — predicting too long or too short. Back in 2001, when asked by a client how long their new purchase should be held, I shrugged and said, “Probably 3-7 years or so.” 13 months later we exchanged that property for them. The crazy appreciation made it an obvious move. Who knew? I didn’t.

Those who bought property in San Diego in the mid-70’s generally felt entitled to obscene value increases in a year or two. Expectations bashed when those who bought in say, summer of 1978 saw the market head toward the planet Insanity with interest rates in the upper teens, and inflation also in double digits. Most of us weren’t able to make a profitably prudent move ’till ‘84 or later.

BawldGuy Takeaway: 1) Don’t predict your return based upon your holding period 2) Your crystal ball is as cracked as the next guy’s.

Learn to say, “Oh, look Honey, our holding period was just over 6 years this time.” Holding periods are only an empirical piece of datum when viewed through the rearview mirror.

Wanna talk? I do. Call me at 619 889-7100. Have a good one.

BawldGuy Axiom: It’s hardly ever the answers to your questions that end up producing dire consequences. It’s usually (80/20 rule?) the answers to the questions you never knew to ask that end up ruining your day.

I’ll assume you either A) Have the necessary capital to acquire your first property(s) or B) The equity/assets to provide it. Most folks without the hard cash, tap into their home’s equity — if it’s prudent under their unique circumstances.

First, let’s get some myths out in the open.

It’s axiomatic that the real estate investor should acquire only high cash flow properties.

When you buy income property it’s common sense to buy local so you can keep an eye on things.

Tax shelter, by definition, comes with real estate investment property.

Holding periods are generally planned for in advance.

Tax Deferred exchanges (1031) are indicated by default when capital gains are an issue.

You are forced to hold on to real estate investments long past retirement due to taxes on capital gains.

Having a cash reserve is a luxury. If you buy right, ya don’t really need much in reserve.

Those are merely a handful of myths so many investors still believe. If you took the strategies which are unknown to the vast majority of real estate investors taken from the truths those myths hide, most investors would significantly increase their ultimate retirement pot of gold.

Let’s talk about one of them now.

Look, my grandpa also told me cash flow is the gold standard of any real estate investment, no exceptions. If I heard it once, I heard it a hundred times a year from adolescence on. Born not long after the turn of the century (Um, that would be the 20th century.), that school of thought pretty much dominated. Over time however, retirement strategies have been created, tested, and shown to be successful without worshiping at the altar of cash flow from Day 1.

Cash flow and capital growth are the two main goals of investors. It’s the timing of both that is most critical to you. Before I continue, don’t walk away from yer laptop thinkin’ BawldGuy said cash flow is bad, or worse yet, to be avoided. What I AM sayin’ is that if maximizing your retirement cash flow is your goal, and you’re 10-40 years from retiring, cash flow ain’t yer friend — capital growth is. Going for cash flow at that point will retard capital growth.

NOTE: To ensure there’s no misunderstanding here — I’m not advocating the avoidance of property that pays for itself. A little cash flow is definitely a good thing. But in your ‘capital growth’ years, look at cash flow as seasoning. Too much and the meal is ruined. Just enough and the meal is enhanced.

The process of creating maximum income for your retirement is simple as pie. Gettin’ it done is not. Cash flow is — directly put — a yield on a pile of cash — capital if you will. Nothing more, nothing less. It’s really not complicated, though it seems many insist on making it so. Follow me here.

Since cash flow is a yield, let’s say the yield is manifested as ‘interest’ on an amount of capital. Regardless of the interest rate, the guy with a million bucks gets the same interest rate as the gal with half a mil. Clearly, the difference then is in the dollar amount generated, which is obviously more for a million dollars than for half as much. Double Duh.

So if you’re say, 22 years from retirement, your agenda is to grow your seed capital into as many huge piles of big bucks as you can — safely. The more piles you create, and the bigger they are, the more ‘Golden’ your retirement years will be. Those who choose instead to spend those same 22 years bowing down to cash flow will end up with far less income at exactly the time they needed the most income.

The reason that last statement is true is cuz maximizing cash flow retards capital growth — and vice versa. Don’t say anything. It’s like fire and water. Add one to the other and one of them loses — no exceptions.

Make sense?

Let’s have a one on one conversation. Call me at 619 889-7100. Have a good one.

The implication from the commenter is that it was “too late” when the “ACTUAL” has already happened. Let me elaborate a bit on my comment to put to rest the concern implied by the question.

Charts go a long way in predicting the future. How? A chart traces out all sorts of repetitive formations. These formations are not just chronicling what is going on, they also forecast what may be about to happen.

Take my column of August 26, 2008 to which I referred last week. I said I saw a formation called a “head and shoulders” formation that forecast that the Dow (then at about 12,300) was going to drop to 8,000, well below my SUPER CHART KEYLINE. How did I know that? Well, several old time chartists, Robert Edwards and John McGee (first edition 1948) wrote a book (Technical Analysis of Stock Trends) that looked at all sorts of formations (over 55) and presented analysis on what each type of formation could lead to, as far as future price action was concerned. With the head and shoulders, they explained how to spot the formation as it formed and then how to measure its implication as to future price goals. I had a nearly two month jump on the crash of the market and even had a specific price to look for, which I published in August, while the price was still way above the Dow 8,000 predicted goal.

Now, not all formations give you the luxury of a very specific measure to turn to. Some only indicate that the market is strengthening or weakening. McGee and Edwards said that by studying their book, you would learn, with experience, how to read even these more ethereal formations. They were right.

Now, I am a purist as a chartist. I know practically nothing about the fundamentals of a stock or index when I first look at its chart. But, I can tell at once if I should forget or pursue that stock by what I see on its chart. And to help you get a bit of a grip on how these other formations work, I will, from time to time, describe other formations in this column so you can become more familiar with them, as well, and learn for yourself what potential impact they could have on your portfolio. Hope you find this future exercise of interest, too.

But, back to the present! I am including my latest S&P Super Chart Keyline this week. It has been several weeks since I included it and I want to update the, yes, head and shoulders formation that it has carved out since last October’s crash. As I told you in October, this head and shoulders formation is the opposite of the one in August 2008. That one was a “down” head and shoulders, meaning the prediction was for a drop in prices. The current one is for a up move and its formation told us last July 25th to Buy, committing one-half of the portfolio money allocated for stocks.

It is true that some analysts said to BUY in April, just after the hard drop in March. That was on a possibility (dubious to a chartist) of a “V” bottom to the market might form. But, my experience told me that trading a “V” bottom is only about 35-40% reliable. Knowing that, I chose to wait until I saw a formation that I can rely upon 70% of the time or more. Thus, I waited until the head and shoulders gave its partial BUY signal at S&P 970 and, of course, the October 8th All-In BUY signal at S&P 1070, signaled when we crossed up the Super Chart Keyline. Granted, it did not catch the exact bottom. Chart formations very seldom do. But, they usually catch the middle 75-80% of a move and you can do very, very well with that kind of progressive gaining. We closed Friday at 1093 on the S&P, by the way. OK, so far.

Now, a few words about the S&P chart below.

First, note that the close last Friday (11-13) was well above the Super Chart Keyline at 1093.48 (the Keyline is currently at 1061). That was welcome news to me, as holding below the Keyline would have been a very worrisome development. And we were also back above the “Headline.” As I said in the 11-2 column, crossing below the Super Chart Keyline after crossing above it is a development that had not occurred since 1975 and one that could have spelled an ominous future – rare though it is. But, having crossed back above the Super Chart Keyline, for now, I consider that all is well.

The target of the head and shoulders formation remains S&P 1220-40 on the cash index (mid-11,000 area on the DOW). So, while I will be watching closely, consider that to be the next stop of major importance.

Might we still fail before we get to 1220 or so? Sure. But, again, the chart will give us plenty of warning before it fails big – barring some completely unexpected catastrophic event moving the markets, of course.

I am also including the Bond chart this week (30 year cash index), as it continues somewhat weak, even though its price is still above the Super Chart Keyline. It is a chart that needs to be watched closely in here.

The major point of interest to me, as a chartist, is that the Momentum Section shows the fast stochastic (the green line) starting to approach the 40-50 level (it uses a scale of 0-100) and that as the green line has risen a bit recently, the Bond price has pretty much stayed the same. That can be a warning to be very alert to possible future weakness. The chart needs some more time to call that one.

We need, especially, to watch for any break below the Super Chart Keyline (now at 116.31). The Bonds closed at 119.19 last Friday, still three points above my Keyline, but on weak momentum moves, as I said. So, any crossing below the Super Chart Keyline here means the future will most likely hold higher interest rates. Since the Bond market is one market the Fed CAN’T control, a prediction of higher interest rates coming would adversely impact the stock market and that is very, very important to us. Be assured I will be watching. If a special report is needed on a Super Chart Keyline break, I will have it at this web site, at once. When we get the new subscription web site up, I would be sending you a direct e-mail of warning. More on that as it unfolds.

Other than that, last week was basically quite uneventful. There were several important numbers reported, most important being the import-export numbers and the consumer confidence report. The confidence numbers slipped more than expected and imports surged by a record percentage of 5.8%, while exports increased only by about 3%. So, we lost ground again in that arena, not a good sign. But, remember these numbers are all a “look back” not a “look forward” and the market is much more focused on the “look forward” items, just now.

Gold continued to rally last week, but I expect that we will see a lot of ups and downs over the next 3-4 years in gold, eventually ending up somewhere in the $2-3,000 range, by then. Only a huge political change would avert that outcome.

So, buy gold? You bet. Every portfolio should be at least 15% in gold, at this point. If your concern is greater, I am even happy to see 20-30% in gold. I expect a huge “blowoff” one day in the gold market – that means a huge run-up of price. Lots of reasons why, but the dollar is the prime reason. When? Haven’t a clue. But the charts are not lying. That day is coming. Patience dear heart, patience.

That pretty much wraps up this week. Next week, I will have a broader spread on Gold and Oil. And I will be looking at the interest rate markets on the international level a bit. Some not so good signs out there in that realm.

So, as always, do have a good investing week. And you keep in touch. I do! See you next week.

Closes as of Friday 11-13-09 (cash index)

DOW Indu. 10,270
S&P 1093.48
NASDAQ 2,167.88
30 YR BONDS 119 14/32
GOLD 1116.70
OIL (Nymex) 76.35

*The name Super Chart Keyline is a registered Trademark of Max Whitmore.

A barcamp is a gathering of experts, in this case real estate related. TechnoGeeks talk about the web, design, various marketing techniques and the like. Brokers/agents do the same but for real estate in general. Blogging is, of course, a hot topic. Contrary to what you might think, only about 2-4% of the agent population blogs or has an active website worthy of the name. When it comes to technology, most in my industry haven’t moved beyond about 1990’s or so.

I was lucky enough to speak to one of a truly rare species, a real estate agent with over 20 years experience who’s also literally a world class web/marketing expert. (He’ll remain anonymous here, as he likes to keep his ‘web side’ under the radar.) We’ve been friends online for quite awhile, but hadn’t met personally ’till yesterday. Though we talked for literally over two hours in which I learned more than my little brain could possibly absorb, it was one comment he made that stopped me in my tracks.

He said he’d been following me for quite some time, while searching the country for others that do what I do. He told me he couldn’t find one who does what I do, or if they did, hadn’t nearly the knowledge/expertise/experience and ability to apply. He continued, saying in five minutes I’d already told him several things about tax deferred exchanges, depreciation, IRS rules, and general real estate investment strategies he never knew about, and he’d been in an active agent for over 20 years. I was very appreciative of the compliment, but initially doubted his conclusion, whereupon he challenged me to name somebody who does what I do.

I named a few, but to be honest, they either lack depth of specific investment training, years of experience in application, or it’s in addition to listing and selling homes for a living.

He then countered with the fact that though he believed there were probably a few hundred in the country who do what I do daily, as bona fide specialists, experts if you will. But his point was that they refuse to deal with what’s essentially the profile of 80% of my clientele — what I’ve always called Regular Folk.

They have no desire to deal with either ‘Newbie Investors’ or those who can’t buy at least $1Mil properties or better — much better. I’ve found this to be true every place I’ve visited, but it never dawned on me what it really meant — that most folks end up relying on brokers/agents who mean well, but simply don’t know many if not most of the information needed to give world class quality advice. Why is that? It’s pretty simple — they can’t know the answers to questions they don’t even know to ask. Yet they’re still doing their best to help their ‘house clients’ with their investments.

How crazy is that?

I began thinking back to all the regions in which I’ve led seminars, spoken at conferences, been on panels, or simply done business. The #1 most repeated comment I heard from people was that I was the first person they’d ever met who seemed to know which way was north on the map so to speak. That always puzzled me cuz every one of those places had real estate investment brokerages with very qualified, experienced agents. But as mentioned earlier, if you’re either just starting out, or own only small properties, they consider you pretty much a bad investment time wise.

I’ll be talking with this rare ‘double expert’ much more now. I’m eager to hear what he has to say. There’s also a huge plus in talking with him as he loves baseball and his daughter is a stud athlete.

If you’re tired of wondering what to do, and/or wondering ‘what happened’, it makes sense to email me, or better yet, call me. I’m at 619 889-7100. Have a great weekend.

America had to defeat the British to win their freedom. We had to do it again in two world wars. We’ve been attacked now on our own soil brazenly — 9/11.

It can’t be said enough — we will keep our freedom only if we continually crush those who would take that priceless freedom from us. There is no ‘middle of the road’ or ‘moderate’ approach to winning or keeping freedom. It’s either crush your enemies or they crush you.

Today my most deeply heartfelt gratitude goes out to all American vets and those currently protecting us here and around the world. We owe our freedom to you as a direct result of the daily sacrifices you make, and to those who’ve made the ultimate sacrifice in service of our beloved country.

Most of us have veterans in our family or know someone currently serving. For me it’s Uncle Cork who was a sailor shortly after World War II, and Uncle Dick who was an Air Force fighter pilot in Korea and Viet Nam. I recently wrote about Cork, who’ll I’ll be visiting soon. Uncle Dick will be 80 next month and is still goin’ strong as ever. I never tire of his stories, they’re incredible.

I’ll end with an Uncle Dick quote — “The next time a military jet flies over, remind yourself that deafening roar is the sound of your freedom.” Amen

You know that money isn’t gonna garner anywhere near 6.25%, especially after tax, right? Right. So go all Old School on yourself. Take $500 a month and apply it equally to the principal of the two loans. Here’s what you’ll reap in say, a 5 year holding period.

First of all you’d wanna know what the loan balance would be if you just paid the payments. In this case, your balance after 60 payments would be $373,350. However, if you added the unneeded cash flow to the same 60 payments at $500 a month, your balance would be (drum roll) $338,240 — about $35,000 more in sales proceeds.

In the same time period the cash flow in your bank account would make what? 1% after tax if you were lucky? Never mind factoring in inflation. You come out ahead around $5,000 or so by paying the loan down. However, when it’s time to sell and/or tax defer exchange the properties, you’ll have made 6.25% on your cash flow while deferring any tax — which you may, in real life never hafta pay.

In my experience real estate investors often take small cash flows and simply spend it. This way they’ve made it possible to do one of two things, both of which are pretty dang cool.

First, at 20% down they’ll be able to buy roughly $175,000 more in property when they sell/exchange. In many regions that’s literally a whole extra property. Works for me.

Or they might choose door #2 which would be to apply $35,000 of unused depreciation to that part of their sales/exchange proceeds, which would give them the cash sans any taxes. Don’t know about you, but that works for me too. Of course they would’ve needed to know these options were available from Day 1 to choose, right.

That’s where Purposeful Planning comes in. To contact me call 619 889-7100. Have a good one.

One of the tough parts of being a chartist is not listening to all the tons and tons of words that tell you to run, hide, capitulate, and prepare for the worst. It took me years of patience and my great mentor to learn this discipline. So, if it all kept you on edge, don’t feel bad. But, the single most important thing I can repeat and repeat to you is this. Until The Super Chart Keyline is crossed down for six weeks in a row (on a Friday close) or we cross down for two weeks in a row below the key supports which I describe to you each week, just sit tight.

Just a brief example of what I mean will help you better understand this. A very good friend, George is his name, sent me a recorded message he received from an analyst that even raised the hair on the back of my neck. It was about seven minutes long and delivered in a very somber, almost frightening tone. The analyst said that all his clients were to prepare for what I could only call the Apocalypse. He didn’t use that word, but he told of a huge drop coming in the market, that all his signals but one were now in place and that when that one hits – and he expected in very, very soon – the world, yes he said the world, was about to fall off the edge of the cliff. (Do the names Elliott Janeway or Robert Prechter come to mind?)

Now, if I was the average investor paying this fellow for his subscription, I would have been frozen in my seat. I do suspect that I might just have thrown the towel in and ran for the hills. The recording’s final summary said that the dollar was about to dive to incredible depths, the stock market to new multi-year lows, and that when the last signal fell into place, he would have a very important set of moves that would save at least his subscribers.

Now, I detailed all this to make a point. The stock market is not about what might happen. The stock market, if you are an investor, is all about what ACTUALLY has happened. The one and only thing that is important to your portfolio is what has actually happened! Once you know this, then you can take steps to protect your portfolio values. But to always be taking steps in anticipation of a coming crash or to lose sleep over what MIGHT happen is to truly live life on the worried edge ALL THE TIME! Not for me, thanks. Now, understand, it is not that I won’t listen if the chart says prepare for a problem. I did just that on August 29, 2008 at Dow 12,300 — when I wrote and told my subscribers that I saw 8,000 Dow coming in 30-90 days and to prepare for a huge downdraft. Or in May 2008 when I told my subscribers to get out of commodities, a huge fall was coming. It did in July. But the chart forecast those events, not my fears. Let the chart tell you what to do! And unless you are an advanced chartist, that is the job you pay me to do. Believe me, I will always do my very best to deserve your trust in that area.

So, with that off my chest, just what happened last week and what should you do this week? First off, the market held its key supports all week, though the souls of many men and women were truly tried to the Nth degree! On Monday (11-2) we hit the lowest price of the week at 1029 S&P cash index, just 20 points from the top of our key support area. But, by the end of the day Wednesday, after the FOMC (Federal Open Market Committee) report, the close was well above this area at 1046. I felt that at that point, even a bad employment report on Friday would not break our support area.

And true to form, the charts climbed to the close on Friday of 1069, 40 points above the weeks low, nearly 4%. What does this mean? Simply, that for the moment, the market does NOT see an Apocalypse about to occur. Can we still fail and this market go to new lows? Of course it can. Mr. Market, as Richard Russell calls it so often, can do whatever he wants or feels needs to be done.

But, I want to repeat what Mr. Market has clearly said to us as of last July 25th. The target for this market, predicted by a very clear UP head and shoulders formation, is 1220-1260. Until we break support at about 990-1010 on the S&P cash index, expect nothing else. We crossed up the Super Chart Keyline on October 9th, crossed below the Super Chart Keyline on October 30th and last Friday (11-6) again closed (at 1069 S&P) above the Super Chart Keyline which now stands at 1061. We also closed below the head and shoulders “headline” on October 30th (see last week’s report), but closed above it last Friday. So far, so good.

So, the answer to your most important question of the moment – What now? — is just sit tight. If you still have some stocks that you want to buy, using money that is the portion of your portfolio designated for stock purchases (you do have your portfolio designated into investment types, don’t you?), you can still be investing at prices you like. We are still over 160 points from 1220 S&P and reaching that area should help your portfolio grow handsomely, assuming your choices are well chosen (I would, however, suggest you keep them in the top ten performing sectors I detailed in my report of October 12 – see the archives here).

Now, there is one other influence on the market I need to address before we close. The House of Representatives passed, by a slim 5 votes, a version of a “reform” health bill. You will read this week of the influence that this will have on the market and how it will (1) destroy it; (2) send it to the moon; or (3) some combination of these two.

Here is my advice. Forget that bill and its potential effect on the market, for now. Keep your eyes peeled on support at 990-1010 S&P. So long as you don’t hear from me via a special report (yes, if we close at 1020 or lower S&P cash index, check back here pronto for special instructions), just keep about your normal investing business.

This bill’s financial effect on the market will not occur until “Mr. Market” sees on the horizon proof that the bill is about to suck money out of the market and send it tumbling. When will that be? I haven’t a clue. But for right now, there is nothing on the horizon that is warning that such an event is about to occur. Mr. Market looks out from 2 to 12 months when he invests and right now, I emphasize right now, he sees nothing that disturbs him. When he does, we will know it well enough in advance to take protective steps. True, we may not get out at the exact top or in at the exact bottom, but we will go home most often with the 80% in-between.

By now, you have noticed that this week’s report has been more about how not to get upset by all the pronouncements that are sure to come your way the next month or two. But, the reason for that is that until The Super Chart Keyline says there is a change, there is not a whole lot more for you to be made aware of right now.

But, before I close, I do want to include a chart from the Oil & Gas sector, one of the top 10 performers in the last 6 months (again see my 10-9 report). This sector has taken a lot of beating as natural gas prices have fallen recently, but I have noted that the stock Key Energy Services Inc. (KEG) has followed quite closely the S&P Super Chart Keyline action.

It bottomed when the Super Chart did. It rallied when the Super Chart did. And it crossed above the Keyline when the Super Chart Keyline did. It has been a good “clone,” you might say.

There is also a small head and shoulders here (see chart) that says if prices hold the $6-6 ½ price level, it could go to about $11 or so, about a $3 gain from Friday’s close of $7.70 (about a 40% gain potential). It looks like a low priced and reasonable risk for your aggressive stock trades. So, I included it in this week’s report. Just remember that it seems to follow the S&P cash index quite closely and if that fails, be alerted to exit this one at 6 ½ or so.

Well, that’s it for this week. Remember the message for today: Keep your eyes on the charts. Let them tell you what to do. Right now, sit tight and expect that unless supports break, the target is S&P 1220-1260 (that would be in the mid-11,000 Dow Industrials area. When will we get there? I still look for mid-to-late first quarter, assuming support holds. And your ears? Well, just keep your ears tuned to some good music –- might I suggest Paul Potts latest album Passione.

As always, do have a good investing week. And you keep in touch. I do! See you next week.

*The name Super Chart Keyline is a registered Trademark of Max Whitmore.

If you’re relatively young or not yet 50, earning more than enough income at work, and living the lifestyle you more or less prefer, cash flow ain’t yer problem. Think about it from a practical viewpoint.

You’re paying taxes, saving money, going on vacations, and educating your kids. You have retirement plans at work, (please stop it) and have some other capital you’d like to invest in real estate. You’ve always been told cash flow is the way to go, so that’s what you set your sight on. That’s also why thousands of couples reach retirement with far less retirement income than was easily within their grasp when they started 15-30 years earlier. How much is far less you ask? If we’re talkin’ about 30 years of chasing cash flow over capital growth it could easily mean a 5-figure reduction in monthly income at retirement. Really.

Here’s the deal.

All cash flow is, is a yield on a pile of cash or equity. The bigger the pile, the bigger the cash flow. The idea in the early years is to build the original pile into multiple BIG piles. The yield (interest rate as an example) is gonna be roughly the same for a million dollar pile as it is for the 5 million dollar piles. The difference is the amount of dollars the yield generates. It’s the same X% yield in both scenarios — only the size of the piles of cash are different. The central theme of retirement is for income, especially after tax income to be as large as possible. To the extent you opt for cash flow over capital growth in the years preceding your actual, you know, need for cash flow, you are purposefully guaranteeing your retirement income will be far less than it easily could’ve been.

Debating this principle is akin to debating gravity.

If you call 619 889-7100 there’s a 90% probability you’ll hear me say, ‘This is Jeff. Have a good one.

BawldGuy Axiom: Lenders lend. When they begin to see the lender ’stamp’ on their forehead fading away, they realize it’s lend or die. They’d rather lend.

The most recent example of this has been in Texas, and not even with owner occupied properties. A institution totally new to investment property lending saw the opportunity to make a killing. They made it known they’d lend 80% LTV on small residential income props. They charged just a smidge over normal points, and a slightly higher, but acceptable interest rate.

What happened?

They found out quickly they were unprepared for the pent-up demand for reasonable loans on income property. 30 day loans took 45 days, then 60 days, but they eventually got done. Borrowers showed up from all points on the map wanting loans for their Texas purchases. They didn’t even make it to the 4th quarter much less to the end of the year as I’m sure they’d planned. They were swamped from Day 1.

Lenders are now dealing with an investment market sporting handcuffs designed by Fannie Mae and friends. The changes they’ve implemented have been good, bad, and just downright silly. The net effect they’ve had on the market is to retard it, not help it.

One of the helpful changes has been the way appraisers are assigned. It’s much more random now. I say helpful, but in the case of new construction or new mostly undeveloped areas of a region, this can backfire on the purpose intended. An analogy would be who you choose to maintain your car. If you owned a Mercedes, taking it to your local Ford dealer for its 50,000 mile service is risky at best. Reasonable folks can agree that even a highly experienced Ford-trained mechanic will simply not be prepared for what he finds under the hood of a Mercedes.

Appraisers unaccustomed to a neighborhood a few miles from where they usually work, don’t know the ins and outs of that one compared to the ones they’ve been appraising for years. This isn’t complicated, is it?

Then there are the underwriting changes. Upping the credit score requirement makes sense, though I strongly suspect folks with less than a 720-740+ score aren’t moles sent by Satan to sink the economy. But seriously people, some of them defy explanation, even by the lenders themselves. Here’s an example.

Last year you bought a duplex. Since ya haven’t owned it for two years, they force you to count the mortgage payment on your application, but NOT the income. Let that set in a bit. This results many times in superb borrowers appearing to be way in over their heads. Yet it presents an artificial (nice way of saying BS) i.e., false picture of the borrower’s true financial position. Imagine having cash flow from your various investment properties half as much as your job income — and you make almost six figures annually! This new ‘accounting’ makes you appear to be almost struggling financially.

How does that help?

When a real estate investor puts 20-30% down plus closing costs, they don’t do it on a whim. They’ve thought long and hard about putting $50-80,000 of their hard earned money into an income property. How motivated do ya think they’ll be to make that investment a long term success? Duh. The arguments made for this 1984 approach to underwriting language are laughable at best, and fraudulent at worst. That’s a discussion for another day, but suffice to say the next lender who gives me a plausible explanation without stuttering, while avoiding eye contact, will be the first.

Then there’s the now infamous four property limit. Gimme a break. My Grandma thinks this one is stoopid, and she’s been dead for over a decade. I’ve railed about this before, but it’s so counterproductive, one can’t wonder what the real intention was. Ya get four props — this includes your residence too which is another rip. You want more, but now the underwriting, gulp, gets even dumber. Of course, this is if ya can even find a lender who’ll make the dang loans. Currently there are only two lenders, B of A (Save us, Lord) and Wells — that’s according to the word I’ve gotten from several lenders who don’t do them.

Lenders don’t like living in a world in which they’re not lending. I have colleagues and personal friends who’re both mortgage brokers and employees of direct lenders. The stories they tell me are literally so dumb sometimes I almost make ‘em swear on their kids they’re not makin’ them up. These guys, for the most part can make loans in the majority of the states — and still their companies’ leadership has made life so tough at times, two of them are considering changes.

At some point some board of directors meeting is gonna explode at the nonsense with which they’re forced to live. It’ll be at that point we’ll begin to see some cracks in the dam. They’ll become relatively proactive in changing the status quo. Even the investors buying these loans are beginning to grumble. The siren song of higher yields generated by highly experienced borrowers, with significant skin in the game is beginning to keep them up at night.

Watch for the grumbling to become audible — sooner rather than later.

To contact me — call 619 889-7100. Have a good one.