A Market-Watcher's Notes From the Highway

• ByTim Melvin, RealMoney.com Contributor
• On 10:49 am EST, Monday December 1, 2008

This past weekend, I did something that time had not allowed for a couple of years. A group of us rented a beach house in Siesta Key, Florida, for the next month. Rather than fly down and pay the egregious holiday rental car rates in the Sunshine State, I decided to drive. I have always loved a road trip, and the journey to South Florida is a familiar one.

The day after Thanksgiving, after stowing the leftovers to feed my son for the next few weeks, I pointed the car south and began a leisurely two-day drive. I generally try to observe the world around me as I drive. Much as I malign my friends between the rivers and inside the Beltway for not being aware what is going on in the rest of the world, I can be a little guilty of it myself.

I made this trip a couple of years ago, and it was completely different. This time, once I was south of the snarl that is Washington D.C., the road was empty. Very few cars were on the road besides myself and a few early snowbirds. I saw no minivans full of families arguing with each other for the entire 1,000-mile journey. The vehicles that were on the road were expensive, leaning toward Cadillacs and luxury SUVs. For the most part, they had just one or two passengers. The middle class stayed home this past week, at least along the I-95 corridor. If, as some experts suggest, travel was down only 1% to 2% this past holiday, then some parts of the country must have had epic traffic jams.

I also noticed one very disturbing sign of economic activity, or lack thereof. Anyone who has ever made this drive is aware that the stretch from North Carolina to the tip of Miami is billboard row. This year, it seemed that almost a third of the billboards were empty or advertised their availability. I started paying attention to this somewhere in North Carolina to see if I could ascertain a pattern. I figured out that what was missing from the billboards were the ads for car dealers and churches. There were fewer real estate development ads, but there were some. The other pattern I noticed was that hotel and motel prices had become ridiculously cheap. The advertised rates were about half of what they were just two years ago.

Two years ago, the state bird of Florida was the construction crane. Not anymore. I saw very little construction activity driving in the state. There was some highway reconstruction around Jacksonville, but I saw no evidence of residential of commercial development at all. In the long run, this is a good sign, as it allows time for the inventory over hang to sell down.

Upon arriving at my destination, I noticed that a lot of the condos and beach houses here are empty. In spite of Florida being one of the hardest-hit markets, the price seemed to still be too high. They are well above the value determined by any sensible kind of cap rate or rental replacement value. Housing is priced to a yield of less than 5%. It should be a lot closer to high single digits or even 10% for the purchase of an unstable asset to make economic sense.

The same is still true of many stocks that I see. Although stocks are cheaper than they used to be, their earnings yield is still less than 10%. Why any businessman would invest money into anything that gave a single-digit cash return in return for an uncertain anticipation of growth is beyond me right now. After years of record profit margins, we are still seeing reversion to the mean, and growth is not a sure thing for some time to come

It seems apparent to me that we are seeing the economy continue to weaken in spite of the enormous fiscal commitments made by the government. Like everybody else, I saw the numbers from Black Friday. Given the level of discounting that was used to achieve the small increase in sales, I do not see how to put a good spin on them. I suspect the strong sales were the result of people buying what they intend to buy for the season while it was marked down for Black Friday sales.

I predict that the remaining weeks of holiday sales will be weak. Since retailers cut their profit margin to razor-thin levels for the holiday weekend, profits will be terrible. The good news is that we may have finally crossed into the second half of the game. Inventory draw-downs will lead to scarcity in consumer goods as well as residential real estate. The bad news is that it is just the start of the second half. Real estate and stock prices have further to fall before we regain solid ground.

Traders will find some great opportunities. We will get some news-driven bear market rallies like we saw last week. But keep in mind that they are bear market rallies. Trade them, use them as a chance to hedge your holdings, but do not fall in love with them. I doubt that they will love you back.

For RealMoney readers, this little trip will have real upside. My companions down here include two of the best traders in futures and options I have ever known. Both have been right for the last year. Also among us is a finance professor of some renown, and later this week a biotech expert and real estate developer will be along. I'm sure these pros will have some valuable insights, and I will be passing them along.

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Know What You Own: Among automakers, General Motors and Ford were gaining on Monday, while Toyota and Honda were losing ground. Among general contractors, Quanta Services, Emcor and Chicago Bridge & Iron were down in midday trading.

Buzz up!