ETF Expert

My brother-in-law is one of the greatest go-getters I’ve ever seen. Although he achieved an exceptional engineering education at Cal San Luis Obispo, he had much bigger aspirations.

At the turn of the century, he decided that real estate was where it was at. He bought properties around the country. He developed in Mexico. He purchased and still operates a Century 21 franchise.

What he, and many aspiring entrepreneurs miss, is how to shelter one’s self from a down cycle. In fact, he hadn’t really been through the 88-95 downturn in California… a 29% drop in home prices. And that meant, rather than scaling back at the height of real estate euphoria by 2005, he continued to expand.

So now, my brother’s caught between a hard place and a rock. His agents can’t sell homes in this market. His lenders can’t write loans with the banks tightening their belts. And my brother-in-law doesn’t quite have the cash flow to pay off the leveraged property that he owns.

Why do I bring up personal info into this financial blog? Because my brother, and dozens of agents who have worked alongside him, will not show up in the employment stat picture. In fact, New York University professor Nouriel Roubini explains that "500,000 workers recently left the labor force and are not going to show up in the unemployment stats."

We have a very troubling consumer forecast for 2008. Let’s run through the logic:

American consumers have an insatiable appetite to spend money… even when they don’t have it. But as long as they have a house that is going up in value and a job that they can count on, they will spend.

Unfortunately, houses are going down in value and unemployment is rising. Stats show it has risen from 4.5% to 4.7% on paper, and that doesn’t count people like my brother, his real estate partners, or even his agents.

We know the feeling of the "wealth effect" when our net worth is climbing, either in our 401ks, our real estate holding(s) or our career. But what happens in reverse? What happens when our homes are losing value and/or we can’t tap any equity due to the lending crunch? What happens when our careers are suddenly thrown for a loop?

True, stocks are hitting all-time highs. But we’re not as euphoric as we were in 1999… we’re a lot more cautious as an investing public. (Plus, the other legs of the stool — jobs, homes — don’t look that securely fastened.)

And now we have another problem: Oil. It’s up to $87-$88 per barrel… a good 10% higher than post-Katrina/$4.00 gasoline in California. When more is spent at the pump, less can be spent at the strip malls. (Or even my wife’s favorite spot… Nordstrom.)

Retail sales seem to be holding up so far. And I expect we’ll tip-toe through the Christmas season, finding some way to buy electronics for our loved ones.

Yet I would stay away from consumer discretionary when 2008 rings in the New Year. That means you aren’t going to want to hang onto the SPDR Select Consumer Discretionary (XLY) as we begin getting earnings reports in January 08.

In fact, the more aggressive investor might even look to profit from UltraShort Consumer Services ProShares (SCC). As I mentioned in a previous post, I might wait until a pickup in market volatility via the VIX Index, and I might wait for the 2008 initial earnings season. But the consumer’s 3-legged stool (home, 401k, job) has the weight of a 480-pound gorilla sitting on it.

Keep in mind, however, there will be beneficiaries from the drop-off in consumer spending. You’ve got to like a Federal Reserve Chairman and a Treasury Secretary who are dedicated to saving the banks. And that means, the KRW Bank Index (KBE) will be in the driver’s seat soon enough.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.