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Investors often ask 'when do you think the market will reach a bottom'.
Since everyone wants to 'buy low' and 'sell high' - market timing is always a factor for savvy investors.
Do you 'buy on the way down' and get exactly the property you want at a great price? Or do you wait 'just another month or two' and hope that the same property goes just a bit lower - but risk losing it to another investor?
Here's my take on how to time the market bottom:
- Government has to reduce the size of bureaucracy. Up until now, government has reduced services and contracts with the private sector - but has refused to lay-off employees. This has decimated the local economy and forced most of the private sector to relocate to the states in search of work, schools and medical care. Less population should mean less government in a 'normal economy' - but here in Puerto Rico, it just keeps getting bigger!
It is considered political suicide to reduce the bloated government payroll - since politics permeate virtually every position in every agency. As a result, 'feeding the monster' of government bureauracy sucks up all resources.
When you see agencies reducing 'permanent staff' - or failing to meet payroll, its time to watch for a 'bottom' to form.
- Electric Authority Restructuring will be a key indicator. If the bond-holders can eliminate the 'super-monopoly' and force efficiencies in production, distribution and incorporation of solar/wind - then it will start to bring electric rates in line with the competition. No private industry will relocate to Puerto Rico if their cost of energy is twice that of other locations. This may also force government downsizing - if they actually have to pay their own electric bills instead of passing the cost along to the private sector.
- Medicare/MedicAide parity with the rest of the US is critical to maintain population. Depopulation will continue - and perhaps escalate if seniors and workers are forced to relocate to the mainland to receive the same medical benefits that other US citizens receive. Puerto Rico should be a paradise for retirees - but few will invest if they get inferior benefits when relocating to the island.
- Bankruptcy Protection for semi-public entities. The current 'confusion' is a major reason for the frozen real estate market. Uncertainty generally means that very few people are willing to make a commitment.
Congress may not make this retroactive - but at least it will serve as a base going forward.
This may seem like an impossible list - but we are just about at the 'tipping point' when decisions will be made on all of these items in the September - November timeframe. Bondholders have given their final extension for the Electric Agency, Government can no longer go the the bond market for more 'free' money and Congress is finally paying attention to Chapter 9 protection and Medicare Parity bills.
The real test may come on December 1, 2015 when government has to decide to pay the government payroll OR pay the bondholders. Consensus is that there is not enough cash to do both. It seems easy to think that the answer is 'just don't pay the investors' until you realize that a high percentage of investors are the retirement systems that pay out pensions to former government workers. So - do you choose to pay current employees and shortchange retirees who depend on pensions?
And what about the hundreds of thousands of voters who are still owed their tax refunds from last year?
Add to this the traditional Christmas bonus to government employees that the Governor insists will be paid.
Bleek as this outlook may be - at least it will force an honest assessment of the situation and perhaps create opportunity for real solutions rather than political posturing.
If you are considering an investment in Puerto Rico…
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