Stocks, Money Markets or Real Estate - Where to put your money?

By Ab, ibtalk.blogspot.com

(UPDATED) Definitely not in Money markets if you have more than ten years before your retirement! Why not? Because inflation will wipe-out your interest returns, the yields on T-Bills are low due to higher demand for them, uncertainty on how government is going to repay its astronomical National Debt and finally there are too many better alternatives for your cash than Money market and these are the alternatives that I'm going to talk about.

If you live in US and consider yourself very risk averse and the stocks is not an option for you then you should consider buying a house! Yes, exactly when everybody is selling them you should start hunting for one of course given that you have couple of hundred thousands of cash.

According to S&P/Case-Shiller Home Price Index the value of residential housing market around 20 metropolitan areas in US has dropped 17.9% since Q2 2006. And don't forget that index represents only average price while the range of house prices might be significant depending on the area.

This kind of opportunity doesn't come every year, so if you've got cash and don't want to deal with stocks then this is the way to go. Spend next six months searching for a bargain, then buy it and put it for rent. Doing so you will collect revenue from renting your property which you may treat as cash dividend and also long term capital gains from appreciation in the value of your property. I believe you won't have problems with renting your place with all these foreclosures (at the end people have to sleep somewhere) and you won't have problems with selling your house at a higher price sometime in the future since your purchase price supposedly will be much lower than the prices we had in 2006.

Don't forget that cheaper US dollar makes home prices very attractive to foreign investors!

For those of you who are willing to buy stocks you should consider oil stocks (particularly Canadian Oil Sands) and US corporations with significant business abroad especially in Europe and China. Let me tell you first that I'm not going to recommend you specific stocks since you should be the one to decide when to enter and when to exit. However I'm going to give you few reasons on why I think oil stocks and US companies with international business should be on your watch list.

You may have noticed recently that the price for oil on demand concerns has dropped from highs of $145 per barrel during summer time to about $90 per barrel couple of weeks ago-and as I write this article it's trading at around $120 per barrel.

In my view the recent drop in oil price is reasonable and justifies investors' concerns about the demand. However I think the decrease in demand is true in the short term but won't hold true in the long term and there are several strong reasons for that.

First, the decrease in demand is not as significant as the decrease in oil price. For the first eight months of 2008 the total oil consumption fell 4% and netted 20.4 million barrels per day in August.

Second, world demand for oil is expected to grow thanks to developing countries like China and India where with improvements in quality of life, the number of cars on the road is also increasing. Any attempt on US side to decrease demand for oil by becoming more efficient and producing more hybrid and electric cars won’t be enough to offset a growth in world demand.

Third, as you may know the supply of oil is limited: it’s becoming more difficult and costly to search for new reserves and we can’t really expect a spike on the supply side; also, the cost of producing consumer grade fuel is increasing due to the low quality of crude. One may argue that Canadian oil sands have enough proven reserves to last for 80 years. However, the problem with oil sands is that it’s difficult and very costly to rapidly increase production, thus the Canadian oil supplies won’t be enough to meet the world’s growing needs. (I will be writing an article on Canadian Oil Sands so stay tuned).

These were the major factors in favour of oil price increase. However, there is one viable substitute to oil and that is Natural Gas. There is plenty of it in Russia and Alaska and it is the only fuel that can decrease demand for oil within the intermediate term. But if you invest in oil stocks whenever the price for oil is below $100 per barrel you shouldn’t have to worry about natural gas because such an entry point gives you enough upside potential before people around the world start aggressively fuelling their cars with natural gas.

Now let's see why US companies with significant international business should be your first choice.

In case you haven't been paying attention to the latest GDP numbers, the economy grew at annualized 3.3% and almost half of it was due to 13.2% increase in exports. The major reason for such export growth is weaker US dollar when compared to foreign currencies. In addition if congress will approve Paulson's plan for $700 billion bailout that will put additional pressure on US dollar as money supply increases. Low interest rates in US make it even tougher for dollar as investors move their deposits abroad.

As dollar weakens, US goods and services become more attractive to foreigners making US companies more competitive on international arena. Another factor in favor of US exports is the fact that the cost of goods produced in countries like China and India has dramatically increased in the past several years making them less cost competitive with US products.

That's why if you focus on companies that have revenue flow diversified across different countries, and especially those companies in the technology and manufacturing sectors, then you should be able to withstand any market downturns better than those companies which operate solely in the domestic market.

You should also note, that in international markets the competition is tougher than in domestic market. This is especially true for domestic companies trying to gain market share in foreign markets and that's why such natural disadvantage forces companies to be more aggressive, innovative and creative to be able to compete and succeed. And those who succeed in global markets become virtually unbeatable when it comes to competition in the domestic market.