Saturday, June 30, 2007

Jersey Benefits Advisors Newsletter - Summer 2007


Market Watch

The Federal Reserve ended its June Federal Open Market Committee meeting on June 28th, and the only change indicated for the foreseeable future is that the Fed sees core inflation as somewhat less of a risk, while overall inflation is still a concern. Interest rates remained on hold at 5.25%, where they have been for a year now, and investors hoping for a rate cut have capitulated. This surrender by bond investors has provided a slightly positive slope to the yield curve, as long term rates are modestly higher than short term rates.

This leads me to believe there may be another way to view the inversion of the yield curve, which happened last year. While many view an inversion of the yield curve as a precursor to recession, historically we have not had a recession every time the yield curve inverts. This last inversion did precede the first quarter economic slowdown of 2007, so perhaps the inversion of the yield curve in 2006 was indicating the mid cycle slowdown which occurred earlier this year. The US economy has been expanding since November of 2001, so based on the length of the last two economic cycles, the first quarter slowdown of 2007 occurred right in the middle of the cycle. However, it should also be noted that the last two US economic cycles have been records, stretching from November 1982 to March 1991 and March 1991 to November 2001, when analyzed from the bottom of one cycle to the bottom of the next cycle, or trough to trough. There were 10 economic cycles from 1945-2001, and the average duration from trough to trough was 67 months. Nobody can really say, with any certainty, how long the current cycle will last, but given all of the shocks incurred over the last five years, the economy has been quite resilient.

Of course, as long as the economy is growing, the stock market will react in a favorable manner. Although the indices are off their peaks set in the second quarter, as the books were closed on the first half of 2007, the DJIA stood at 13,408.62 which is a gain of 7.6% year to date. The NASDAQ closed at 2,603.23 for a gain of 7.8% thus far for 2007. The S&P 500 finished at 1,503.35 which is an increase of 6.0% for 2007. While the S&P 500 is off its record close of 1,539.18, the fact that it finally surpassed the old record of 1,527.46 set back in 2000 is a significant technical feat which bodes well for a continuation of the current bull market.

The consensus of economic forecasts for the second half of 2007 predict GDP growth of between 2%-3%, which is what should be expected for a mature expansion. How much strength remains in the economy depends on a number of factors. Maintaining healthy growth without increased inflation is paramount. While core inflation seems to be under control, the increases in the prices of food and energy are being felt by everyone. There is also a great deal of concern regarding the subprime mortgage market and the collateralized debt obligations and collateralized mortgage obligations on which many hedge funds feed. With mortgage foreclosures in the subprime market increasing, which lowers the value of CDO’s and CMO’s, there is a fear many hedge funds could incur significant losses, like those at Bear Stearns, as the value of their portfolios are rebalanced at the end of the quarter. As with most aggressive investment bets, when fundamentals change, things can go south in a hurry. In my mind this is just one more reason for diversifying your assets and not chasing returns.

Hype, Hope and the 4th of July Holiday

The Blackstone IPO and Apple iPhone’s debut were two very hyped events which took place in June. While Blackstone’s stock initially surged, it is now below the original offering price as private equity houses begin to reassess the cost of doing ever larger deals as the cost of debt increases. Apple’s faithful lined up in front of stores for days, prior to the release of the iPhone, and even with a cost of $599, sales are expected to be brisk. One can’t help but wonder how many people really want to watch video on their cell phone, especially with all of the huge plasma and LCD screens available for only a few hundred dollars more. Then again, after the 4th of July fireworks, it might be nice to relive the experience again and again while sitting in traffic on the way home.


At Jersey Benefits Advisors and Jersey Benefits Group, Inc. protecting your privacy is very important to us. We want you to understand what information we collect and how we use it. We collect and use information from you on applications and other forms as well as information about financial transactions with us and from non-affiliated third parties. This “nonpublic personal information” is obtained in connection with providing a financial product or service to you.
We do not disclose any nonpublic personal information about you without your express consent, except as permitted by law. We may disclose the nonpublic personal information we collect to persons or companies that perform services on our behalf.
We restrict access to your nonpublic personal information and only allow disclosures to persons and companies as permitted by law to assist in providing products or services to you.
We maintain physical, electronic and procedural safeguards to protect your nonpublic personal information at all times.


Many people have 401k or 403b accounts from jobs they’ve left for various reasons. One of the problems with this is the duplication of objectives within each account. Having a lot of funds, in several accounts, does not always provide the diversification you aim to achieve.
If you or a family member are in this situation, and would like to consolidate assets into one diversified IRA and receive just one statement, please give me a call to analyze the accounts, make recommendations and assist with the paperwork involved. As long as you have terminated employment with the employer, or the particular plan has been terminated, you are eligible to roll the funds over into an IRA. You do not have to be of retirement age.
If you have retired, or are considering retirement, you have the option to move assets out of your employer plan and into an account, which can provide a lifetime income, when you retire. The whole idea is to work with someone you trust and is available to you, when you wish to discuss your account. Every employer plan is different, and every individual is different, so personal preference is very important, and there is no “one plan fits all”.
Depending on your appetite for risk, IRA accounts can be in stocks, bonds, mutual funds or ETF’s with one or more companies. If you’re somewhat risk averse, variable annuities offer participation in the market with downside protection and guaranteed growth for an additional fee. Feel free to give me a call to discuss your options.


Investment Advisory services offered through:
Jersey Benefits Advisors
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257

Securities offered through:
Transamerica Financial Advisors, Inc.
A registered Broker/Dealer
1150 S. Olive St. Suite T-25
Los Angeles, CA 90015
Member NASD & SIPC

Third Party Administration and Insurance Services offered through:
Jersey Benefits Group, Inc
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257

All opinions expressed in this newsletter are solely those of John Kaighn & Jersey Benefits Advisors, formerly known as Kaighn Financial Services.
Visit our website at

Monday, June 25, 2007

Winds of War

Normally, I write my entire blog, but on ocassion an article comes to my attention which I think needs to be shared. Such is the case of this editorial by Joshua Muravchik, which appeared in the Wall Street Journal this morning. We live in dangerous times, and I believe there are many people in this country who have not fully assessed the dangers posed by radical Islam and in particular, Iran. This article serves as a bit of a current events and history lesson as well as a warning of a future Middle Eastern regional conflict, which could draw us in, should we continue to run up the white flag in Iraq.


By Joshua Muravchik

Several conflicts of various intensities are raging in the Middle East. But a bigger war, involving more states-Israel, Lebanon, Syria, Iran, the Palestinian Authority and perhaps the United States and others is growing more likely everyday, beckoned by the sense that America and Israel are in retreat and that radical Islam is ascending.

Consider the pell-mell events of recent weeks. Iran imprisons four Americans on absurd charges only weeks after seizing 15 British sailors on the high seas. Iran's Revolutionary Guard is caught delivering weapons to the Taliban and explosives to Iraqi terrorists. A car bomb in Lebanon is used to assassinate parliament member Walid Eido, killing nine others and wounding 11 more. At the same time, Fatah al-Islam, a shady group linked to Syria, launches an attack on the Lebanese army from within a Palestinian refugee area, beheading several soldiers. Tehran trumpets further progress on nuclear enrichment as President Mahmoud Ahmadinejad repeats his call for annihilating Israel, crowing that "the countdown to the destruction of this regime has begun."Hamas seizes control militarily in Gaza. Katyusha rockets are
launched from Lebanon into northern Israel for the first time since the end of last summer's Israel-Hezbollah war.

Two important inferences can be distilled from this list. One is that the Tehran regime takes its slogan, "death to America,"quite seriously,even if we do not. It is arming the Taliban, with which it was at sword's point when the Taliban were in power.

start wars
by underestimating
democracies. Events
in the Middle East
suggest Iran is
making that mistake.

It seems to be supplying explosives not only to Shiite, but also Sunni terrorists in Iraq. It reportedly is sheltering high-level al Qaeda figures despite the Sunni-Shiite divide. All of these surprising actions are for the sake of bleeding the U.S.
However hateful this behavior may be to us, it has a certain strategic logic: "The enemy of my enemy is my friend." What is even more worrisome about the events enumerated above is that most of them are devoid of any such strategic logic. For example,the Hamas "putsch" in Gaza-as Marwan Barghouti, the hero of the Palestinian
intifada, labeled it from his prison cell-was an enormous blunder.

Hamas already mostly controlled Gaza. It is hard to imagine what gains it can reap from its "victory." But it is easy to see the losses. Fatah, and the government of its leader Mahmoud Abbas, will be able to restore their strength in the West Bank with the eager assistance of virtually the whole outside world, while Gaza will be shut off and denied outside aid far more strictly than during the past year. Israel
will retaliate against shelling with a freer hand. Egypt will tighten its border.
And Hamas has in one swoop negated its own supreme achievement, namely winning a majority in Palestine's 2006 parliamentary elections. Until now,Hamas had a powerful argument: how can the West demand democracy and then boycott the winners?
But now it is Hamas itself that has destroyed Palestinian democracy by staging an armed coup. Its democratic credentials have gone up in the smoke of its own arson.

Syria's actions in Lebanon scarcely make moresense. The murder of parliamentarian
Eido will solidify and energize the majority that opposes Syria. Some suppose that, having now bumped off two Lebanese MPs (Pierre Gemayel was the other one), Syria
plans to shave away the anti-Syrian majority in Lebanon's parliament by committing
another five murders. But if so, this is a crazy gambit. Such a campaign would invite international intervention. It might well fracture the pro-Syrian forces: More Shiites will abandon Hezbollah and more Maronites will turn against Hezbollah's cat's-paw, Michel Aoun. And the murders might be for naught anyway: By-elections are
already being planned that are likely to replace the martyred legislators with
others of the same mind.As for the attack on the Lebanese army, Fatah aI-Islam is on the brink of being crushed, leaving behind only more hatred of Syria and a better-armed, more confident Lebanese army.

As for Iran's actions, while arming the Taliban and Iraqi terrorists may make sense, what is the point of seizing British sailors or locking up the four Iranian-Americans, including the beloved 67 year-old scholar, Haleh Esfandieri, none of whom are involved even in political activity, much less in the exercise of hard power?

The apparent meaning of all of this pointless provocation and bullying is that the ails of radicals-Iran, Syria, Hamas and Hezbollah-is feeling its oats. In part its aim is to intimidate the rest of us, in part it is merely enjoying flexing its muscles. It believes that its side has defeated America in Iraq, and Israel in Gaza and Lebanon. Mr. Ahmadinejad recently claimed that the West has already begun to "surrender," and he gloated that "final victory. . . is near." It is this bravado that bodes war.

A large portion of modern wars erupted because aggressive tyrannies believed that their democratic opponents were soft and weak. Often democracies have fed such beliefs by their own flaccid behavior. Hitler's contempt for America, stoked by
the policy of appeasement, is a familiar story. But there are many others. North Korea invaded South Korea after Secretary of State Dean Acheson declared that Korea lay beyond our "defense perimeter." Saddam Hussein invaded Kuwait after our ambassador assured him that America does not intervene in quarrels among Arabs. Imperial Germany launched World War I, encouraged by Great Britain's open reluctance
to get involved. Nasser brought on the 1967 Six Day War, thinking that he could extort some concessions from Israel by rattling his sword.

Democracies, it is now well established, do not go to war with each other. But they often get into wars with non-democracies. Overwhelmingly the non-democracy starts the war; nonetheless, in the vast majority of cases, it is the democratic side that wins. In other words, dictators consistently underestimate the strength of democracies, and democracies provoke war through their love of peace, which the
dictators mistake for weakness.

Today, this same dynamic is creating a moment of great danger. The radicals
are becoming reckless, asserting themselves for little reason beyond the
conviction that they can. They are very likely to overreach. It is not hard to
imagine scenarios in which a single match-say a terrible terror attack from Gaza-could ignite a chain reaction. Israel could handle Hamas, Hezbollab
and Syria, albeit with painful losses all around, but if Iran intervened rather
than see its regional assets eliminated, could the U.S. stay out?

With the Bush administration's policies having failed to pacify Iraq, it is
natural that the public has lost patience and that the opposition party is
hurling brickbats. But the demands of congressional Democrats that we throw in the towel in Iraq, their attempts to, constrain the president's freedom to destroy Iran's nuclear weapons program, the proposal of the Baker-Hamilton commission that we
appeal to Iran to help extricate us from Iraq-all of these may be read by the
radicals as signs of our imminent collapse. In the name of peace, they are
hastening the advent of the next war.

Mr. Muravchik is a resident scholar
at the American Enterprise Institute.

John Kaighn is a Registered Investment Advisor with Jersey Benefits Advisors and writes articles on various business and investment information, ideas and opportunities. For more information about this and other topics you can visit and

Saturday, June 23, 2007

Understanding the ROTH IRA

The ROTH IRA is a retirement product which allows the withdrawal of tax free income from a tax deferred account, and it is a fantastic savings vehicle for people of any age, but particularly for younger people. Congress created The Roth IRA on January 1, 1998 as a result of the Taxpayer Relief Act of 1997. It's named after the late Senator William V. Roth, Jr. The Roth IRA is different from the Traditional IRA because it provides no deduction for contributions, but if you meet certain requirements, all earnings are tax free when you or your beneficiary withdraw them, whereas with the Traditional IRA taxes would be due upon withdrawal. Some other benefits of the ROTH IRA are no early distribution penalty on certain withdrawals, and there is no requirement to take minimum distributions after age 70½.

While the decision to use a ROTH IRA is based on several factors, the presence of a retirement plan in the workplace is one of the major reasons for utilizing a ROTH IRA. If you still have the ability to save, after committing the maximum contribution to your 401k plan, then the ROTH IRA makes sense, because you are limited in the tax deductibility of contributions to a Traditional IRA, if you have a workplace pension plan or 401k. For people who have no workplace retirement plan, the bottom line is that most people are better off with the Roth IRA. The reason is that the dollar amount in Roth IRA is effectively larger than a Traditional IRA because it holds after-tax dollars. If you can take advantage of this feature of the Roth IRA by maximizing your contributions you'll add greater tax leverage to your retirement savings.

There are two ways to establish a Roth IRA either by making a regular contribution to a Roth IRA or by converting a traditional IRA to a Roth IRA. As mentioned before, contributions can be made to a Roth IRA even if you participate in a workplace retirement plan. These contributions can be as much as $4,000 for 2007 with a $1,000 catchup for those 50 and older. There are just two requirements for contributing to the ROTH IRA. First, you or your spouse must have compensation or alimony income equal to the amount contributed. Secondly, your modified adjusted gross income can't exceed certain limits. For the maximum contribution, the limits are $99,000 for single individuals and $156,000 for married couples filing joint returns. The amount you can contribute is reduced gradually and then completely eliminated when your modified adjusted gross income exceeds $114,000 for single individuals or $166,000 for married couples filing jointly. These dollar amounts apply through 2007. You can convert your regular IRA to a Roth IRA if your modified adjusted gross income is $100,000 or less, and if you're single or file jointly with your spouse. You'll have to pay tax in the year of the conversion, but for many people the long-term savings is preferrable to consequesnces of the tax incurred.

Distributions from Roth IRAs are tax-free until you've withdrawn all your regular contributions. After that you'll withdraw your conversion contributions, if any. Special rules apply when you withdraw your conversion contributions. When you've withdrawn all your regular and conversion contributions, any subsequent withdrawals come from earnings. The withdrawals are tax-free if you're over age 59½ and at least five years have expired since you established your Roth IRA. Otherwise, with a few exceptions, they're taxable and potentially subject to the early withdrawal penalty.

John Kaighn is a Registered Investment Advisor with Jersey Benefits Advisors and writes articles on various business and investment information, ideas and opportunities. For more information about this and other topics you can visit and

Monday, June 18, 2007

Summer Solstice Heats Things Up!

Among other items of interest, such as the Commerce Department's release of data on housing starts and the Labor Department's disclosure of data on weekly jobless claims, this Thursday will be the longest day of the year as the summer solstice marks the official start of summer. Right on target, the temperatures here in the east are set to reach into the 90's, providing a scorching beginning to this festive season. With the core inflation reports of last week being somewhat benign, after stripping out the highly volatile food and energy prices, the market ended the week with a bang and could be poised, like the mercury, to creep up further this week.

Overall, the most recent economic reports seem to be verifying the renewed strength of the economy after the mid cycle slowdown, which we've discussed previously. With bond yields surpassing the 5.25% mark briefly last week, bond investors have realized the next move by the Fed on interest rates may be an increase, although my personal belief is that until the depth of the housing slump and subprime mortgage debacle is determined, the Fed will be on hold. Once again, the yield curve is sloping in a positive direction, which bodes well for economic strengh. Perhaps the inversion of the yield curve for part of 2006 was merely indicating the mid cycle slowdown that occurred, and not predicting recession!

So as you mark the summer solstice with whatever ritual suits your tastes, remember the economy and the markets have some upside potential left, even if we do begin to see some increased volatility going forward. I can't say this enough, but it bears repeating, that the markets are not predictable on any given day, and rarely go up without retreating. This ebb and flow of stock prices is what keeps things interesting and allows the supply and demand of stocks to be reset as the psychological drama among investors unfolds. Happy First Day of Summer 2007!

John Kaighn is a Registered Investment Advisor with Jersey Benefits Advisors and writes articles on various business and investment information, ideas and opportunities. For more information about this and other topics you can visit and

Friday, June 8, 2007

Before the Onslaught

Every now and then there comes a time to diverge from my central theme of investment information and divulge facets from other aspects of my life, as well as other interests and passions. With the first full week of June nearly complete and temperatures soaring into the 90's here in sunny Cape May County, I am looking forward to one of the perks of living in a tourist area before the tourists show up inforce.

Most schools still have at least one more week, and so our beaches don't really get crowded until after the 15th of June. Therefore, it is the perfect time for me to enjoy a leisurely stroll along the water's edge today, perhaps in Stone Harbor, and a few hours of reading on the beach tomorrow in Ocean City. It is rather nice to be able to choose a different town and beach on any given day, because they are all so unique and variety is the spice of life. If I have the urge for a great meal and drink, the Washington Inn or Virginia Hotel provide the perfect locale for a romantic dinner in Victorian Cape May. The porch at the Virginia Hotel is a superb spot for sipping mojitos while absorbing the ambiance of the Victorian bed and breakfast hotels which line the festive streets.

It is the little pleasures that keep me plodding along through this adventure we call life, replete with its successes, failures, joys, tradegies and fun. My daily schedule, as intense as it sometimes can be, is punctuated by these delights which I relish ocassionally. The best part of my routine is that it is really not a routine at all, but rather a series interconnected events which ebb and flow with the seasons. The summer season is about to come into full bloom and my schedule will be changing along with the floral landscape.

In life I wear several hats which have a bit of a convergence. My role as guidance counselor is about to end for the current school year, which provides more time for me to spend visiting, calling and satisfying my investment advisory clients as well as the opportunity to enhance my online businesses. It's all about providing insights, information and guidance, so my routine just changes. Luckily this occurs at the right time, because the gardens at my home require my constant attention and care. I've been particularly delighted this spring by the array of color provided by the azaleas, rhododendrons and now mountain laurel which populate my property. As my dogs and I traverse the trails which wind through my yard and the National Wildlife Preserve on the eastern border of my property the fragrance of the mountain laurel is truly intoxicating.

So as the markets gyrate a bit this week, the only numbers which have any real meaning, in my opinion at this juncture, would be a DJIA close of 12,308 and a S&P 500 close of 1,385 because these closing levels would represent a 10% correction from the highs set this spring. Even a drop to these levels would not be an indication of trouble in the markets, but merely a healthy retraction, a little ebb and flow, so to speak.

Thank God it is Friday and the weekend is finally upon us, especially as many of us swelter today in the oppressive heat and humidity descending on the eastern seaboard. To anyone who reads this, get out and smell the roses, soak up the sunshine, don't overreact to the market news you'll hear this week and come visit South Jersey when the schools close. To the locals, we better get out there and enjoy today and early tomorrow, because the onslaught is about to begin! Did I hear rum runner, marguerita, mojito or a nice cabernet sauvignon?

John Kaighn

If you are interested in free information about Investments, Business, Marketing or Online Opportunities, visit my websites at:

Thursday, June 7, 2007

Markets Release Some Steam

We have been experiencing a bit of a sell off in the markets over the last few sessions. If you remember, I made a statement here recently that it wouldn't surprise me to see the S&P 500, and the markets in general, have a bit of a sell off, after the S&P broke the old record set in 2000. As you know it did break the record, and now the sell off has begun.

We have had some sizeable gains in the market this year, and as you know, the market usually never moves in a straight line up or down. Whether this is the long awaited correction, which is defined as a 10% drop, or just a pause, remains to be seen. Traders will be heading for the exits, as investors begin to hunker down and absorb the blows to their portfolios. For long term investors, diversification and dollar cost averaging should help you weather the current storm and add to positions at a discounted price. I do not think this is the beginning of a bear market, as the economy has been exhibiting signs of increased strength recently.

Have a great day and stay tuned for other helpful bulletins to keep you aware of investment, economic and market news!

John Kaighn

For more information on the markets, business marketing or online opportunities, visit my websites at


Wednesday, June 6, 2007

Email Marketing Essentials

If you want an email campaign to succeed, you don`t want to
offend anyone when sending your messages. Turn off a
consumer with your email and you can be sure they`ll
tune out your message. Don`t let this happen to you!

A message that earns respect makes sales. That`s why I will
begin with the topic of email etiquette. Train yourself
to always stick to the rules below when crafting your email
message to potential customers.


Whenever you write an email, always format the lines so that
they`re 65 characters, or less, across. To do this, you may
need to do a "hard return" by hitting "Enter" at the end of
the line.

Wondering why to limit your lines to just 65 characters?
(Good question! It shows you`re thinking.) There are two
reasons that "less is more":

-- The first thing to remember is that looking at a computer
screen for a long time causes EYE FATIGUE for many readers.
The shorter span of characters across the screen makes
reading easier and more appealing to the recipient of your
email message.

-- The other reason to go short instead of long is this:
at 60-65 characters on received messages. If your email
is wrapped at 70, the content will arrive all "chopped up."
This makes it unattractive...and worse -- unappealing.

-- Tip within a Rule #1: Email clients such as Outlook
Express allow you to SET THE LINE-WRAP to any
character-width you choose. That means you won`t have to
hit Enter each time after typing 65 characters. Makes life

-- Tip within a Rule #2 - You can type 65 asterisks or
dashes in a Notepad file to create a template. Then paste
your email below it to see if any lines extend too far to
the right.


How many times have you changed the TV channel to avoid
listening to a screaming car salesperson? No one likes a
screaming salesperson...and no one likes a "screaming" email
message, either. Odds are, when someone has over-amped the
volume of their message by using too many capital letters
(not to mention too many exclamation points and other
punctuation) - you`re going to be turned off.

On the Internet, email messages written in all caps are
considered yelling. It`s okay to write some sentences and
some words in all caps, but don`t go overboard. (As you can
see in this message, I`ve tried to use capital letters to
help break up sections of the content from time to time)

-- Tip within a Rule: Consumers buy from a source they
trust. Emails in all caps are perceived as "shady" or
uneducated, and have an appearance that damages the
credibility of an offer.

=> RULE #3 - WATCH YOUR Ps & Qs (Spelling and Grammar)

Would you be influenced by an email selling you something
that had noticeable spelling and grammar mistakes? Sure you
would...and the influence would be negative, not positive!
When a consumer reads a sales message that`s filled with
errors, they think to themselves, "Good grief, this person
doesn`t even take the time to get his emails right. His
product is probably the same quality as his emails."

When you`re in business, YOUR IMAGE IS YOUR REPUTATION
and your reputation is the reason people buy from you or the
guy down the block. It`s essential that you create an image
of your prospects. Sending emails filled with errors doesn`t
hurt your professional destroys it. (Ouch!)

John Kaighn
Jersey Benefits Advisors
The Kaighn Report

Monday, June 4, 2007

Reassurance or Foreboding?

As we begin the first full week of June, many investors should be asking themselves the same questions Michael Santoli asked in Barrons this week, which are "after a biblical seven years of wandering, the Standard and Poor's last week finally surmounted its former all-time closing high, set near the apex of the market bubble in 2000. Is this a moment to celebrate or lament, a sign of reassurance or foreboding?"

These are very good questions, indeed, because one can never be sure of the direction of the market, but higher highs are usually the sign of a bull market having the strength to continue the upward trend. However, in the short term there could be some gyrations on the way to the next record, because in a bull market one must also witness higher lows! Don't get too caught up in the various news reports you'll hear, but rather continue with your investment plan in order to reach YOUR goals.

I've reprinted an article from my newsletter written in the first quarter of 2005 that spoke of concerns about speculation in the housing market and how to cope with it, especialy if you needed to buy a home. I sure hope we don't enter another era of speculation in the stock markets again, but then, who would have thought we could create a bubble in housing, so soon after the 2000 stock market bubble? One point I must make is that even though bubbles were created, much REAL WEALTH was also created in the 2000 stock market bubble and the recent housing bubble, depending on when and what you bought. A true advertisement for the warning, "Buyer Beware".

Speculation and the Housing Market in 2005

When Greenspan finishes his term as Fed chief, I am one person who surely will miss his succinct use of language to make a point. The use of the term “irrational exuberance” to explain the dotcom bubble, in hindsight, was right on the money. In discussing the current housing boom, he has used the word “froth” to discuss the “relatively exotic mortgages which are of particular concern”. While there are no predictions of a dotcom era style bust in real estate, the fact that 20% of new mortgages in 2005 are “interest-only”, up from 5% in 2003 is the froth of which Greenspan speaks. Consider a 10% drop in home prices for a moment. With a 10% down payment and an “interest-only” ARM, all equity in the home evaporates, and monthly payments eventually will rise with no principal reduction, because interest rates are rising. Does this sound just a bit frothy or even speculative?

The point is to always remember the cyclical nature of the economy, the stock market, the housing market and life in general. In the economic cycle, we are in the middle of the expansion phase, and within this phase, there are ups and downs. The market will rise and fall during this part of the cycle, but the trajectory should be positive if you think long-term. Housing has been in a boom, since the dotcom bust and could very well be near the top. If you need a house, because it will be your home, shop wisely. If you are looking at real estate as an investment at this juncture, perhaps you could wind up in a situation like the above mentioned scenario.

Here are some facts to consider if you are concerned about the housing market. According to Business Week, “today’s housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra low rates of a weak economy. Either the economy’s long-term prospects will get worse, or rates will rise. In either scenario, housing will weaken.” We’re already seeing interest rates rise, so “perhaps housing is entering a more sober period when it won’t be the prime generator of growth.” Overall, the feeling is the housing sector will cool off, and areas with more speculative markets will see more depreciation in home values than those which had a more modest increase over the last three years. This has happened before, and it will happen again. This is no new paradigm, it is just “the cycle”.

John Kaighn is a Registered Investment Advisor with Jersey Benefits Advisors and writes articles on various business and investment information, ideas and opportunities. For more information about this and other topics you can visit and