Stock Market Investing:

Development One: Economic numbers that suggest recovery begin to outpace negative economic news. This leads to the perception — or possibly, the reality — that the Fed will reverse its stance on easy credit.

If you are a new reader I strongly advise the perusal of past post before you begin your protest. Those of you who are familiar with my work will know the well documented relationship between bad economic numbers, easy credit, weak US$ and strong equity markets. As long as the Fed remains committed to easy credit in all its forms the bull market can continue.

However, I have witnessed a disturbing trend over the last few weeks. Good news on the economy leads to selling. This suggests to me a real fear pervades the markets with regard to the continuation of easy credit. The equity markets are trading at these lofty levels because of liquidity not reality and if the Fed controlled gravy train of easy credit stops then trouble will ensue. When the gravy stops dog will eat dog. What the distribution of the last few weeks may be telling us is that the big dogs are smelling trouble and are preparing.

Today’s trading offers a perfect illustration of Development One. First, good earnings numbers out of Microsoft & Amazon were not able to move the markets higher. Instead the excitement was used by the big players to distribute their holding. Second, the following “good” economic report hit the news wires this morning, but the equity markets sold off almost immediately after the release:

Existing Home Sales Exceed Expectations
Existing home sales jumped 9.2% to 5.57 million units in September. The increase followed an unexpected decline (-2.9%) of sales in August. The consensus was expecting sales to rise by a much more modest 5.1% to 5.35 million units.

We obviously don’t have the answer to these questions. However, this very real possibility must be respected. There has always been a high correlation between long rates and the equity markets. I can think of no better example than the crash of 1987. For four months the bond market was collapsing (rates rising) before the equity markets infamously followed.

Of course, in ’87 bonds sold off because the Fed was tightening. If, however, bonds sell off even in the face of Fed easy credit policies then I hate to see the ensuing equity market response.

Record Auctions Announced…euro 1.5001…yen 91.5060 (3.411% -07/32)
Treasury will sell a record batch of bonds next week with $44B 2-yrs Tuesday, $41B 5-yrs Wednesday and $31B 7-yrs Thursday. The record levels show an increase of $1B on the 2-and-5s, and $2B on the 7-yrs. There will also be $7B reopened 5-yr TIPS going off Monday along with $29B 3-mos and $30B 6-mos. The market may get some relief as the news is over, but the high end of expectations had been for closer to $115B versus the $116B announced, so any relief may be brief.

Development Three: The high profile SEC take down of Galleon may cause a ripple effect leading to hedge fund unwinds.

Galleon had over $3 billion and now according to DJ-Galleon winding down all hedge funds.

Last year we all witnessed what happens when hedge funds are forced to unwind. Many of the big funds are often involved in the same trades and one unwind leads to another. There will be many denials along the way but the equity markets will speak the truth.

I will also respectfully submit to you, the readers, that the derivatives crisis is far from over. The individuals that created the credit crisis are still running the show. If you believe this statement is incorrect or feel President Obama promised you change so his cabinet must be full of new thinkers, I suggest you view the PBS Frontline documentary entitled The Warning .

The Warning brings to mind two obvious questions:

1- What will cause the next derivatives crisis? Could it be the take down of a major hedge fund that ignites the next collapse?

2- Why isn’t Brooksley Born a major member of the Obama administration? If he was truly an agent for change wouldn’t she be a must in the cabinet?

Development Two: A funding crisis unfolds.
Will the US$ decline in value to a point where long rates must increase aggressively for our government to continue funding its debt? How long will China and others tolerate the ruse of quantitative easing before demanding higher rates?

Tags: 2nd stimulus, DOW, earnings, economy, equity markets, Fed, galleon, investment strategy, nasd, Not Categorized, obama, sp500, stock market investing, treasury market, US$

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           As markets continue to produce signs of stabilization over the next quarter, it is unlikely that unemployment figures will show much improvement. With figures the highest they have been in more than 25 years, unemployment appears to have neared its peak. Lowering the rate to levels our economy can adequately support will prove to be a daunting task. But, with a little encouragement the corporate sector certainly has the power to handle it.

            Last week, Federal Reserve Chairman Ben Bernanke was quoted by multiple major news sources after he told the Brookings Institute, “The recession is likely over at this point.”[1] According to Bernanke, the economy appears to be growing, but not at a pace that will be sufficient for lowering the unemployment rate. Historically, economic upturns after recessions have been stamped with consumer demand. This time around, however, many Americans may not have the ability to help lead a recovery because they have been completely wiped out financially.

            In order to spur consumer-led demand, the corporate sector will again have to make jobs readily available. The unemployed are not the kind of consumers that are needed to invigorate our economy and induce growth. We do not need to turn to an economics textbook to tell us that our broken economic cycle can be patched with more available jobs—this much we know.

            Corporations large and small have been forced to adapt to this constricted economy and the majority of them were required to do so through downsizing. Now, company leaders are reluctant to increase their workforce until they are confident there is a significant increase in demand for their products and services. But, one strong possibility that could provide the encouragement needed to get company leaders hiring again is a temporary change in corporate tax policy.

            A temporary tax break aimed at equaling the payroll costs of adding new employees would strip the risk for companies that are awaiting a full-blown recovery before they hire. Plus, according to a recent article published in The Wall Street Journal:

“The impact of a two-year program on the federal deficit would be relatively modest. Using a conservative set of assumptions, an $18 billion annual program, which represents 10% of estimated corporate tax receipts in the next fiscal year could create nearly 600,000 good-paying jobs …”[2]

            Before they commit to hiring, companies are waiting for consumers to spend. But, before consumers commit to spending, they are waiting for companies to hire. The cycle is stagnant and will remain so until one side is persuaded to change their behavior. A government-sponsored tax break for companies that agree to hire could be the first action taken during this recession that encourages our country’s government, companies and individuals to work together.

Capital River is Frozen; We Can Thaw it

            Because of the severe impact of the recession, the stream of capital that once flooded our economy has been reduced to a trickle. The majority of the flow evaporated when banks were forced by the Fed to tighten their lending standards as delinquent loans polluted their books. Consequently, failing to restore the flow is making it extremely difficult for the Fed to take progressive measures toward recovery and has the potential to drop us back into another recession.

            According to Bloomberg.com:

“The Fed’s second-quarter survey of senior loan officers, released Aug. 17, showed U.S. banks tightened standards on all types of loans and said they expect to maintain strict criteria on lending until at least the second half of 2010.”[3]

With dropping values in commercial real estate, rising unemployment numbers and a seemingly unending onslaught of delinquent mortgages; banks are not lacking reasons to practice strict lending measures. Earlier this year, through a series of stress tests, the Fed found that 19 of the country’s largest banks needed $75 billion in new capital to protect themselves from mounting losses.

            With all of my recent writings and blog postings concerning the benefits of getting our private capital back in the game, I am by no means hiding my agenda for restoring capital flow. The economy will only be repaired once the flow of capital is rejuvenated. It is much easier to lead capital tributaries back into the main stream if they are first flowing. Over the next couple of quarters, banks will continue to deleverage and work toward a balanced lending system. But, without raising more private capital, banks will not be able to establish a lending system that enables credit-worthy individuals and businesses to acquire reasonable loans; which puts an enormous restraint on economic progress.

            Our economy is already positioned to attempt to force a jobless recovery, which will certainly create complications in sustaining a recovery. Trying to force a credit-less recovery will only exacerbate our struggles. Dragging our banks through a painful recovery without sufficient capital will only position them to break and lead us right back through more of the same. By identifying ways to put our private capital back into the equation we are positioning our financial system to rise from this recession stronger and more efficient. By investing in private enterprise, we are sparking long-term, mutually-beneficial relationships between capital-producing businesses and banks (while also earning gracious returns on our initial investments). Now is the time to put our private capital back to work.

Without Our Capital, Banks Get the Axe

            Our private capital plays an integral part in our local economies—which then all collectively have crucial roles in our country’s financial stability. Because banks have become over-reliant on easy credit, they are now struggling to keep their businesses running by raising capital the old fashioned way. Without our capital, our banks (and more importantly our communities) cannot function properly. Not able to fulfill their debt obligations, banks are closing their doors and falling under the control of the FDIC; which “estimates bank failures will cost the fund about $70 billion through 2013.”

            Banks are necessary to ensure that money circulates in our communities. They distribute the money of their depositors to borrowers who have a worthwhile purpose for the money. The banks secure our savings and lend the money to companies or individuals. Banks provide a convenient location for borrowers to acquire funds. Without banks, companies would find it very difficult to borrow large sums of money.

While banks perform their role as intermediaries, they also essentially increase the supply of money. By accepting deposits from its customers and loaning the money to worthy borrowers, banks “create” money. Consider the following simple example. Imagine a customer deposits $20,000 into her bank account. Even though the bills are no longer in circulation, the amount of money in our country does not change as a result of the deposit. Allowing the money to simply sit in the bank’s safe would not earn the bank anything. Therefore, the bank lends $10,000 to an entrepreneur in return for an additional interest fee. The depositor still has a $20,000 credit in her account and the entrepreneur has $10,000, therefore the money supply has increased by $10,000. The entrepreneur purchases supplies with the money and creates a product that he sells for a profit. As long as banks have depositors, they are able play their crucial role of increasing the money supply by making funds available to those looking to find backing for their ventures.

            The word “bank” itself is derived from the Italian word “banca,” which referred to the table on which coins were counted and exchanged in the middle ages. “Bancarotta,” from which the word “bankrupt” was derived, means “broken bank.” Originally, if a banker was unable to pay his debts, the authorities arrived to smash his table in half with an axe. Today, the FDIC seizes failed banks and seeks buyers for their branches, deposits and faulty loans—all, for some reason, without smashing anything with an axe.

All my best,

Thomas J. Powell 

Tags: banks, Bernanke, Credit, economy, ELP Capital, entrepreneur, FDIC, Federal Reserve, las vegas, markets, Money, nevada, obama, private capital, Real estate, real estate investments, recession, Recovery, reno, tax, Thomas J. Powell, unemployment

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            With a bad habit of ignoring profound systemic problems, Federal Treasury officials are now securing a system that encourages the same careless risk-taking that originally got us into this mess. With this week marking the one-year anniversary since Lehman Brothers imploded, it is only appropriate to discuss the faulty system that protects and rewards failing financial institutions.

            The talking heads in charge of the world’s financial practices are on path to deliver more of the pain and suffering we have been experiencing over the past 20 plus months. The Lehman Brothers’ collapse last year showed us how brutal a large bank failure can be. Now, because of the mess caused by Lehman’s demise, it is unlikely that our government would again allow an institution of similar size to fail. This essentially gives big banks a free pass to misbehave. If you owned a business that was referred to as “too big to fail,” and you knew the government would do all they could to keep your doors open, would you not be inclined to take risks? It is like giving a six year old the keys to a candy factory and a set of cavity-resistant teeth. All risk is stripped away, so why not have some fun?

By receiving government funds, big banks are allowed to carelessly take on high degrees of risk, knowing that there is a safety net underneath them. This recession has been gut-wrenching. It has badly battered our economy and exposed wounds that will not heal in our lifetimes. No one wants to experience a downturn of this size again. But, if officials continue to foster an environment that rewards carelessness by major financial institutions, we will inevitably get more rounds of the same. While we should be demanding big banks to practice prudent due diligence, we are instead enabling them to write off any level of accountability. This recession should have been a major wake-up call for all businesses, but those institutions deemed “too big to fail” have also been allowed to be “too big to learn.”

Top Five of the Bad, Bottom Five of the Good

            Ravaged by the bursting of the real estate bubble, Nevada is among the states with the deepest wounds. Historically, our state has been in the top or bottom five of the most-unappealing statistically-compiled lists put out by major media. Unfavorable, sure, but we all choose to live here for one good reason or another. For instance, our tax structure keeps Nevada among the most business-friendly states in the country. For this reason, we have highly-competitive local markets and capitalism thrives here. Our state officials are somewhat handcuffed because of our demand to keep government out of our businesses as much as possible. By adopting and supporting this system, Nevadans have agreed to take on more personal responsibility when it comes to providing our own financial security—and we are now being put to the test.

            Across our country, state officials are scrambling for ideas that will simultaneously better their state’s situation and put them in the position of being quality leaders. In Nevada, our elected officials have considered bringing in a pricey third-party consultant to advise them on how to progress the state. This means not only are the individuals we put in office to make vital decisions not carrying out their duty, but now we will also foot the bill for a new position. We elected these authorities to represent us; not lead us, by way of expensive consultation, in an undesirable direction. With that said, when we elect them we do not, in turn, remove ourselves from the equation. We are not reduced to waiting on our state leaders to be proactive.

            These are extremely trying times for our country. The recovery is going to be led by us via our private capital and our private enterprise. The government does not have a weapon in its repertoire that comes close to matching the power of our collective private resources. Across the U.S., and particularly in our state, there is an abundant supply of quality projects that have been postponed due to insufficient capital. Because success requires both money and knowledge, every successful idea struggles with acquiring adequate funding at least once throughout the process. Every successful venture has to be properly backed and the majority of the backing comes from private capital. At the end of the day we, the people, are the engine that runs our country.

            Nevada is riddled with quality projects that could be going forward with proper capital and qualified management. We now have to be proactive in matching the two. Being among the top five states in the country in foreclosures, troubled institutions and bank closures does not mean we cannot also be among the top five states to emerge from this recession.

Survival of the Government-Backed Banks

            Even the banks that did not become entangled in the shaky investment strategies of Wall Street during the boom still indirectly had their knees taken out from beneath them throughout this meltdown. According to CNBC.com, 92 banks have failed in the U.S. through the first nine months of 2009; including three here in Nevada. As a comparison, in all of 2008 only 25 banks closed.

            In any meltdown, the government’s focus is on the big banks that have the potential to buckle our country’s financial system if they go under. But, that focus leads to a distinct advantage for big banks over their competition. Having government support allows the bigger banks the power to go out and collect the majority of the available capital, while smaller banks are forced to scavenge. This crisis has presented terrible obstacles for banks to raise the capital lifeblood needed to remain in business. Without liquid capital, smaller banks are consumed by their debts. With losses on commercial real-estate loans rising, the smaller banks that feed credit into our communities are drowning.

            When governments support the behemoth banks and allow the smaller banks to sink, they essentially help eliminate the competition needed to improve our financial system. Without intervention, smaller banks are generally able to pose a competitive threat to the large firms because they are more apt to find ways to be faster, smarter and more strategic. It has always been a staple in American capitalism to save a place in our economy for smaller businesses because they push against the bigger corporations and keep them honest.

            Competition in the banking industry leads to a financial system that operates more efficiently. By helping to eliminate competition, our government is essentially allowing the largest banks to monopolize the industry. By supporting the large and abandoning the small, our government is positioning us to face a much weaker economic recovery than if the innovative smaller firms were allowed to compete fairly. We are essentially heading in the same direction as Europe, which has long had its bank assets heavily concentrated in massive firms. The tactic may make it easier for governments to regulate financial systems, but it also eliminates the capitalistic nature that has made our banking industry the strongest in the world.

NEXT WEEK: Banks as Intermediaries

All my best,

Thomas J Powell

Tags: Add new tag, Bernanke, economy, ELP Capital, Investment, markets, nevada, Real estate, recession, Risk, tax, Thomas J. Powell, to big to fail, tom powell, Treasury

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Earlier this week, after wrestling with the spate of painful economic news provided by major media, I recognized that I had no immediate control over any of the massive economic concerns. The stock market zigged when I hoped it would zag. Unemployment numbers, often reported differently, moved at different paces in the undesirable direction. Our federal deficit grew, which increased our individual debt responsibility. The problems were not confined by the pages of the newspapers. When I peered through my office window I saw quality real-estate projects continuing to sit lifeless because they lacked funding. After a few moments of reflection, I recognized that I, and certainly the majority of us, am being forcibly weighed down by all of the negative. Instead of dwelling on the uncontrollable, we should be manifesting the positive by taking hold of the reins on those things in which we can have significant influence.

I decided to start anew with more refreshing thoughts. So, I turned to a medium in which I had some control over the information that was presented to me: Google. Two main pages topped the list when I searched for the words “Economy: We Are the Answer.” The first was an informal Yahoo Answer Board on which the following question was raised: “Is there hope for the American economy or should we just drastically change the way we live?” The user went on to define “drastically change” by giving up our private houses and cars. The second most-popular page that appeared was BarackObama.com, which suggests no one within Google’s reach really believes we the people have the capacity to be the answer to our economic problems. According to my Google search, the answer either rests in the hands of President Obama or we will all be forced to live in communal frat houses without automobiles.

When our economy is running smoothly, we all welcome the opportunities to be part of a do-it-yourself world. We bag our own groceries, scan our own documents, rent our own movies and print our own boarding passes. On a weekly basis, we all most likely take it upon ourselves to deposit, track, clean, swipe, dry, spray, refill, bus, organize, pour, dispense and scan in the presence of other do-it-yourselfers in the vast public. As long as the tasks are minimal and the goal is clearly in view, we are encouraged to do everything ourselves. The responsibilities we used to let others handle, we now do ourselves (I cooked my own meal at Melting Pot earlier in the month). About half of the times I visit a gas station, there is no reason for an attendant to be present—unless I am in Oregon or New Jersey, where state officials prohibit me from pumping my own gas. But, when an issue has options that are more complex than selecting diesel or regular, our individual accountability takes a vacation. Why do we turn our focus to other superpowers to take control and eliminate ourselves from the equation?

The Problem is Passivity                               

This economic downturn is nothing more than a collection of intertwined problems. Although financially painful and physically overwhelming, there is no reason for any of us to hide underneath our desks and wait for the shaking to end. Think about the steps we all take when trying to overcome a timely problem—for an example, a clogged drain. We take a short period of time to analyze the situation. We look at all the factors involved and ask ourselves crucial questions: Is the water draining at all? Is the clog causing the pipes to leak? How severe is the leak? Is it causing immediate damage? Next, inevitably, it is human instinct to search for the quickest fix. We switch on the garbage disposal and rub our lucky rabbit’s foot. When we are forced to take real action we must recognize the weapons we have to combat the problem (a plunger, a drain snake, Drain-O). After we extinguish our resources, we then consult the knowledge of an expert. 

Now consider the enormity of our current economic struggles. The formula for dealing with the problem is much more complex, but it should still follow the basic fundamentals. Why then have droves of investors been complacent to listen to long-winded “experts” before analyzing their situation and deducing what it is that they can do for themselves? The formula is flip-flopped when we let ourselves believe that any given problem is too big or too complex. Remember the old adage, “We can only eat an elephant one bite at a time”? Many of the intricacies of this recession are out of our control, but the sooner we take control over the issues we can influence, the sooner the complex problems begin to untangle.

If the severity of the problem is directly proportionate to the amount of time we take to analyze it, then we only need a brief moment to stare into a clogged drain. In that same vein, our economic crisis is much more complex and has required a longer period for analysis. I argue we have passed this stage of the process and action is required now. This summer brought about a number of signs that suggest we are now slogging around somewhere near the bottom. With home-improvement projects, summer vacations and outdoor entertainment, consumers typically spend more in the summer months. We are now entering what is destined to be a difficult autumn. Unemployment will continue to strain on families, foreclosures will mount and consumers will tighten the belts they let momentarily loosen over the summer.

On the other hand, as the leaves turn and nature gets stripped of its color, a buckled economy will continue to present opportunities for us to take action. It is time for all of us to stop viewing ourselves as helpless observers and again consider ourselves part of the equation. In some ways we already are important variables, but we rely on the inadvertent action we take to be sufficient. How many times have you heard an angry citizen blurt out something along the lines of “I do my part, I’m a taxpayer”? The somewhat-passive action of paying taxes funds many integral economic systems in which our country balances itself. Just as we hire plumbers to help unclog our drains and keep them running smoothly we elect (read “hire”) officials to help unclog our economy and keep it running smoothly. With our plumbers, we are responsible for paying the bill to enable them to do their job. The same is true for the officials; by paying our taxes, we essentially all pick up our share of the bill and expect them to do their share of the work. Without our capital, their positions would not exist; but this hardly means we have positioned ourselves as active parts of the recovery.

Investing to Make a Difference

To be an important cog in the recovery machine, we must put our money to work. Our money does not do any good stuffed in a mattress or buried underneath the deck. Private capital built this country and there are few economic problems that private capital cannot solve, if allocated effectively. During the Great Depression, a time when the economy constricted and the majority of construction projects were put on hold, the entire construction of the Empire State Building was completed. Thanks to funding from its principle backer, an automobile tycoon aiming to one-up a major competitor, the Empire State Building was constructed with staggering momentum. During the Depression, building materials were cheaper and workers were eager to earn a wage, much like today. The construction put people and money back to work in dire times; not to mention the mystique the building has given our country for nearly eight decades.

A project as grand as the Empire State Building might only come around once a century, but that does not rule out the need for quality projects in our own communities. When private capital teams with quality-managed projects, the outcomes can be extraordinary. But, you need both. Whereas quality projects cannot get off the ground without capital, poorly-managed projects get ran back into the ground even with all the capital in the world.

This recession has torn through our communities and left a stockpile of quality real-estate projects to collect dust. Without proper funding, the projects remain undeveloped, unproductive and severely underemployed. Placing our private capital into quality projects will bolster the number of available jobs in our communities and get people behind a meaningful cause. There are loads of individuals that could be taking charge and becoming part of this recovery. We will show great resilience when we, on our own, come out of this strong, super-charged and feeling part of something.

We have to put the days of excuses behind us. We should be searching for any project that someone says “can’t be done” and aim to defy. When the newspapers have stopped reporting stories that highlight economic blemishes, our unemployment numbers are approaching all-time lows and our government takes a permanent vacation from bailouts; we will only vaguely remember our current doubts. We will, however, remember the period of time when we all did our part to restore communities. We will remember the turning point when we took action to pull ourselves from the painful times and regained our spot as part of the equation.

Tags: bail-out, Bernanke, Billion, Business, Credit, deficit, do-it-yourself, economy, Finance, Geithner, media, obama, Paulson, Real estate, Retirement, Standing In The Rain, Stimulus, Thomas J. Powell, Trillion

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Reasonable Regulation: That’s Allstate’s Stand

            Many companies involved in financial services cower when an official of any stature mentions the threat of national regulation, but Allstate has decided to embrace it. Since late April, Allstate has been pushing an advertising campaign that is rooted in support for creating a national regulation agency for all players in the financial industry, including insurance companies. Each ad in the four-part series, which runs in major magazines such as The Atlantic, touts the common theme of calling on “Congress to act boldly and quickly in drafting strong, comprehensive and clear federal regulation.”[1]

             Under the current system, insurance companies are regulated on a state-by-state basis, something that Allstate CEO Tom Wilson thinks needs be changed. In a national press release, Wilson argued:

 The American consumer is burdened with a patchwork of insurance regulatory systems that are cumbersome and ineffective in managing risks in an era of rapid change and innovation. American families need better protection from systemic risks and access to products and services that will help better manage their financial futures.[2]

            Allstate’s push for a national regulation system is bold. The campaign appears to be having an impact as the Obama administration has started tackling a number of vital decisions that could ultimately lead to national regulation for all financial services. President Obama himself may not have been directly affected by Allstate’s campaign, but according to PRnewswire.com at least one Congressperson has received more than $20,000 in campaign contributions from Allstate over the past four years. Clearly Allstate has identified the potential benefits that would come bundled with national regulation.

            One group that stands to be trapped and bound by the regulatory net of a national system is the stock brokers on Wall Street. The Obama administration has proposed a plan that would hold brokers to the stricter fiduciary standards of registered investment advisors. Under this plan, brokers would be required by law to act in their clients’ best interests, not their own. Also, with each piece of investment advice, brokers would be obligated to disclose what they stand to gain personally. A plan to implement a complete regulation overhaul is sure to be cumbersome and will take time to be implemented effectively. The Obama administration would be wise to have patience with this reform and comb through all of the complexities before attempting to have anything signed into law.

 At the end of the day, the federal regulatory overhaul will aim to force those in the financial system to be more transparent, something the Allstate campaign clearly addresses: “Only when there is transparency around valuing the risk in the financial system—including the role of insurance to help mitigate that risk—will we regain confidence in the economy.”[3]           

To view all of the Allstate advertisements in their entirety, visit allstate.com/fedreg.

Commercial Real Estate’s Role in the Next Bailout

            Banks have had little to celebrate over the past 20 plus months. Still dizzy from the debacle caused by residential real estate, banks nationwide fear the devastation that could soon be unleashed by the rising number of foreclosures in commercial real estate.

            The banks which provided the money to build endless numbers of commercial buildings originally did so because they, like so many others, believed occupancy and rent rates would always consistently rise. But, many owners of commercial buildings are now fueling another wave of foreclosures because they are not able to generate enough cash from tenants to cover their principal and interest payments. Because the loans have also been bundled and sold on Wall Street as commercial-backed mortgage securities (CMBS), the foreclosed buildings spark a ripple effect. Anticipating the severe consequences this could have on our economy, the Federal Reserve is struggling to contain the situation and prevent the need for a second wave of bank bailouts.

            According to Deutsche Bank, about $153 billion in loans that make up CMBS will come due by the end of 2012. The vast majority of these will not be eligible for refinancing through their lenders because the values of the properties have dropped so dramatically.[4] The losses will potentially cripple not only the owners of the commercial properties, but also anyone holding CMBS. Furthermore, because CMBS typically help drive pension and hedge funds, the pain will be widely spread.

            The only positive side of this mess will be the number of affordable investment opportunities for those looking to get into commercial real estate. Commercial real estate does perform in the long haul. But, because of the onslaught of new commercial buildings that sprouted in recent years, we are now experiencing an uncomfortable rebalancing of the industry. Loans that were made on loose credit and then bundled by Wall Street into dicey investment vehicles are all being exposed. However, the underlying properties are not rotten; they still make for sound investments.

            Like the residential market, the commercial real-estate industry was saturated with quick deals that turned sour because they were not thought through. Now, because the consequences stretched so far, the commercial real-estate industry has to be turned upside down and untangled. Although the untangling process will be turbulent, it will also be exposing an array of investment possibilities. Commercial real estate provides the venues for consumer spending. As the economy slowly recovers, so too will the demand for prime commercial real estate—something that will be readily available and reasonably priced in the immediate future.  

Keep Health Care in Our “Best Interest”

            I have been reluctant to bring the argument of national health-care reform to the Powell Perspective because it does not necessarily pertain to real estate, finance or investing. But, national health-care reform has the potential to have drastic impact on our economy, and for this reason I believe it deserves attention here.

            I have been convinced to raise this issue after overhearing a 20-something at the gas pump discuss the issue with someone of similar age. “Man, the whole thing is no big deal, I mean how often do we really go to the doctor anyway?” he said. As I drove off, I realized that the young man, healthy and probably feeling somewhat resilient, was simply not interested in the topic. He wanted to be able to disregard the topic so he could have more attention to focus on the issues that had a more immediate impact on him.

            This week will bring an important turn in the debate over national health-care reform. The Obama administration has committed itself to rethinking the plan before the President is scheduled to address Congress on September 9^th. President Obama is now going to be leading the arguments that he has been able to mostly sidestep thus far. What has me concerned is that the administration will recognize what I did while pumping my gas: The youth do not care. If the Obama administration addresses this and rebrands the issue to somehow get the youth behind it, then the approval rating for health-care reform could skyrocket. The same demographic that helped the President win the office, could now help direct a national issue that they may not be truly interested in for another 20 years. On the other hand, maybe it is time to address the demographic who will still be paying for this change long after we are gone. After all, the people that currently have a vested interest are at a standstill after becoming equally heated on both sides of the issue.

            Since its appearance in the Obama administration’s limelight, health-care reform has done nothing but become more complex. The plan is unclear. No one knows what it will look like, we only know what the media reports: We’re currently 37^th in the world in health-care quality. Death panels will dictate how long we live. The President will personally pull the plug on our grandma. If there are details to this administration’s plan, then they have all been shadowed by heated talk show hosts’ attempts to get the public screaming about something no one knows about.

            On September 9^th President Obama is going to be forced to add some structure to his administration’s plan. Thus far, no one has been able to dissect and discredit the plan because it has only taken shape through various town hall meetings and informal gatherings. In his first address to Congress since February, President Obama will be talking exclusively about health care. This national issue is going to take rigid leadership from the President. If he wants to make any progress he is going to have to involve the nation by getting the young to care and the old to stop shouting at one another and listen.

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Stats Won’t Save Us

Every day, and every minute somewhere on the Web, another statistic that hints at an economic recovery is reported, copied, translated, manipulated and reevaluated. It seems for every positive up tick in economic numbers, there is also a negative. We have been experiencing shaky times for the past 20 months. Every sector is not going to at once join together on an all-knowing graph somewhere and move together as one gradually-rising black arrow.

Stats are meant to give us market indication. “Experts” on the economy make sense of the stats by attaching other positive attributes to them without any solid proof. In social psychology, it is similar to how the halo effect works: If I see Bob Somebody helping an old lady cross a busy intersection, then I automatically believe Bob to be a good person; without having any solid proof. Helping the elderly in dangerous situations is good, I saw Bob do that, so Bob must be good. Similarly, the media tells us recessions are scary and bad, positive things do not happen in recessions; therefore a positive up tick in one sector must mean we are out of the bad recession and into the good recovery. Experts link good news with other good news without any solid proof.

Earlier this month, Newsweek ran a cover that pictured a big red balloon which read “The Recession is Over!” The cover and its related story caused a small uproar that resulted in criticism from President Obama. Although the cover story was meant primarily to sell magazines, the author did make a solid point: “… when economists proclaim a recession over, they’re celebrating a technicality: they mean economic output has stopped contracting.”[1] When the economy stops contracting, it does not simultaneously return to the rising rates we experienced in the years prior to this recession.

The reporting of numbers, percentages, graphs and ratios should only be taken for face value. We use them as indicators, as ways to gauge where we are and the possibilities of where we could be heading. Be aware that we are approaching a period that is sure to be overflowing with economists eager to be the first to accurately predict the recovery by accident. Statistics will punctuate every news story you ingest. A small increase over a quarter is no reason to speculate and sink loads of savings into any financial market. The recovery will come. As we work towards it, I encourage you to stick with the basics. Own stocks that make sense. Consider incorporating alternative investments such as real estate into your portfolio not only because of their soundness, but also because they work as a wonderful hedge against inflation. Pay off debt. Adapt to the times. And, most importantly, focus on those things in your life that you care about the most.

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Tags: alternative investments, appreciation, Bank, bank account, Basis Points, Bernanke, Billion, bonds, bottom, bounce, Cash For Clunkers Part One: Good For Business?, commercial real estate, Compounding Interest, consumer sentiment, Credit, credit constraction, due diligence, durable goods, Economic Recovery, economics, economy, Finance, financial, Financial Future, gains, Geithner, Harvard Real Estate, Hedge against inflation, home prices, home value, Inflation, Investing, investment balances, job loss, just right recovery, lagging indicator, Money, Money Market, new home sales, Paulson, Piggy Bank, Portfolio, President Barack Obama, profit, Putting cash to work, Putting Money to Work, Real estate, real estate assets, recession, Reset, Resources, Retirement, risk analysis, Ronald Reagan, Rule of 72, Short Sales, Smart Money, Standing In The Rain, Stimulus, stocks, strong signs, The Powell Perspective, Thomas J. Powell, Trillion, Trust, Trust But Verify, U.S. Debt, upward swing

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Cash for Clunkers Part II: Dealers Have Clunkers, No Cash

            In last week’s first Cash for Clunkers installment, Cash for Clunkers Part I: Good for Businesses?, I discussed the potential threat the program poses for small businesses. This week I am presenting Part II.

            Auto dealers across the country have been accepting qualified jalopies from consumers in exchange for up to $4,500 off of a new ride. Under the guidelines of the program, the federal government promised to repay auto dealers if they submitted the appropriate rebate forms. This week, the Department of Transportation (DOT) reported that 411,624 rebates have been submitted, totaling over $1.7 billion—more than half of the $3 billion that the government dedicated to the program.[1] Then yesterday U.S. Transportation Secretary Ray LaHood announced the program would be shut down Monday August 24^th because the $3 billion had dried up.

            The concern underlying the delayed payments is two-fold. For one, this is another commitment the government volunteered American tax dollars to without being adequately prepared to efficiently follow through. With every new government-sponsored program, we are losing loads of money to inefficiency. The second concern is that dealers typically purchase new cars from the manufacturers through finance programs. Often times, such financed deals cannot be paid off if the dealers are waiting on money from the government. Therefore, the dealers continue to pay substantial interest charges, which cut their profits on the vehicle sales. Interest fees could be difficult for many dealerships to swallow during what has so far been a dismal year for the auto industry.

            According to the National Highway Traffic Safety Administration (NHTSA), the federal agency in charge of overseeing Cash for Clunkers, it is racing to dedicate more staff to deal with the current massive backlog of rebate applications. The DOT reported that the NHTSA Cash for Clunkers staff “will hit 1,100 by the end of this week.”[2] In order to reach this high number of staff members, Citigroup and federal employees are being taken away from their current duties to help clean up the program.

            The ideas behind recent government-sponsored programs are rushed through Washington only to reach the general public with great inefficiencies. It is true, as Warren Buffet recently wrote in a New York Times opinion article, that “Our immediate problem is to get our country back on its feet and flourishing – ‘whatever it takes’ still makes sense.”[3] However, “whatever it takes” does not always need to translate into sacrificing preparation for the sake of immediate action. The amount of money the government wastes trying to clean up these programs after they are implemented could be dramatically slashed if officials took more time to think them through.

Short-Term Investments Clash with Long-Term Goals

            While investors who armed their portfolios for the long-term still experienced massive losses, they are better suited to ride out the turbulence than those who speculated for the short term. Stocks prices have jumped 40 percent higher than recession lows back in March, but investors should still be prepared for market pullback, which appears to be inevitable. With many experts predicting a bumpy recovery, long-term investments are getting more and more attention.

            Hoards of investors panicked and pulled their long-term capital from equities as the stock market deteriorated. Now, many of them are attempting to patch up their battered portfolios with stable, productive long-term investments. As investors’ emotions are calming and they are again taking action with their life goals in mind, the hunt for smart investments with long-term perspective is becoming more appealing. The media reports daily that we are amidst a buyers’ market, but the majority of the opportunities are suited for short-term investors looking to reclaim their loses overnight. After experiencing record losses, individuals are less cautious of risk. They are more willing to take on greater risk if it comes with the slight chance that they can quickly heal their deep financial wounds. However, wise investors are curbing the need to speculate in the short term and are once again assessing their long-term goals in order to help them guide their financial decisions.

            If your overall goal is to have the money you have earned make you enough money to live on after you retire, then you need to be looking beyond the stock market. A balanced portfolio with a dose of long-term investments, such as owning real estate, hedge funds, venture capital-related projects and REITs, is much more likely to help you achieve your life goals. Plus, short-term investments tend to carry headaches and heavy price tags, while longer-term investments tend to ride out turbulent markets and be priced more appropriately. Whatever the amount of financial losses you have recently experienced, remember to let your life goals play a part in your investment decisions.

Gradual Recovery, Not a Quickbound

            Many economists who hypothesized a steep, booming recovery have now changed their predictions. Historically, dramatic plummets have frequently resulted in steep recoveries. However, the current recession has the characteristics that are likely to breed either a slow, gradual rebound or a slight rebound followed by a new slump.

            The numbers for key indicators of economic growth this summer have been, at best, mixed. On the bright side, stock prices have climbed more than they have fallen, our gross domestic product is declining at a duller rate and job losses have slowed slightly. But, our unemployment rate still teeters around the highest levels reported since the early 1980s, consumer confidence fell in June and July, and homeowner vacancy remains well above the long-term average.

            Statistics aside, what we are likely to see is the emergence of a slight rebound, being fueled partially by consumer spending that cannot be sustained. Customers have been momentarily lured to the big-ticket-item marketplace because of juicy incentives such as the $4,500 Cash for Clunkers rebate and the $8,000 federal tax credit for first-time home buyers. Federal stimulus money will continue to help rejuvenate the economy for the remainder of the year, and likely on into 2010. But, when the money tanks get low, the recovery is going to once again become reliant on natural factors, such as consumer spending and successful businesses.  

            Consumers are likely to make large purchases less frequently because of new tendencies to save instead of charge. Households are saving much more than they have at any other point this decade. This is putting a muzzle on consumer spending, which accounts for around 70 percent of our GDP. Frugal customers are forcing businesses to reevaluate their business strategies. Furthermore, businesses are being required to implement money-producing techniques not reliant on excessive borrowing, which is and will continue to be rare. If consumers and businesses cannot sustain the momentum achieved by the stimulus money, then another slump will inevitably develop.

            The main initiative for the stimulus money is to breathe life back into significant economic driving forces like consumer spending or business investing. Currently, our major driving force, which is just barely keeping the economy idling, is the federal stimulus money. Throughout the end of 2009 and into 2010, we are all going to be responsible for building solid, long-term strategies that will be stable long after the federal stimulus tanks run dry. The government’s spending programs may have helped us avoid a financial apocalypse. But, without taking on the responsibility to continue moving our economy in a positive direction when the funds run out, we will soon find ourselves in another dire slump.

Tags: Add new tag, Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Retirement, Short Sales, Standing In The Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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Second quarter earnings can be best characterized as light on revenue but strong on cost cutting, leading to better than expected EPS. The more positive bottom line results have helped fuel the equity market rally over the last couple of months.

Meanwhile, Aug. 13 (Bloomberg) — The Libor-OIS spread narrowed to a level former Federal Reserve Chairman Alan Greenspan said he regarded as “normal,” adding to evidence the freeze in credit markets is thawing. Clearly credit market stabilization has been a major driver of the equity market rally.

While the rally has been a nice reprieve from the bear market the question remains what will compel the markets higher in Q3 and Q4. With credit back to normal that driver is off the table and cost cutting/belt tightening can only work to improve EPS for a short period of time. Revenue must accelerate in the 2nd half of the year for this bear market rally to turn into a bonafide bull market.

With that thought in mind I am publishing the next two stories. If the consumer can’t find a job then spending will not return and revenue will continue to be disappointing. I fear this will result in a resumption of the down trend in the back half of the year.

Of course, these are long term questions and as my Mom always says “you must live the questions; the answers reveal themselves.” “Living the questions” in this case means trading the trend while keeping your eyes open and your mind alert.

ECONX July Retail Sales Disappoint
The July Retail Sales report is a disappointment and yet another reminder, in the midst of a rising stock market, that the consumer isn’t all he/she used to be due to weak wage growth, depressed asset prices, and concerns about job security…

For the month retail sales were down -0.1%. Excluding autos, they were down -0.6%. Both figures were well off the consensus forecasts that called for increases of 0.8% and 0.1%, respectively. The government doesn’t provide any context behind the numbers, but with broad declines in most sales categories, it is clear that consumers weren’t doing a lot of discretionary spending.

There will be a tendency to dismiss the weakness as being the result of consumers delaying purchases to take advantage of tax-free holidays that got pushed into August this year. There will likely be some makeup in August, but there is still no other way to read the July data than to consider it a disappointment. To the latter point, retail sales, excluding autos, gasoline station, and building materials, which is a measurement that flows into GDP estimates, was down for the fifth straight month.

ECONX Initial Claims Still Way Too High

Initial jobless claims for the week ended August 8 increased to 558,000 from a revised 554,000 in the prior week. The current number lifted the 4-week moving average to 565,000 from 556,500. Continuing claims, in contrast, fell 141,000 to 6.202 million. That dropped the 4-week moving average for the series to 6.259 million from 6.287 million. There is cold comfort in the drop in continuing claims since it most likely reflects people losing benefits. To be sure, there isn’t much hiring happening… Separately, while the trend in initial claims has been better of late, a reading north of 500,000 at this point is still downright bad and still well above prior recession levels when the 4-week average for claims was closer to the 400,000-450,000 range. The labor market is weak and these figures aren’t a great portent for consumer spending activity.

Tags: alan greenspan, earnings, economy, equity markets, initial jobless claims, july retail sales

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Once Bitten: Learning to Trust Real Estate Again

The housing bust burned real-estate investors. Even more frightening, many investors were blindsided by the bust because “credible” officials as high up as then -Federal Reserve Chairman Alan Greenspan were convincing them housing was immune to speculative bubbling. At some point, however, investors will be wise to forgive the real-estate market and reintroduce real-estate assets into their investment portfolio. Many signs are starting to strongly suggest that the time to do so may be right around the corner.

The housing bubble was the beginning of a lot of hardship, but it also sparked an onslaught of once-in-a-lifetime investment opportunities. Historically, real estate has acted as a hedge against the erratic actions of portfolios overloaded with stocks and bonds. But, which real-estate investment option has the best chance of performing well as our economy fights through a recovery? This question brings up a key point: Those who will capitalize on the upcoming real-estate investment opportunities will be those who are knowledgeable, current and responsive.

One market that is looking to explode with investment possibilities is that of commercial real estate. According to Foresight Analytics, a total of $1.4 trillion in commercial real-estate loans on U.S. properties will be coming due over the next five years. Therefore, troubled commercial real estate is and will continue to be actively searching for responsive investors. Those with the wherewithal to complete their due diligence and supply the capital are likely to be well compensated. However, getting involved in commercial real estate can be complicated.

The easiest way to break into the asset class is to do so through a real estate investment trust (REIT). According to a recent cover story in Forbes:

The highest-yielding stocks in the real estate universe are property-owning REITs, which are in business to collect rent and pass the money along to shareholders. … All REITs have the same basic objective: buy property and put it to ‘higher and better use.’[i]

Over the next five years an abundance of low-cost mortgages issued earlier in the decade will be expiring and owners of commercial properties will be actively searching for fresh capital. Anticipating a market soon to be filled with distressed commercial properties, many REITs across the country have started to raise new equity. In order to conserve money, many REITs have cut dividends, but investors wise enough to get involved are still currently soaking up average dividend yields of 7.3 percent.[ii]

With the previously mentioned $1.4 trillion in commercial real-estate loans coming due in the next five years, investors with available capital will be faced with enormous investment opportunities. The banks that created the loans do not appear to have the means to refinance them. This will leave the owners of the commercial loans anxious to attract new capital or sell at close-out prices. The REIT industry, which is currently active in purchasing and improving distressed commercial properties, offers educated investors a relatively easy way into the world of commercial real-estate investing. Plus, REITs usually own dozens of commercial properties, which often enables them to weather turbulent economic times. But remember, commercial real-estate investing can be complicated, no matter which flavor you choose. So always analyze your risk. Also, be weary of “experts” trying to convince you that any market is invincible or immune to any investing fundamental.

Not a Bank, an Ally

As far away from banks as Ally tries to position itself, the truth it, it is still a bank. Built up from the ashes of GMAC Bank, Ally is striving to push banking “in a new direction.” With transparency as its crutch, Ally is an online banking institution pleading for the public to see right through it.

In May, with General Motors seeking to file Chapter 11 bankruptcy, GMAC Financial Services hurriedly changed the name of its bank from GMAC Bank to Ally. Not wishing to be linked to the failing auto company, GMAC Financial Services underwent an intense marketing makeover to create a banking image that people could trust. Although potential customers may still be furious with the government bank bailout, Ally promises to take other frustrations out of banking.

One of Ally’s many advertising messages boasts, “No monthly fees. No minimums. No sneaky disclosures. No kidding.” Another asks, “What is your bank trying to sneak by you?” Ally’s mission statement claims it is a bank “that values integrity as much as deposits.” But, is this accountability too little, too late?

In an effort to prove to customers that it is not just a product of a high-priced marketing effort, Ally is heavily promoting a no-penalty certificate of deposit. The CD, which touts a two-percent, one-year annual percentage yield, is one of the most competitive currently in the market.

In times when the economy is bringing honesty to the surface of nearly every business, is it better to go with one that overtly claims to be straightforward or one that was all along? Obviously, the latter is much more difficult to find. Ally claims it is “always going to give it to you straight,” but will what they are giving amount to more than round-the-clock customer service, straightforward language and clever TV commercials?

A Spotlight the Size of California

Lately, the nation has looked to California to witness the opening of the worst wounds this recession has to offer. Being the epicenter of the housing collapse intensified California’s existing problems and brought its house of cards down to a heaping mess. The Golden State’s unemployment rate is more than two percentage points higher than the national average of 9.5 percent. The state government has issued IOUs in place of tax returns, student grants and payments to creditors. Governor Schwarzenegger is constantly involved in seemingly-endless negotiations with legislative leaders. Credit agencies have started to downgrade the rating on the state’s debt. The state’s student-teacher ratio is more than 30 percent above the national average and appears to be rising. And, grimmest of all, the state faces an estimated $26 billion-dollar budget gap for the current fiscal year.

The entire country was hit by the current recession, but California was mauled. While 48 states face budget deficits, none of them are as severe as California’s. The state was hit from nearly all directions, but, from my view, California appears to have two major hurdles to overcome.

First, the state is unfriendly to business. Last month, CNBC released results from a survey it conducted concerning the best states in which to operate a business. California ranked second to last in business friendliness, cost of business and cost of living. In this year’s survey, even Hawaii passed California in terms of business friendliness. In fact, the only state with harsher legal and regulatory framework was West Virginia, for the second year in a row. Overall, California ranked 32^nd. The state was pulled higher up because of its superiority in technology and innovation. Also, the state that makes up one-eighth of our economy did rank first in something else: access to capital, something that certainly cannot continue.[iii]

The second major obstacle I see is Californians expect a plethora of government-funded services but they are unwilling to sustain the tax threshold required to keep them running. This obstacle also faces our country as a whole. Our aging population requires an increase in Medicare and Social Security spending, yet no one wants to foot the bill. In May of this year, the California Legislature left tax increases in the hands of the voters and, not surprisingly, the voters rejected them. After all, the state’s income tax rates and motor vehicle registration fees are already among the highest in the country. With California already drowning deeply beneath its own problems, budget cuts were the only other viable possibility. The spending cuts approved this year “equal almost 30 percent of the general revenue fund and will affect schools, prisons, colleges and welfare.”[iv]

California’s appealing creative environment has caused inventive people to flock there for decades. But, with California’s system in shambles, residents may find it easier to relocate than to restructure. California’s ideal weather may not prove to be enough to attract the creative people needed to pull the state from its current slump.

Tags: Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Reset, Retirement, Short Sales, Standing In Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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Yeah, There’s a Czar for That

It is beginning to appear that the job of high-up elected officials is simply to hire others to oversee the issues we elected them to solve. President Obama has appointed a czar for nearly every significant issue that faces his administration. According to a recent article in the Chicago Tribune, “Republican Sen. John McCain has joked that President Barack Obama has ‘more czars than the Romanovs,’ the dynasty of czars that ruled Russia for three centuries.”

While the President is unquestionably overwhelmed with responsibility, the answer cannot always be to appoint a new position, which often means a new hefty salary. These new positions help keep one pair of eyes dedicated to an issue, which adds focus to important problems that need quick solutions. But, we elect individuals we feel can handle certain responsibilities and, in turn, we hold them accountable. Eventually the government will be overrun by managers instead of employees. Responsibilities will be thinly outlined, feet will be stepped on and too many cooks will be in the kitchen.

According to Reuters.com, the Obama administration has appointed:

a drug czar, a U.S. border czar, an urban czar, a regulatory czar, a stimulus accountability czar, an Iran czar, a Middle East czar, and a czar for both Afghanistan and Pakistan, which in Washington-speak has been lumped together into a policy area called Af-Pak. There are upward of 20 such top officials, all with lengthy official titles but known in the media as czars …

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Tags: Bank, Bernanke, Billion, Credit, due diligence, economy, Finance, Geithner, Harvard Real Estate, Money, Paulson, President Barack Obama, Putting Money to Work, Reset, Retirement, Short Sales, Standing In Rain, Stimulus, The Powell Perspective, Thomas J. Powell, Trillion

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