Three Industries I'm Bearish On For 2014

As we start 2014, it appears the American economy hasn't improved that much over the past few years. Although the White House and the media keep repeating the half-truth (at best, and whole lie at worst) that the economy is in recovery, I don't see much evidence of it in the Denver-metro area. 

Commercial vacancies seem to be everywhere, and a grocery store (in what I thought was a middle to upper-middle class neighborhood) closed its doors. Medical and recreational marijuana seem to be the largest growth industries after the 'evil weed' was declared legal in Colorado on January 1. 

So why did I choose this topic for this post? In investing, poker and life, success sometimes results in making the fewest mistakes - not hitting the most 'home runs.' Ask anyone who had their retirement savings wiped out by the Wall Street crashes of 2000 and 2008. If you choose the wrong industry to be in, it could cost you a lot of time and money. If you're an older Generation X-er or Baby Boomer, the stakes and opportunity costs of missing a better industry are much higher. 

What are these three industries that could be Tar Babies for your career and investing future?

1) Residential mortgages. A lot of brokers made insane amounts of money from the 2000s real estate boom, and have done well with the recent "mini-boom" in real estate in the Centennial state. Interest rates have been held down at rock-bottom levels by the Federal Reserve the past four years. Unfortunately, the Fed won't be able to maintain these ultra-low rates.

Although the BLS tells us the national unemployment rate is still low, it relies on a Clintonian-like spin of how you define "low." This number doesn't include "discouraged" workers who have given up looking for a job because of the difficult job market. The more reliable number is the employment participation rate, which measures the percentage of Americans who are gainfully employed. 

Zero Hedge reported last month this number has soared to a record 91.8 million Americans - an all-time high. So much for that "Hope and Change" stuff we were sold by the Marxist-in-Chief. 

I don't know the exact numbers on credit quality, but I don't see how the average Americans' FICO score could improve when almost 1/3 of the population isn't gainfully employed. Unlike the Roaring 2000s when all you needed was the ability to fog a mirror to get qualified for a home mortgage; credit standards have tightened up a lot. 

Lenders also require this crazy thing called (gasp!) a down payment. And a pretty sizable one in some cases - like 10 or 20% of the purchase price. With all these strikes against it, I'm not optimistic that this industry is (or will be) the "gold mine" it was from 2002 to 2007.

2) Commercial real estate. The boom in commercial followed the spike in the residential market. During the 2000s the real estate market was like playing the board game Monopoly: Trade your four green houses for one red hotel, strip mall or multi-unit property. If an investor could have properties appreciate 10-30% a year in the residential market, why couldn't you do the same thing in the commercial market where the numbers were bigger?

But the decline in the residential market also led to the downfall of commercial. When the easy money and credit stopped flowing (with no fundamentals and household incomes to support it), the end was in sight for this market as well. I see plenty of commercial vacancies in the Denver-metro area, and another grocery store (an anchor store for a strip mall) also closed its doors. 

The increase in the commercial vacancy rate isn't all due to a muddle-through economy. The Internet has given business owners a better, faster, and cheaper way to do business. Think about it: If your business isn't location or employee-dependent, you can deliver the product or service and accept payment online... why would any marginally sane business owner want the added expense and liability of a brick-and-mortar building?

I don't see the US economy or real estate markets getting better anytime soon, and Internet-related business will only increase from here on out. If you're a commercial building owner or lender, I don't think this industry will be good for a long time to come. The exceptions could be commercial buildings with medical and government tenants. However, if you consider making any commercial real estate investments, remember: Caveat emptor, or buyer beware. 

Make sure it's in a good part of town with reliable tenants who can pay for years to come. And make sure the numbers make sense as an investment TODAY. Don't bet on future appreciation or an improving economy, which may not come as soon as you think. There are many 'wildcards' which will affect the US economy - and some are outside of the country and outside of our government's control. 

A soft commercial real estate market leads to the third industry I'm bearish on:

3) New construction (residential and commercial). The 2000s produced a glut of new homes and commercial buildings, and times were good. But when you factor in the real estate and stock market crashes, tightening up of credit and the increase in Internet-related business, it doesn't make sense from a business standpoint.

Remember, if a business owner can run operations through a company website, why should he foot the cost to build and maintain a new brick-and-mortar facility? 

A good physical location doesn't have the intrinsic value it used to (with a few exceptions), and there are plenty of vacant homes and commercial buildings that you can lease or buy for a fraction of the cost of new construction. 

In the short term, these industries could perform better than I expect, especially with government intervention and/or tax incentives. 

However, I have a good track record predicting economic and financial trends. Here are a few samples:

-  I was bullish on physical gold and silver back in 2003, because of the federal government's increase in spending and debasing the currency - similar to what happened towards the end of the Roman Empire. Both metals have more than tripled in price since '03, and I believe have more upside room to run. 

-  In 2004 I predicted the bust of the residential real estate bubble, because household incomes didn't  increase even close to the rate of increase in home prices. I was three years early, but cracks in the sub-prime mortgage market in August 2007 were the beginning of the end for the late, great Real Estate Boom. 

-  And in 2008 I was bearish on Fannie Mae and Freddie Mac because both entities were missing financial statements for the last three quarters. If they weren't quasi-government entities, their stock prices would have dropped like a rock. I bought February and April put options in January, but they both expired worthless because the stock prices didn't drop far enough (and soon enough) to make a profit... and I stubbornly held on in hopes they would.

However, on September 9, 2008 my hunch was vindicated. The federal government took both Fannie and Freddie into receivership (i.e., bankruptcy)... both stocks dropped below a $1 per share... and both stocks were de-listed from the New York Stock Exchange in July 2010. 

If you consider making your fortune, staying employed or hitching your income wagon to either of these three industries, be very careful - and have a Plan B ready in case either of these wagons goes in the economic ditch.