Cycles are an inseparable part of the landscape of markets. Fortunes are often made in the valleys. I was thinking of this after I read several obituaries of Trammel Crow, who died this month. He was a guy who saw many booms and busts over his 94-year life.

Trammell Crow was a big-time developer and died a rich man. The Wall Street Journal once described him as “America’s biggest landlord.” His firm, Trammell Crow Co., estimates it built some 500 million square feet of real estate space. But it was a long road to get there from humble beginnings. His life is one of those great American success stories.

Unable to attend college because of the Great Depression, he took a number of odd jobs, including plucking chickens and unloading boxcars. Eventually, he landed a job at a bank, and then studied to become a public accountant. By 1938, at the age of 24, he was the youngest CPA in the state of Texas.

After World War II, he got his first experience in construction building grain elevators with Doggett Grain. Eventually, he managed to build his first warehouse with a partner and leased it to Rayovac Battery Co. It was his first real estate success. He was on his way.

There would be good times and hard times on this journey. The 1970s downturn nearly bankrupted him. But it didn’t take out any of his risk-taking nature. “I once heard it said that the cat that is burned on an oven range will never touch a hot one again,” he said in a 1980 interview. “True enough, but that cat won’t go near cold ovens either. The same is true for business. Failures that transform a businessman into a super-cautious individual can cripple.”

I also remember Trammell Crow from my career in banking. I started out banking when I was 22 years old. I remember working with a senior lender on a deal to finance a big real estate project. He pointed out that we had to be sure we liked the collateral because the developer might toss us the keys, like Trammell Crow. I must’ve had a somewhat puzzled look on my face because the lender asked me, “You know who Trammell Crow is, right?” And he asked it in a way that you might ask someone today if they know Barack Obama.

I honestly can’t remember what my answer was. I remember the embarrassment of not knowing who he was. Yet he was among the most famous developers in the country. A 22-year-old always thinks he knows more than he does. It’s one of those things.

Anyway, the senior lender was referring to a well-known episode Trammell Crow had with his bankers. He basically tossed a bunch of keys on the table on told them they could either give him new terms on his mortgages or take the keys. They reworked terms.

Old Crow was an American original. He left quite a legacy, and not only in the millions of square feet of real estate and the fortune he leaves behind. Many talented people came out of the Trammel Crow ranks and went on to become major real estate players. He had a huge influence on the industry.

Source: Trammel Crow: Lessons in Real Estate Investing

This from Money Morning:

The consensus estimate of earnings for the Standard and Poor’s 500 Index for 2009 is currently about $83. The index itself is currently standing at about 904. That means the market is trading on only 10.6 times next year’s forecast earnings, far below the historical average multiple.

So it is a screaming buy, right?

Not so fast.

“Consensus” estimates of earnings lag reality substantially. Because they include an average of all earnings forecasts over a considerable period, forecasts made in late September would still be included in today’s consensus estimate. But in a period such as the present, when reality has changed substantially since September, the official consensus forecast may differ wildly from what most analysts currently believe. The $83 number is thus a lagging indicator, which doesn’t take account of financial sector disasters, sharply slowing output, or tight credit conditions.

Most analysts, finally made more cautious by five successive quarters of declining earnings on the S&P 500 index, currently believe that the S&P 500 will earn about $60 in 2009. What’s more, David Rosenberg of Merrill Lynch & Co. Inc. (NYSE:MER), who has been exceptionally bearish for some time with an estimate of $50, has been joined in bearishness by Goldman Sachs Group Inc. (NYSE:GS), which has brought its group estimate down to $53.

That’s much more scary. Taking the average S&P 500 multiple at around 14 times earnings, an earnings estimate of $60 would put a “median” estimate of the index at 840; an earnings estimate of $50 would put it at 700. Take a bear market low at 10 times earnings, and you could postulate an S&P 500 low of 600 or even 500.

Still, bear market earnings estimates can be taken only so far, especially those of analysts. After all, on July 7, 2008, a joint report by two top houses predicted that the S&P 500 index would have its best six months since 1982 in the latter half of 2008. That’s about as wrong as they could possibly have been!

Still, one should not be surprised by their failure; while one of the two well respected but wrong houses was Deutsche Bank AG (NYSE:DB), the other was – Lehman Brothers Holdings Inc. (OTC:LEHMQ). Truly, a lot can change in six months.

2009 Bears

Nevertheless, while it’s clear that from an earnings viewpoint 2009 should be approached with caution, it is also clear that some sectors and countries will do reasonably well, while others have futures that are truly scary.

Some of the more bearish sectors and regions include:

• Financial services: The entire industry appears to be scaling down to a fraction of its 2007 size, as many of the innovations of the last 20 years turn out to have been spurious. Investment management also is destined to be much less innovative and less lucrative in the wake of the Bernard Madoff scandal. Eventually, banks and other financial institutions will emerge from the downsizing, but 2009 is much too early to expect that.

• Real estate and construction: Housing won’t bottom out until mid-2009 at the earliest, and will recover only very slowly thereafter. Non-residential construction will also be very limited, as offices, stores and hotels will be in glut. There may be some money to be made in road construction from President-elect Obama’s infrastructure program, however.

• Emerging markets with no money: The emerging markets that rely on borrowing to fund themselves will be out of luck, as debt will be expensive and hard to come by. Eastern Europe and most of Latin America will be in for a thin time, as their balance of payments and in many cases budget deficits will take years to straighten out.

• Western European countries with high cost bases: The Western European countries with expensive labor and high taxes will find life tough in 2009, particularly if they previously enjoyed a real estate bubble or were big in finance. Germany will probably do fine because its high-skill labor is highly competitive and it had no housing boom; Britain, Spain and Italy will be in a much more difficult situation.

2009 Bulls

Conversely, there will be sectors and countries whose earnings can be expected to hold up well, and whose shares are worth looking at:

• Gold mines: Inflation is almost certain to return in 2009, because of all the fiscal and monetary stimulus. That has to be bullish for gold, other precious metals, and mining companies.

• U.S. exporters: The rest of the world will show some economic growth, and the U.S. budget and payments deficits and expansionary monetary policy will make U.S. exporters benefit, unless they are involved in businesses that depends heavily on tourism, such as aircraft.

• Healthcare providers: Pharmaceutical companies may have problems with President elect Barack Obama’s healthcare plans, because the returns for patented drugs will be reduced, but hospital chains and other healthcare providers will probably benefit from an overall increase in government healthcare spending.

• Asian countries: In general, Asian countries will do better than the United States and Western Europe, because their cost bases are less overblown and their competitiveness is greater. China and India may have problems, but I like the prospects for Korea, Taiwan and Japan and for companies in those countries involved primarily in their domestic markets. If the Indian election in spring goes to the pro-business BJP party, it will be a buy too; if not, India will have difficulty funding its overblown government sector.

• Brazil: Brazil has a well-balanced economy, less foreign debt than it used to have, and a monetary policy of high real interest rates. It can, therefore, afford to expand domestically through monetary means in a way no other country can.

Source: Gloomy Earnings Prospects Hold Key To Stock Buying

This from Today’s Financial News:

Well look at that. Government intervention is actually helping in a way our lawmakers intended. While not all of the Fed’s programs have been a success, the one it created last week is working to get the nation’s economy back on track.

You may recall the Federal Reserve announced last week that it planned to purchase up to $500 billion worth of mortgage-backed securities from government-sponsored agencies like Fannie Mae and Freddie Mac. Its goal was to grease the rusty gears of the real estate industry and force mortgage rates lower.

The plan worked.

The Mortgage Bankers Association announced this morning that last week’s mortgage application rate skyrocketed a record 112%. With the gauge at 857, applications last week were at their highest levels since late March.

Of course, buyers were not gobbling up homes during the Thanksgiving week because Fannie and Freddie were getting a break. They were applying for mortgages because interest rates are at their lowest rates since 2005. Buyers are getting a fantastic deal.

The boosters are ignited

A week or so ago, a 30-year fixed mortgage came with a rate of close to 6.5%. Today, perspective buyers can lock in a rate with Wells Fargo (NYSE:WFC) of just 5.375%. That is enough to pull monthly mortgage payments down by several hundred dollars each month.

With rates this low and homes this cheap, buyers are finally realizing the opportunity they have on their hands. Out of all of the deals the Fed has created over the past three months, this one has the most potential of directly helping the American people.

But what about you as an investor? Well, the news is even better. The real estate industry has traditionally been a leading indicator. In other words, it rises ahead of the financial markets. An increase in home purchases and therefore home values, is a surefire indication that the equities market will be making similar moves in the near future.

There are some great investment opportunities out there.  But for now, stay away from traditional real estate plays like REITs and the nation’s large homebuilders. The deleveraging tsunami is still pulling these sectors under and there will likely to be more pain in the near future.

If you want to make conservative investments with larger-than-usual profit potential, stick with the big guys. Blue Chips are a great investment as the nation gets back on track. Companies like General Electric (NYSE:GE) and Altria (NSYE:MO) with their strong dividends and proven history of healthy revenue growth are worth your money.

The Federal Reserve is making positive moves, the real estate market is on the rebound and moneymaking opportunities are all over the place. If you are not going to buy a house or two at these great prices, at least invest in a few discounted stocks.

Source: The real estate industry gets a favor from Bernanke

More from Penny Sleuth:

While most investors look for industries they expect to boom in the future, there’s a solid investment case to be made for buying stocks in bad industries.

Jeremy Siegel, one of Wall Street’s best investment minds, said that, “Some of the most successful investments of the last thirty years have come from industries whose performances have been utterly horrendous.”

And if ever there was a horrendous market, housing’s it. The housing industry has sunk almost 40% this year, sending most investors heading for the hills…but not all…

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Does $2.00 for a Gallon of Gas Seem too Good to be True? Well, that’s because it is…

A barrel of oil cost $140 earlier this year, since then it’s miraculously dropped all the way to today’s price of  $57…

Smells a bit fishy… Especially once you hear about the secret that George Bush learned behind closed doors… To find out what the Saudis aren’t telling us about their oil supply, click here…

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There’s a niche in the housing market that’s actually been doing quite well over the last month, returning 36.4% when the S&P was fighting off some of the worst losses in history.

Putting the Fab in Prefab

Prefab manufactured housing has been making a comeback in spades. The industry has been growing at a steady clip for one obvious reason: in today’s credit crunched economy, people are looking for low-cost means to home ownership.

Prefab manufactured housing is the sector of the housing market that includes things like trailers and RVs, as well as higher end modular homes that are built off-site and put together at the construction site. The beauty of these kinds of homes is the low purchase cost for consumers.

Because prefab homes are so much less expensive to build in a factory setting than a traditional home at a construction site, they’re becoming a welcome alternative for those who don’t have the money to pony up for a custom-built home.

And why shouldn’t consumers love prefab homes? From a quality standpoint, there’s almost no difference between a completed prefab home and a custom-built one. According to an article in BusinessWeek, “Thanks to style-conscious architects, today’s manufactured houses prove you can combine low cost and high design — and they’re selling well.”

Many people see the prefab world as the future of the housing industry — imagine, putting up a home in 2-4 weeks at a fraction of the cost of building from scratch. The trend’s an impressive one…

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“Dear Mr. President”…

You say you have a lot of work to do. I’ll say you do…

If you fail to deal with the crisis named in this report — immediately — and you might as well not bother showing up on Inauguration Day…

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Like most, I grew up familiar with traditional construction. You can imagine what a surprise it was then to find that back in my home town, a new house had been constructed in just a couple of weeks in the neighborhood my parents live in. “It’s one of those modular homes,” explained my father when he noticed the confusion on my face as we drove by.

The most impressive part about the modular home phenomenon is the fact that these houses don’t look any different from any other house you’ve ever seen. They don’t feature any fewer amenities. But they do have marked advantages. Sounds like a stock play to me…

Prefab Performance

Prefab homes are a small niche with only a handful of stocks. But just look at the numbers, and there’s no question about the potency of prefab. 83% of companies in the industry saw returns in the last four weeks — almost half of which were in the double digits.

Skyline Corp (NYSE:SKY) and Champion Enterprises (NYSE:CHB) are a couple of examples of small-cap prefab home companies that saw nice returns in September. In fact, small-caps rule the roost in the prefab arena…most companies have market caps between $33M and $450M, making them an interesting play for penny stock investors.

As prefab homes catch more and more attention from real estate developers and consumers, you can bet that this trend will keep going strong.

Source: Bringing Down the House

JP Morgan Chase has announced it will delay foreclosure proceedings while it works with struggling homeowners.  Over the next 90 days, the bank will look at loans and determine if the loan is eligible for a reduced interest rate or loan balance.

The company has already helped over 250,000 families with over $40 billion in troubled loans, and over the next two years plan to help another 400,000 homeowners with over $70 billion in loans. Loans held by Washington Mutual (NYSE:WAMU) and EMC Mortgage Corp, which were recently acquired by JP Morgan Chase, will also be eligible for revision.

What remains to be seen is the effect this will have on foreclosure rates. Reducing a borrower’s interest rate slightly doesn’t necessarily translate to a large reduction in a mortgage payment. A drop of $75 or $100 a month in the mortgage payment would be welcome for the homeowners, but the savings could quickly be eaten up by rising costs elsewhere.

Hopefully the plan relies more on reducing principal balances to more accurately reflect fair market values. This would help by stabilizing home values at fair-market levels, rather than letting foreclosures decimate neighborhoods.

For example, if a home bought a few years ago for $250,000 gets re-appraised for $180,000 and the borrower can now afford the payments and avoids foreclosure. This drops the value down to $180,000 for comparables, but avoids a potential drop to $125,000-140,000 if the home goes into foreclosure and gets sold at auction. Not a perfect solution, but anything is better than another foreclosure.

Source: Focus Can Now Shift To The Collapsed Housing Market

The paper reports today that although the first wave of subprime mortgage defaults is peaking, a second and far more damaging wave of defaults in building – this time in the alt-A and prime mortgage brackets.

Alt-A mortgages in arrears quadrupled to 12 percent in April from a year earlier. And delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent over the same period.

If the alternate-A and prime mortgage markets collapse, it’s very bad news indeed. Since last year, Money Morning’s investment director, Keith Fitz-Gerald, has been predicting a $1-trillion total for mortgage-related writedowns – just waiting to play havoc on investor portfolios.

But that figure could be just the tip of the iceberg should alt-A and prime mortages follow subprime mortages’ lead.

Daily Pfenning editor Chuck Butler has been warning readers that the housing market has been in far worse shape than the government has been prepared to admit for some time. That’s because foreclosures are included in existing home sales data. As long as someone was living in the house when it was foreclosed, which would put the percentage very high.

Of course, the other side of the housing bust is that US houses are affordable again, as Steve Sjuggerud pointed out in DailyWealth in June.

Since last summer, the change has been extraordinary. The typical mortgage payment on the typical home in America now is 20% cheaper than it was less than a year ago. Let me explain:

Last July, the median U.S. home would have cost you about $230,000. And you’d have paid about 7% in interest on your mortgage. So that’s a $1,200 monthly mortgage payment on that house (assuming a 20% down payment).

Today, the median home price is $200,000 – a $30,000 difference from last summer. And mortgage rates are down to 6%.

Between the lower price and the lower mortgage rate, you’d be paying less than $1,000 a month on your mortgage now – for the same house that would have cost you $1,200 last summer!

And Takeover Trader editor Louis Basenese, thinks holding part of your portfolio in real estate is still a good idea, despite all the doom and gloom surrounding the sector.

Louis says waiting for a bottom is not an option because “no single data point or insider perspective is going to fortuitously signal an unambiguous bottom in the current housing market. Not new home sales… not building permits… not the latest inventory data… nothing. And nobody’s going to give us the ‘all clear,’ either.”

Waiting for irrefutable proof of the turn is flawed anyway. The stock market is a forward-looking beast. When housing prices “officially” bottom, real estate stocks will likely have already run-up in price. But there’s a surefire way not to get caught watching the paint dry…

Stick to the tried and true. Buy sound companies and have the discipline to stick to proven asset allocation. It makes all of the market indicators and posturing above pointless.

But that also means committing to owning shares of companies that are out of favor with the investing public. And no sector has been more discarded than real estate.

I suggest a low-risk, low-hassle, low-cost approach to investing in the housing market. Leave active management behind and consider the Vanguard REIT Index (MUTF:VGSIX). It will give you the broadest real estate exposure possible for an almost negligible expense ratio of 0.2%.

Public Storage and Equity Residential Properties are among its top five holdings. Both have returned over 12% this year. The fund also maintains consistent dividend strength, yielding more than 5% right now.

And here’s another little portfolio-boosting secret: This year’s big losers are often next year’s Wall Street darlings. Historical data bears that out. And so will holding a part of your portfolio in real estate.