Editor's Note: This article, by Alec Young, International Equity Strategist at Standard & Poor's, was originally published in the February 2010 edition of Capital IQ's Monthly Market Observations, pp. 34-36.
Japan is the largest overseas stock market in the world, recently weighing in at 14.6% of free float adjusted international equity market capitalization. Just when its long-term underperformance has led many investors to thoroughly dismiss it, Japan is finally outperforming. It’s the strongest major stock market in the world year-to-date by a wide margin, rising 9.3%.
Given its large benchmark weight, being underweight Japan when it outperforms risks detracting materially from performance. In addition, from a contrarian sentiment perspective, the mere fact that Japan has been relegated to perennial underweight status implies to us that it is due to post much more competitive returns. After years of underperformance, we believe everyone who would want to lighten exposure to Japan likely already has. Additional turnaround drivers we foresee are outlined below.
S&P Economics expects Japan's economy to expand within a range of 1% to 1.5% in 2010, up from 2009’s estimated 5.4% contraction. With domestic demand remaining weak amid deflationary pressure and political uncertainty, we believe a recovery is being driven by improving external demand. The consensus expects Japanese corporate profits to rebound sharply in 2010 as China and the U.S., Japan’s two largest export markets, continue to recover. Through November, these two markets accounted for 35% of Japan’s 2009 exports. Furthermore, Japan derives an additional 34.2% of its export revenue from other faster-growing Asian economies like South Korea, Singapore, Hong Kong and Vietnam.
Japanese export earnings should also benefit from a more stable yen. The country’s export EPS suffered in 2009 as the yen rose 9.5% vs. the U.S. dollar, making the country’s exports less competitive in the U.S., as well as in China and Hong Kong, both of whose currencies are pegged to the greenback. In order to maintain 2009’s torrid rate of appreciation, the ¥/$ exchange rate would have to average ¥84.7/$ this year, 6.7% above current levels of ¥90.8 /$, by our analysis.
As a result of improving Asian and U.S. demand, as well as easing year-over-year currency comparisons, the Japanese export recovery that began last March should continue to accelerate, by our analysis.
Lastly, while analyst EPS revision ratios in other foreign markets peaked in the fall, Japan’s continue to make new cyclical highs.
Also, Japan is trading at a historically cheap level, at 18.2X 2010 consensus EPS estimates, a 14% discount to its 10-year average of 21.2X forward EPS. We believe this increases the likelihood of more competitive returns in 2010.
Several ways to profit from this is by buying Japanese ETFs JOF, JEF and DJF.
Tuesday, February 23, 2010
Tuesday, February 02, 2010
Don't Buy REITs
If you feel like investing in real estate, you're better off buying cheap lots in Florida rather than REITs. Yes, it is possible to buy a waterfront lot for under $5,000 - a much better investment than the stock market right now. Check out this essay by Dan Amos:
The commercial real estate crisis may be the most anticipated crisis in history. But just because it's widely anticipated doesn't mean that the crisis won't be destructive for REIT shares. Since most REITs are richly valued, the slow-moving commercial real estate crisis will ensure that future returns disappoint.
Consider the valuation of REITs versus the S&P 500, which itself is overvalued. Despite being 25% below its late 2007 peak, the US stock market - measured by the S&P 500 index - is very expensive. The "Shiller P/E ratio," developed by Yale professor Robert Shiller, measures the S&P 500 against the average S&P 500 earnings over the previous 10 years, adjusted for inflation. It's a much more robust measure of valuation, considering the fluctuation of corporate earnings, and the fact that after bubbles, much of the earnings booked during the boom are written off during the bust. Consider that the earnings booked by Citigroup and other big banks near the peak of the bubble were largely written off during the bust. Therefore, a 10-year average of earnings is a better indicator of true earnings.
The Shiller P/E ratio for the S&P 500 Index is now 21 - up dramatically from 13 at the March 2009 lows. This 21 P/E is higher than at almost any point in stock market history, outside of the late 1920s bubble, the late 1990s bubble, and the market peak in 2007. The S&P 500 is overvalued based on the Shiller P/E, but corporate earnings are supposedly going to soar in 2010, right? Well, even if you believe the optimistic 2010 estimates, the market is still more than fully valued on that metric.
Ditto REITs.
Commercial real estate - and the REITs that hold commercial properties - began to deflate rapidly in late 2008. But the Fed stepped in with bailout funds and easy money to halt the deflation...and even pumped the bubble back up a bit. The nearby chart shows the results of the Fed's handwork. REITs of all shapes and sizes more than doubled off the stock market lows of last March, while the Bloomberg Hotel REIT Index more than tripled. (We'll come back to this chart a little later).
This rally has the look and feel of a dead-cat bounce, which means that it provides an attractive short-selling entry point.
REITs soared as the bubble inflated from 2000-2007, then crashed when the bubble popped in 2008 and early 2009, and then launched a dead cat bounce when the Fed flooded the system in mid-2009 with massive injections of liquidity and cheap credit. Now REITs are priced at bubble valuations - valuations that bear little resemblance to economic reality.
This bounce has postponed a healthy purge of assets in which old capital invested by foolish speculators during the bubble would have been wiped out - clearing the way for new owners to assume title to real estate at reasonable prices. When central banks prop up deflating bubbles with super-easy bailout cash, the bubble investors don't liquidate their overly inflated assets. They hang on and hope for a turnaround.
But bubbles always deflate...always. Government intervention merely muffles the hissing sound for a while. This story played out in the Japanese real estate bubble that peaked in 1990, and it's happening with the US commercial real estate bubble that peaked in 2007. Capital becomes trapped in a dead asset class, thereby stretching the bubble's resolution out over decades.
Toward the end of 2009, it became clear that "extend and pretend" had become the official policy at most banks that hold commercial mortgages. We won't see a cleansing flush of hundreds of billions in underwater properties changing hands to new owners. Instead, properties will be dribbled out of the foreclosure pipeline at a slow pace. This measured pace of foreclosures will add to the chronic glut of property that will be quickly listed for sale into any bounce in demand.
Some of the best short-selling opportunities in the REIT sector may be in the hotel REIT sub-sector.
It's not a stretch to expect the hotel business will be ugly for a long time. Corporate and leisure travel is in the midst of a depression. And leveraged hotel owners built or acquired too many hotels near the peak of the commercial real estate bubble.
Now many hotel owners are desperate to generate cash in order to pay down debt and retain titles to properties. Some are slashing nightly room rates below break-even levels. You know from the growth of Internet hotel booking services just how much more competitive and transparent hotel pricing has become over the past decade. Unless competitors are willing to match the pricing of the most desperate hotel owners, healthier competitors will suffer lower occupancy.
Some levered hotel owners, like Sunstone Hotel Investors, are abandoning their equity in some properties to salvage others. In the fourth quarter of 2009, Sunstone defaulted on several nonrecourse mortgages held against 13 of its properties and turned the title over to its lenders. Sunstone calls this a "deed-back," but it's really a strategic default.
Sunstone's lenders will probably keep and operate the hotels, rather than dump them at a distressed price. The behavior of Sunstone and its lenders shows how many hotel owners and lenders are putting off the necessary liquidation of underwater properties with bloated cost structures. The industry still needs to make more progress on downsizing, slashing operating costs, shrinking mortgage sizes, and lowering room rates to match demand. Until it does, the industry's returns on capital will not consistently exceed its cost of capital.
Hotel REITs are highly sensitive to perceptions about the near-term health of the hotel business. Trends in occupancy and room rates shape perceptions about earnings. Hotel REITs own portfolios of hotels and outsource the management to companies like Marriott for a fee.
Because of the relatively fixed costs of paying management companies a fee for operating hotels, Hotel REITs operate with high operating leverage: A 20-30% decline in revenues can translate into a 50-75% decline in operating income. Also, unlike offices or retail REITs with sticky long-term leases, the cash flow for hotel REITs adjusts quickly to changing conditions on a day-by-day basis.
Over the past nine months, hotel REITs have soared on the perception that corporate and leisure travel will rebound strongly in 2010 and 2011. Analysts have forecast a sharp rebound in earnings.
But I'm not buying it. In fact, I'm selling it.
Regards,
Dan Amoss
for The Daily Reckoning
The commercial real estate crisis may be the most anticipated crisis in history. But just because it's widely anticipated doesn't mean that the crisis won't be destructive for REIT shares. Since most REITs are richly valued, the slow-moving commercial real estate crisis will ensure that future returns disappoint.
Consider the valuation of REITs versus the S&P 500, which itself is overvalued. Despite being 25% below its late 2007 peak, the US stock market - measured by the S&P 500 index - is very expensive. The "Shiller P/E ratio," developed by Yale professor Robert Shiller, measures the S&P 500 against the average S&P 500 earnings over the previous 10 years, adjusted for inflation. It's a much more robust measure of valuation, considering the fluctuation of corporate earnings, and the fact that after bubbles, much of the earnings booked during the boom are written off during the bust. Consider that the earnings booked by Citigroup and other big banks near the peak of the bubble were largely written off during the bust. Therefore, a 10-year average of earnings is a better indicator of true earnings.
The Shiller P/E ratio for the S&P 500 Index is now 21 - up dramatically from 13 at the March 2009 lows. This 21 P/E is higher than at almost any point in stock market history, outside of the late 1920s bubble, the late 1990s bubble, and the market peak in 2007. The S&P 500 is overvalued based on the Shiller P/E, but corporate earnings are supposedly going to soar in 2010, right? Well, even if you believe the optimistic 2010 estimates, the market is still more than fully valued on that metric.
Ditto REITs.
Commercial real estate - and the REITs that hold commercial properties - began to deflate rapidly in late 2008. But the Fed stepped in with bailout funds and easy money to halt the deflation...and even pumped the bubble back up a bit. The nearby chart shows the results of the Fed's handwork. REITs of all shapes and sizes more than doubled off the stock market lows of last March, while the Bloomberg Hotel REIT Index more than tripled. (We'll come back to this chart a little later).
 |
This rally has the look and feel of a dead-cat bounce, which means that it provides an attractive short-selling entry point.
REITs soared as the bubble inflated from 2000-2007, then crashed when the bubble popped in 2008 and early 2009, and then launched a dead cat bounce when the Fed flooded the system in mid-2009 with massive injections of liquidity and cheap credit. Now REITs are priced at bubble valuations - valuations that bear little resemblance to economic reality.
This bounce has postponed a healthy purge of assets in which old capital invested by foolish speculators during the bubble would have been wiped out - clearing the way for new owners to assume title to real estate at reasonable prices. When central banks prop up deflating bubbles with super-easy bailout cash, the bubble investors don't liquidate their overly inflated assets. They hang on and hope for a turnaround.
But bubbles always deflate...always. Government intervention merely muffles the hissing sound for a while. This story played out in the Japanese real estate bubble that peaked in 1990, and it's happening with the US commercial real estate bubble that peaked in 2007. Capital becomes trapped in a dead asset class, thereby stretching the bubble's resolution out over decades.
Toward the end of 2009, it became clear that "extend and pretend" had become the official policy at most banks that hold commercial mortgages. We won't see a cleansing flush of hundreds of billions in underwater properties changing hands to new owners. Instead, properties will be dribbled out of the foreclosure pipeline at a slow pace. This measured pace of foreclosures will add to the chronic glut of property that will be quickly listed for sale into any bounce in demand.
Some of the best short-selling opportunities in the REIT sector may be in the hotel REIT sub-sector.
It's not a stretch to expect the hotel business will be ugly for a long time. Corporate and leisure travel is in the midst of a depression. And leveraged hotel owners built or acquired too many hotels near the peak of the commercial real estate bubble.
Now many hotel owners are desperate to generate cash in order to pay down debt and retain titles to properties. Some are slashing nightly room rates below break-even levels. You know from the growth of Internet hotel booking services just how much more competitive and transparent hotel pricing has become over the past decade. Unless competitors are willing to match the pricing of the most desperate hotel owners, healthier competitors will suffer lower occupancy.
Some levered hotel owners, like Sunstone Hotel Investors, are abandoning their equity in some properties to salvage others. In the fourth quarter of 2009, Sunstone defaulted on several nonrecourse mortgages held against 13 of its properties and turned the title over to its lenders. Sunstone calls this a "deed-back," but it's really a strategic default.
Sunstone's lenders will probably keep and operate the hotels, rather than dump them at a distressed price. The behavior of Sunstone and its lenders shows how many hotel owners and lenders are putting off the necessary liquidation of underwater properties with bloated cost structures. The industry still needs to make more progress on downsizing, slashing operating costs, shrinking mortgage sizes, and lowering room rates to match demand. Until it does, the industry's returns on capital will not consistently exceed its cost of capital.
Hotel REITs are highly sensitive to perceptions about the near-term health of the hotel business. Trends in occupancy and room rates shape perceptions about earnings. Hotel REITs own portfolios of hotels and outsource the management to companies like Marriott for a fee.
Because of the relatively fixed costs of paying management companies a fee for operating hotels, Hotel REITs operate with high operating leverage: A 20-30% decline in revenues can translate into a 50-75% decline in operating income. Also, unlike offices or retail REITs with sticky long-term leases, the cash flow for hotel REITs adjusts quickly to changing conditions on a day-by-day basis.
Over the past nine months, hotel REITs have soared on the perception that corporate and leisure travel will rebound strongly in 2010 and 2011. Analysts have forecast a sharp rebound in earnings.
But I'm not buying it. In fact, I'm selling it.
Regards,
Dan Amoss
for The Daily Reckoning
Sunday, August 02, 2009
How The Government Steals From Pensioners
I think we've just witnessed the end of capitalism. The U.S. government (remember "We The People"?) has just taken money from Chrysler debtholders in the name of saving jobs for American union workers. Not only is this freely giving away money to the long-failing auto industry, but the government plans to pay for it with our tax dollars and the future tax dollars of our children…
In case you missed the story, three Indiana pension funds (holders of Chrysler bonds meant to pay income to retirees in retirement) protested the way the U.S. government ran rough shod over secured lenders in the Chrysler deal. So the pension funds went to the Supreme Court for help. They got shoved away.
If you're not familiar with bankruptcy laws, so-called "secured" lenders were normally the first to get paid back money loaned to a company if the company had to file bankruptcy. Unsecured lenders don't get anything until the secured lenders get everything they are legally promised.
For example, imagine a company's assets amounted to $150 million after a bankruptcy proceeding. It owes its secured lenders $125 million and the unsecured $100 million. The secured lenders get their $125 million, and the unsecured get $25 million. This has been the way bankruptcy has been settled for centuries. Secured means just that – secured.
But not anymore.
In the case of Chrysler, the secured lenders are getting only 30% of what they're owed. The other stakeholders – all the unsecured ones – like the union, the banks with unsecured loans, and even shareholders – are getting as much as the bondholders. Normally, they get nothing until all of the secured debt is paid back. Not a dime. But not this time. Not today.
Why should you care? For one simple reason. You're at risk for the same thing happening to you – the government stealing right out of your pockets. Your retirement savings may soon be taken away while the government is stealing from other bondholders. Heck, if you have your money in a pension fund or a company 401(k) right now, you're at risk. I'll bet you're being stolen from and don't even know it...
Monday, July 20, 2009
Looking at the Trends for Gold
I came across an interesting article by Byron King. Here it is:
The first thing I do when I sit down at my desk in the morning is check the price of gold. The second thing I do is check the price of oil.
Sure, the price for gold and oil changes all the time. Prices go up and down, for good and bad reasons. Heck, sometimes prices fluctuate and the reasoning defies logic.
Still, I watch the price points. Deep down, I’m looking to see if the prices for gold and oil are following my long-term view of what ought to happen. That is, my long-term view is that both gold and oil prices are going to rise to astonishing heights.
Scarcity rules. That’s the foundation of my investment thesis. Today, I’ll explain my thinking about gold and leave oil for another time.
Reviewing the Gold Landscape
The first thing to understand, as an old geology professor at Harvard once told me, is that “gold is where you find it.” And the second thing to understand is that no matter where you look, gold is hard to find — and getting harder.
In the past decade, gold-related exploration efforts and expenditures have increased dramatically. I’ve seen numbers adding up to tens of billions of dollars poured by mining companies into gold exploration.
But despite the best efforts of the global mining industry, world gold production has DECREASED since early in this decade. Take a look at the chart below, depicting world gold production 1850-2008.
I Love This Chart
I love this chart. I could spend all day discussing it. For example, look at the very steep rise in gold output during the 1930s. That was during the depths of the worldwide Great Depression. In both the U.S./Canada (blue area), and the rest of the world (gray area), people were digging more and more gold. The Soviets (purple area) increased their gold output too, courtesy of Joseph Stalin and his Gulag. Desperate times call for desperate measures, I suppose. Will that sort of history repeat this time around?
Falling Gold Output, Plus Monetary Inflation
Or look at that massive run-up in gold output from South Africa (green area) in the 1950s and 1960s. That was during a time when South Africa was instituting its post-World War II system of apartheid. Labor was cheap (sorrowfully cheap), and quite a lot of international investment poured into South Africa without moral qualm. The South Africans dug deep and just plain tore into those gold-bearing reef structures of the Witwatersrand Basin.
But notice how quickly the South African gold output declined in the 1970s, as the mines got REALLY deep and the rest of the world began to institute sanctions against South Africa over its apartheid system.
And then look at the gold price run-up that followed in the late 1970s. It was a time of inflation, mainly coming from the U.S. dollar. Yet world gold mine output was dropping as well. Falling output, plus monetary inflation? The gold price skyrocketed. Another bit of useful history, right?
Recent History — the Trend Is Down
Now let’s focus on more recent history, since about 1990. There were large increases in gold output from the U.S./Canada (blue), Australia (gold) and Asia (China orange, non-China open bar). By 2000 or so — the world production peak — gold prices were down toward $300 per ounce and below.
But as the chart shows, in the past 10 years, gold output has shown a marked DECLINE in the major historic gold mining regions. The prolific gold output from the U.S./Canada, Australia and South Africa has followed downward trends. Sure, these regions still lift a lot of ore and pour a lot of melt. But the production trend is DOWN.
Why the downward trend? I suppose you could call it “Peak Gold,” but that term really doesn’t convey the explanation. Let’s highlight some of the reasons for the decline.
In North America, Australia and South Africa, people have been kicking the rocks for 100-150 years. The large deposits and the high-grade good stuff have been discovered. The ore that’s “easy” to mine has been mined. The deeper ore is more expensive to dig, lift and process.
And I have to mention that over time, the culture in so-called “developed” parts of the world has gotten greener. People and policy have turned against mining in the developed world. So mining doesn’t happen where it’s not appreciated.
The flip side is that if mining is declining in the developed world, then the future of gold mining must be growing in the developing world, right? Well, yes and no. Of course, it’s true that there are more rocks to kick and ore bodies to uncover in the underexplored regions of the world. But this leads to another problem.
Development Issues in the Developing World
The U.S./Canada, Australia and South Africa all have well-established and (more or less) workable mining laws — despite the best efforts of many current politicians and regulators to screw it all up. These historically producing areas are politically stable. Overall, there’s good mining infrastructure, with road and rail networks, power systems, refining plants, a vendor base, mining personnel and access to capital.
But that’s not the case in many areas of the developing parts of the world. Political stability? Security? Infrastructure? Transport? Power? Refining? Vendors? Personnel? Capital? Everywhere is different, of course. But overall, the entire process is much more problematic. So there’s a lot more risk. When you move away from the traditional mining jurisdictions, the whole process of exploration, development and mining is more expensive.
Thus, the new gold discoveries of the future are going to lack some (if not most, or perhaps all) of the advantages of the developed mining world. That means that the ore deposits of the future will have to offer much higher profit margins, based on size and ore grade, to compensate for the increased risks. Too bad Mother Nature (or Saint Barbara, who looks after miners) doesn’t work that way.
It also means the timeline to develop the mines of the future will likely be stretched over many years while political, legal, bureaucratic, logistical and social issues are ironed out.
Future Gold Output on a Downward Trend
The key driver for the future of worldwide gold supply will be DECLINING output overall over time. Coupled with monetary inflation, you can expect to see MUCH HIGHER GOLD PRICES.
The gold that does come up will be from more distant locales, and deeper levels, or it will be more costly to process from lower-grade ores. The whole gold mining cycle will get more expensive and more risky.
The first thing I do when I sit down at my desk in the morning is check the price of gold. The second thing I do is check the price of oil.
Sure, the price for gold and oil changes all the time. Prices go up and down, for good and bad reasons. Heck, sometimes prices fluctuate and the reasoning defies logic.
Still, I watch the price points. Deep down, I’m looking to see if the prices for gold and oil are following my long-term view of what ought to happen. That is, my long-term view is that both gold and oil prices are going to rise to astonishing heights.
Scarcity rules. That’s the foundation of my investment thesis. Today, I’ll explain my thinking about gold and leave oil for another time.
Reviewing the Gold Landscape
The first thing to understand, as an old geology professor at Harvard once told me, is that “gold is where you find it.” And the second thing to understand is that no matter where you look, gold is hard to find — and getting harder.
In the past decade, gold-related exploration efforts and expenditures have increased dramatically. I’ve seen numbers adding up to tens of billions of dollars poured by mining companies into gold exploration.
But despite the best efforts of the global mining industry, world gold production has DECREASED since early in this decade. Take a look at the chart below, depicting world gold production 1850-2008.
I Love This Chart
I love this chart. I could spend all day discussing it. For example, look at the very steep rise in gold output during the 1930s. That was during the depths of the worldwide Great Depression. In both the U.S./Canada (blue area), and the rest of the world (gray area), people were digging more and more gold. The Soviets (purple area) increased their gold output too, courtesy of Joseph Stalin and his Gulag. Desperate times call for desperate measures, I suppose. Will that sort of history repeat this time around?
Falling Gold Output, Plus Monetary Inflation
Or look at that massive run-up in gold output from South Africa (green area) in the 1950s and 1960s. That was during a time when South Africa was instituting its post-World War II system of apartheid. Labor was cheap (sorrowfully cheap), and quite a lot of international investment poured into South Africa without moral qualm. The South Africans dug deep and just plain tore into those gold-bearing reef structures of the Witwatersrand Basin.
But notice how quickly the South African gold output declined in the 1970s, as the mines got REALLY deep and the rest of the world began to institute sanctions against South Africa over its apartheid system.
And then look at the gold price run-up that followed in the late 1970s. It was a time of inflation, mainly coming from the U.S. dollar. Yet world gold mine output was dropping as well. Falling output, plus monetary inflation? The gold price skyrocketed. Another bit of useful history, right?
Recent History — the Trend Is Down
Now let’s focus on more recent history, since about 1990. There were large increases in gold output from the U.S./Canada (blue), Australia (gold) and Asia (China orange, non-China open bar). By 2000 or so — the world production peak — gold prices were down toward $300 per ounce and below.
But as the chart shows, in the past 10 years, gold output has shown a marked DECLINE in the major historic gold mining regions. The prolific gold output from the U.S./Canada, Australia and South Africa has followed downward trends. Sure, these regions still lift a lot of ore and pour a lot of melt. But the production trend is DOWN.
Why the downward trend? I suppose you could call it “Peak Gold,” but that term really doesn’t convey the explanation. Let’s highlight some of the reasons for the decline.
In North America, Australia and South Africa, people have been kicking the rocks for 100-150 years. The large deposits and the high-grade good stuff have been discovered. The ore that’s “easy” to mine has been mined. The deeper ore is more expensive to dig, lift and process.
And I have to mention that over time, the culture in so-called “developed” parts of the world has gotten greener. People and policy have turned against mining in the developed world. So mining doesn’t happen where it’s not appreciated.
The flip side is that if mining is declining in the developed world, then the future of gold mining must be growing in the developing world, right? Well, yes and no. Of course, it’s true that there are more rocks to kick and ore bodies to uncover in the underexplored regions of the world. But this leads to another problem.
Development Issues in the Developing World
The U.S./Canada, Australia and South Africa all have well-established and (more or less) workable mining laws — despite the best efforts of many current politicians and regulators to screw it all up. These historically producing areas are politically stable. Overall, there’s good mining infrastructure, with road and rail networks, power systems, refining plants, a vendor base, mining personnel and access to capital.
But that’s not the case in many areas of the developing parts of the world. Political stability? Security? Infrastructure? Transport? Power? Refining? Vendors? Personnel? Capital? Everywhere is different, of course. But overall, the entire process is much more problematic. So there’s a lot more risk. When you move away from the traditional mining jurisdictions, the whole process of exploration, development and mining is more expensive.
Thus, the new gold discoveries of the future are going to lack some (if not most, or perhaps all) of the advantages of the developed mining world. That means that the ore deposits of the future will have to offer much higher profit margins, based on size and ore grade, to compensate for the increased risks. Too bad Mother Nature (or Saint Barbara, who looks after miners) doesn’t work that way.
It also means the timeline to develop the mines of the future will likely be stretched over many years while political, legal, bureaucratic, logistical and social issues are ironed out.
Future Gold Output on a Downward Trend
The key driver for the future of worldwide gold supply will be DECLINING output overall over time. Coupled with monetary inflation, you can expect to see MUCH HIGHER GOLD PRICES.
The gold that does come up will be from more distant locales, and deeper levels, or it will be more costly to process from lower-grade ores. The whole gold mining cycle will get more expensive and more risky.
Tuesday, February 24, 2009
Real Estate Market Overview 2009
The Condensed Version: Serious dislocation has resulted in the following challenges:
1. A huge capital gap has been created (most debt has vanished, and all the available equity is not enough to fill the hole).
2. No one expects surviving financial institutions to ramp up lending once they finally stop their own mammoth balance sheet bleeding (even with gargantuan government bailouts).
3. Persistent risk aversion and new regulation could limit debt capital flows for the foreseeable future, muting transaction activity.
4. Many owners needing to roll over mortgages in the coming years can expect to face substantial refinancing hurdles, including higher lending rates, more stringent underwriting, increased equity requirements, and recourse terms.
5. The aftershocks of rampant “over-the-top lending” that batter the entire credit system leave property markets substantially overleveraged and vulnerable to significant depreciation.
a. Real estate value losses will average 15 to 20 percent off mid-2007 peaks, and could be more severe for lesser-quality commercial properties in secondary and tertiary locations.
b. For 2009, U.S. commercial real estate faces its worst year since the wrenching 1991–1992 industry depression:
i. Values will drop substantially
ii. Foreclosures and delinquency rates will increase sharply
iii. The limping economy will likely crimp property cash flows
iv. Lower growth going forward
6. In 2009, expected total real estate private equity investment returns will likely register in negative territory for the first time in nearly two decades.
7. In a classic flight to quality, those interviewed continue to favor familiar coastal global pathway cities as investment outlooks grow bleak—ratings uniformly decline for almost all markets.
8. Only apartments show some enduring strength—increasing numbers of young adults and people pushed out of the housing market keep rent rolls relatively healthy.
9. Always favored, industrial properties may weaken in the consumer downturn—fewer goods are shipped and distributed.
10. Businesses stop expanding or downsize, hurting office.
11. Hotels suffer as business and tourist travel is cut back in the recessionary environment.
12. Retail really hits the skids — cash-strapped Americans struggle with credit card debt, the mortgage mess, and gloomy employment environment.
13. Already savaged, homebuilders see little hope for improvement until mortgage markets come back and the job picture brightens—not in 2009.
Current prognostication: Expect financial and property markets to hit bottom in 2009 and flounder well into 2010.
Los Angeles Summary: Holding up the best in housing-ravaged southern California, L.A. benefits from a well-diversified economy and dense infill environment with higher barriers to entry than in nearby suburban markets like Orange County and the Inland Empire. An office building wave could weaken the market into 2010 after a falloff in demand—the financial services crash hurts prime west Los Angeles in particular. Downtown continues to benefit from condominium and apartment projects, which help nurture a more 24-hour environment amid hulking office towers, but Pasadena, Glendale, and west L.A. commercial centers still retain an upper hand closer to premier family-friendly executive neighborhoods. Driving to downtown gets more challenging every year and gas prices increase commuting angst. Overall, multifamily has legs: “It’s almost
impossible to lose money on apartment investments, if you have a five- to ten-year investment horizon.” Hotels benefit from the city’s global pathway location. But housing woes devastate homebuilders in previously high-flying San Bernardino and Riverside, where foreclosures spiral and home values drop like rocks. The once white-hot Inland Empire industrial market
cools temporarily—as nationwide consumer contraction hits warehouse demand near the nation’s largest port, L.A./Long Beach. “Bigbox warehouse developers pushed too far,” “building to the horizon.” Upscale Orange County—“ground zero for the mortgage collapse”—gets nailed by its exposure to home lenders, some of which go belly up. Absorbing shadow office
space “could take three to four years.” The O.C. housing picture looks even worse—prices dive. Weak household credit dampens shopping center outlooks throughout southern California.
DETAILED BREAKDOWN
1. Capital Deficiencies: For 2009, the multibillion-dollar questions become: When will money return to the suddenly strangled real estate markets, and who will be investing and at what levels? As markets deleverage and correct, the length and severity of the repricing process will influence the resumption and intensity of capital flows.
Markets went from inundated in capital to drastically undersupplied, especially for precious debt:
2. Credit Gridlock: The nation’s economic prospects and credit markets remained completely gridlocked with no signs of imminent recovery.
Most wish that financial institutions would “take their inevitable writedowns and clear the market,” but understand that the potential severity of losses in a sudden reaccounting could undermine more companies and crater confidence in a suddenly fragile banking system. Instead, lenders grasp for government handouts and buy time—letting buyers quietly cherry-pick
nonperforming loans and making allowances to many borrowers.
Not surprisingly in light of the credit cataclysm, it appears certain that capital availability for both debt and equity will be constrained in 2009 and investment will be “rather muted.” (See Exhibit 2-3.) In fact, overall capital availability ratings (on a one-to-nine scale) are the lowest in the survey’s history. Only opportunity funds and mezzanine lenders will have more
money to invest than in 2008, according to the surveys. Significantly, expectations sink for financing from commercial banks and CMBS. Many previously active private syndicates and tax exchange buyers without leverage leave the scene.
3. Transactions:
(A) Risk Adversion: Some wonder how they ever embraced the alluring notion that secular change in the capital markets had eliminated most cyclical investment risk. In hindsight, “there was never any structural change, just a temporary surge of capital into the markets.”
(B) Muted Transaction Activity: There is a vast bid-ask chasm separating buyers and sellers. 2008 deal volumes are 20 percent of those of 2007, and 2009 may not be much better. “It’s a terrible time for transaction people” after “some incredible years.” Most agree that sellers will blink first—“they need to get reality.” Underwater owners will almost certainly cave toward buyer expectations, hoping enough dollars come off the sidelines to buffer pricing in bidding for
distressed assets. Unlike in recent years, cash buyers will have the advantage—leveraged buyers and financial engineers “are gone.”
4. Refinancing Issues – Buy, Hold, or Sell:
(A) Significant Depreciation: “As long as you can sit with what you have you’ll be fine.” Taking all the bad news in stride, most real estate players, including homeowners, should uncomfortably ride out the storm. Owners who locked in debt on a long-term basis or shied away from heavy leverage—like pension funds and real estate investment trusts (REITs) — should have the staying power and cash flows to cover obligations to lenders and stomach paper losses.
For private equity real estate owners, “It’s too late to sell.” In fact, Emerging Trends surveys register the lowest sell signal in the report’s 30-year history (see Exhibit 1-1). Survey buy ratings continue to rebound off 2006 lows (when players should have retreated) as investors hopefully expect seller capitulation to meet their increased yield expectations. Many real estate owners just focus on holding on through the “rough sledding,” comprehending that
transactions are beside the point until the market takes its bitter medicine and suffers pain. “The best bet at this point is to ride out the cycle.”
5. Value Depreciation
(A) Cap Rates Readjusting: An interviewee consensus calculates that cap rates need to increase about 150 to 200 basis points on average from their recent lows to more normal 7.5 to 8.5 percent territory depending on property sector, market, and asset quality. That translates into a possible 15 to 20 percent value haircut. Trophy, 24-hour city properties should have less exposure—with their cap rates rising 50 to 75 basis points—while B and C product could
see increases of 200 to 300 points. Inflation and rising interest rates pose additional downside risk. Through 2008, Fed policy makers continued to keep interest rates well below historic norms to stave off economic turmoil despite energy cost–driven inflation and blame on low rates for creating baleful asset bubbles. Over the longer term, interest rates should rise, putting more upward pressure on cap rates.
(B) Buyers and Sellers can’t agree: “Sellers want prices available a year ago, while buyers want prices anticipated a year from now.” While lenders dithered and sidestepped marking down their convoluted portfolios, appraisers and private equity fund managers also avoided taking significant writedowns through most of 2008 despite the handwriting on the wall. They
pointed to the lack of meaningful transactions to gauge value declines and the yawning gap between buyers’ and sellers’ expectations, reminiscent of the housing markets circa 2006. Various opportunity funds have raised “a ton” of money—rumored at upwards of $300 billion—but managers don’t want to start acquiring anything before the market has finished sliding, and some commitments may not stick after the downturn. The dearth of transactions, however,
stymies devaluations. Owners won’t sell at “liquidation prices” if not forced, and lenders haven’t pushed troubled borrowers for fear of exacerbating recognition of their own problems. This circle will likely only be broken when banks and special servicers ramp up foreclosures. From the trickle of transactions, interviewees suggest that pricing levels had declined at least 10 percent off 2007 highs by midyear 2008.
(C) Limping Economy: Optimists had been hoping for offsets from rising property net operating incomes to help counter depreciation from rising cap rates. But the lackluster economy compromises their projections. Instead of rents rising or at least holding steady, owners resign themselves to a deteriorating leasing environment where concessions and tenant inducements proliferate. Higher energy costs and inflationary pressures ramp up operating costs, shrinking
bottom lines further. Total returns cannot escape negative territory—the depth and severity of the recession will determine the extent of losses. This downturn “looks like a long doubleheader,” bemoans an interviewee. “The first game is the credit crisis and we’re only in the middle innings. And now we have another game to play and that’s the poor economy.” “Every day that goes by without economic improvement increases the risk for real estate.”
(D) Lower Growth: Without as much leverage in the market, any pricing increases over time will be more “moderate.”
“The impact of lower debt levels and more expensive debt is lower growth assumptions.” Underwriting will be based on 12-month trailing cash flows, not dreamy forward projections. “
6. Private Equity Model: Opportunity funds need to reorient their formulas and expectations—returns and promotes won’t be as high without a boost from debt. Money will be made on riding markets back to recovery and releasing properties, not on cap rate compression and financing structures.
• Cash and low-leverage buyers will be king;
• Surviving banks will impose strict lending guidelines, requiring more recourse and equity;
• Left-for-dead commercial mortgage–backed securities (CMBS) markets will revive, but in a more regulated form;
• Opportunity funds will need new investment models that can’t rely on massive leverage and cap rate compression to boost returns and promotes.
7. Global Pathway: The favored 24-hour coastal cities—D.C., San Francisco, New York, L.A., Boston, and Seattle—will hold value better and bounce back more quickly. Core players and offshore investors gravitate to these elite business and cultural centers linked directly to Asia and Europe commercial capitals. Hot-growth Texas markets—Houston and Dallas—show temporary strength as long as oil prices stay high.
8. Buy or Hold Multifamily: Apartment investments get a boost from a host of significant trends: increasing numbers of young adults who leave their parents’ homes, more aging baby boomers looking to downsize from suburban lifestyles, and stiffer mortgage costs/requirements that make homeownership too expensive for some prospective buyers. Increasing renter demand helps blunt ongoing recessionary impacts and ensures solid cash flow increases when the economy improves.
9. Buy or Hold Industrial: Despite near-term softness in availability rates, coastal gateways and primary international airport hubs will consolidate their positions as prime warehouse markets operating along global pathways. Watch for distressed owners and pick off bargains in top markets.
10. Hold Office: Long-term leases can bridge the downturn.
11. Hold Hotels: Occupancies decline and room rates suffer—it’s no time to sell.
12. Pray for Retail: Mall owners hope consumers haven’t collectively shopped till they dropped. Neighborhood centers with stronger grocery anchors and chain drugstores should fare best: people still need to eat and purchase more Advil for all their headaches.
13. Buy Residential Building Lots: The market collapse mauls homebuilders—increasingly, they capitulate and give up inventoried land tracts in bankruptcies and foreclosures. Prices are cents on the dollar from market peaks. But investors must be prepared to hold for a while.
Purchase Distressed Condos: At the right prices, these projects can be transformed into profitable rentals. Properties in urban areas near transit hubs make the best bets. Once markets recover, units can be converted back for sales.
Dire Effect of Jobs Market: The dreary jobs picture stirs particular apprehension about the country’s ability to bounce back from its current slump. Although overall U.S. employment had been healthy from 2002 to 2007, job creation and wage growth trailed other economic expansions. High-paying manufacturing jobs continued to migrate overseas, replaced
by lower-wage/lesser-benefit service sector “discount store” jobs. At the margins, many white-collar companies steadily transferred more “knowledge-based” work overseas to lower-cost markets thanks to telecommunications and Internet technologies. While high-tech jobs have rebounded off 2001 lows, the important financial services industry “is a train wreck” and its prodigious Wall Street bonus machine in shambles. To make matters worse, the government sector will scale back in 2009, as state and local agencies face severe declines in tax revenues. Slashed budgets translate into reduced government hiring and layoffs as well as reductions in contracts to private firms and funding for nonprofits. For the short term, rising unemployment and additional consumer distress appear unavoidable. Interviewees, meanwhile, continue to
scratch their heads about new job growth engines; most mention energy, health care, and education. Initiatives to recast the country’s increasingly obsolete infrastructure (roads, rails, transit, airports, electric grid, water/sewage systems) as well as securing greater energy independence through new technologies may key an eventual resurgence. But such programs have no chance to gain immediate traction, given various political, business, and financing roadblocks — certainly not in time to help in 2009.
Check out deals on Commercial real , single-family homes and even cheap hunting land.
1. A huge capital gap has been created (most debt has vanished, and all the available equity is not enough to fill the hole).
2. No one expects surviving financial institutions to ramp up lending once they finally stop their own mammoth balance sheet bleeding (even with gargantuan government bailouts).
3. Persistent risk aversion and new regulation could limit debt capital flows for the foreseeable future, muting transaction activity.
4. Many owners needing to roll over mortgages in the coming years can expect to face substantial refinancing hurdles, including higher lending rates, more stringent underwriting, increased equity requirements, and recourse terms.
5. The aftershocks of rampant “over-the-top lending” that batter the entire credit system leave property markets substantially overleveraged and vulnerable to significant depreciation.
a. Real estate value losses will average 15 to 20 percent off mid-2007 peaks, and could be more severe for lesser-quality commercial properties in secondary and tertiary locations.
b. For 2009, U.S. commercial real estate faces its worst year since the wrenching 1991–1992 industry depression:
i. Values will drop substantially
ii. Foreclosures and delinquency rates will increase sharply
iii. The limping economy will likely crimp property cash flows
iv. Lower growth going forward
6. In 2009, expected total real estate private equity investment returns will likely register in negative territory for the first time in nearly two decades.
7. In a classic flight to quality, those interviewed continue to favor familiar coastal global pathway cities as investment outlooks grow bleak—ratings uniformly decline for almost all markets.
8. Only apartments show some enduring strength—increasing numbers of young adults and people pushed out of the housing market keep rent rolls relatively healthy.
9. Always favored, industrial properties may weaken in the consumer downturn—fewer goods are shipped and distributed.
10. Businesses stop expanding or downsize, hurting office.
11. Hotels suffer as business and tourist travel is cut back in the recessionary environment.
12. Retail really hits the skids — cash-strapped Americans struggle with credit card debt, the mortgage mess, and gloomy employment environment.
13. Already savaged, homebuilders see little hope for improvement until mortgage markets come back and the job picture brightens—not in 2009.
Current prognostication: Expect financial and property markets to hit bottom in 2009 and flounder well into 2010.
Los Angeles Summary: Holding up the best in housing-ravaged southern California, L.A. benefits from a well-diversified economy and dense infill environment with higher barriers to entry than in nearby suburban markets like Orange County and the Inland Empire. An office building wave could weaken the market into 2010 after a falloff in demand—the financial services crash hurts prime west Los Angeles in particular. Downtown continues to benefit from condominium and apartment projects, which help nurture a more 24-hour environment amid hulking office towers, but Pasadena, Glendale, and west L.A. commercial centers still retain an upper hand closer to premier family-friendly executive neighborhoods. Driving to downtown gets more challenging every year and gas prices increase commuting angst. Overall, multifamily has legs: “It’s almost
impossible to lose money on apartment investments, if you have a five- to ten-year investment horizon.” Hotels benefit from the city’s global pathway location. But housing woes devastate homebuilders in previously high-flying San Bernardino and Riverside, where foreclosures spiral and home values drop like rocks. The once white-hot Inland Empire industrial market
cools temporarily—as nationwide consumer contraction hits warehouse demand near the nation’s largest port, L.A./Long Beach. “Bigbox warehouse developers pushed too far,” “building to the horizon.” Upscale Orange County—“ground zero for the mortgage collapse”—gets nailed by its exposure to home lenders, some of which go belly up. Absorbing shadow office
space “could take three to four years.” The O.C. housing picture looks even worse—prices dive. Weak household credit dampens shopping center outlooks throughout southern California.
DETAILED BREAKDOWN
1. Capital Deficiencies: For 2009, the multibillion-dollar questions become: When will money return to the suddenly strangled real estate markets, and who will be investing and at what levels? As markets deleverage and correct, the length and severity of the repricing process will influence the resumption and intensity of capital flows.
Markets went from inundated in capital to drastically undersupplied, especially for precious debt:
2. Credit Gridlock: The nation’s economic prospects and credit markets remained completely gridlocked with no signs of imminent recovery.
Most wish that financial institutions would “take their inevitable writedowns and clear the market,” but understand that the potential severity of losses in a sudden reaccounting could undermine more companies and crater confidence in a suddenly fragile banking system. Instead, lenders grasp for government handouts and buy time—letting buyers quietly cherry-pick
nonperforming loans and making allowances to many borrowers.
Not surprisingly in light of the credit cataclysm, it appears certain that capital availability for both debt and equity will be constrained in 2009 and investment will be “rather muted.” (See Exhibit 2-3.) In fact, overall capital availability ratings (on a one-to-nine scale) are the lowest in the survey’s history. Only opportunity funds and mezzanine lenders will have more
money to invest than in 2008, according to the surveys. Significantly, expectations sink for financing from commercial banks and CMBS. Many previously active private syndicates and tax exchange buyers without leverage leave the scene.
3. Transactions:
(A) Risk Adversion: Some wonder how they ever embraced the alluring notion that secular change in the capital markets had eliminated most cyclical investment risk. In hindsight, “there was never any structural change, just a temporary surge of capital into the markets.”
(B) Muted Transaction Activity: There is a vast bid-ask chasm separating buyers and sellers. 2008 deal volumes are 20 percent of those of 2007, and 2009 may not be much better. “It’s a terrible time for transaction people” after “some incredible years.” Most agree that sellers will blink first—“they need to get reality.” Underwater owners will almost certainly cave toward buyer expectations, hoping enough dollars come off the sidelines to buffer pricing in bidding for
distressed assets. Unlike in recent years, cash buyers will have the advantage—leveraged buyers and financial engineers “are gone.”
4. Refinancing Issues – Buy, Hold, or Sell:
(A) Significant Depreciation: “As long as you can sit with what you have you’ll be fine.” Taking all the bad news in stride, most real estate players, including homeowners, should uncomfortably ride out the storm. Owners who locked in debt on a long-term basis or shied away from heavy leverage—like pension funds and real estate investment trusts (REITs) — should have the staying power and cash flows to cover obligations to lenders and stomach paper losses.
For private equity real estate owners, “It’s too late to sell.” In fact, Emerging Trends surveys register the lowest sell signal in the report’s 30-year history (see Exhibit 1-1). Survey buy ratings continue to rebound off 2006 lows (when players should have retreated) as investors hopefully expect seller capitulation to meet their increased yield expectations. Many real estate owners just focus on holding on through the “rough sledding,” comprehending that
transactions are beside the point until the market takes its bitter medicine and suffers pain. “The best bet at this point is to ride out the cycle.”
5. Value Depreciation
(A) Cap Rates Readjusting: An interviewee consensus calculates that cap rates need to increase about 150 to 200 basis points on average from their recent lows to more normal 7.5 to 8.5 percent territory depending on property sector, market, and asset quality. That translates into a possible 15 to 20 percent value haircut. Trophy, 24-hour city properties should have less exposure—with their cap rates rising 50 to 75 basis points—while B and C product could
see increases of 200 to 300 points. Inflation and rising interest rates pose additional downside risk. Through 2008, Fed policy makers continued to keep interest rates well below historic norms to stave off economic turmoil despite energy cost–driven inflation and blame on low rates for creating baleful asset bubbles. Over the longer term, interest rates should rise, putting more upward pressure on cap rates.
(B) Buyers and Sellers can’t agree: “Sellers want prices available a year ago, while buyers want prices anticipated a year from now.” While lenders dithered and sidestepped marking down their convoluted portfolios, appraisers and private equity fund managers also avoided taking significant writedowns through most of 2008 despite the handwriting on the wall. They
pointed to the lack of meaningful transactions to gauge value declines and the yawning gap between buyers’ and sellers’ expectations, reminiscent of the housing markets circa 2006. Various opportunity funds have raised “a ton” of money—rumored at upwards of $300 billion—but managers don’t want to start acquiring anything before the market has finished sliding, and some commitments may not stick after the downturn. The dearth of transactions, however,
stymies devaluations. Owners won’t sell at “liquidation prices” if not forced, and lenders haven’t pushed troubled borrowers for fear of exacerbating recognition of their own problems. This circle will likely only be broken when banks and special servicers ramp up foreclosures. From the trickle of transactions, interviewees suggest that pricing levels had declined at least 10 percent off 2007 highs by midyear 2008.
(C) Limping Economy: Optimists had been hoping for offsets from rising property net operating incomes to help counter depreciation from rising cap rates. But the lackluster economy compromises their projections. Instead of rents rising or at least holding steady, owners resign themselves to a deteriorating leasing environment where concessions and tenant inducements proliferate. Higher energy costs and inflationary pressures ramp up operating costs, shrinking
bottom lines further. Total returns cannot escape negative territory—the depth and severity of the recession will determine the extent of losses. This downturn “looks like a long doubleheader,” bemoans an interviewee. “The first game is the credit crisis and we’re only in the middle innings. And now we have another game to play and that’s the poor economy.” “Every day that goes by without economic improvement increases the risk for real estate.”
(D) Lower Growth: Without as much leverage in the market, any pricing increases over time will be more “moderate.”
“The impact of lower debt levels and more expensive debt is lower growth assumptions.” Underwriting will be based on 12-month trailing cash flows, not dreamy forward projections. “
6. Private Equity Model: Opportunity funds need to reorient their formulas and expectations—returns and promotes won’t be as high without a boost from debt. Money will be made on riding markets back to recovery and releasing properties, not on cap rate compression and financing structures.
• Cash and low-leverage buyers will be king;
• Surviving banks will impose strict lending guidelines, requiring more recourse and equity;
• Left-for-dead commercial mortgage–backed securities (CMBS) markets will revive, but in a more regulated form;
• Opportunity funds will need new investment models that can’t rely on massive leverage and cap rate compression to boost returns and promotes.
7. Global Pathway: The favored 24-hour coastal cities—D.C., San Francisco, New York, L.A., Boston, and Seattle—will hold value better and bounce back more quickly. Core players and offshore investors gravitate to these elite business and cultural centers linked directly to Asia and Europe commercial capitals. Hot-growth Texas markets—Houston and Dallas—show temporary strength as long as oil prices stay high.
8. Buy or Hold Multifamily: Apartment investments get a boost from a host of significant trends: increasing numbers of young adults who leave their parents’ homes, more aging baby boomers looking to downsize from suburban lifestyles, and stiffer mortgage costs/requirements that make homeownership too expensive for some prospective buyers. Increasing renter demand helps blunt ongoing recessionary impacts and ensures solid cash flow increases when the economy improves.
9. Buy or Hold Industrial: Despite near-term softness in availability rates, coastal gateways and primary international airport hubs will consolidate their positions as prime warehouse markets operating along global pathways. Watch for distressed owners and pick off bargains in top markets.
10. Hold Office: Long-term leases can bridge the downturn.
11. Hold Hotels: Occupancies decline and room rates suffer—it’s no time to sell.
12. Pray for Retail: Mall owners hope consumers haven’t collectively shopped till they dropped. Neighborhood centers with stronger grocery anchors and chain drugstores should fare best: people still need to eat and purchase more Advil for all their headaches.
13. Buy Residential Building Lots: The market collapse mauls homebuilders—increasingly, they capitulate and give up inventoried land tracts in bankruptcies and foreclosures. Prices are cents on the dollar from market peaks. But investors must be prepared to hold for a while.
Purchase Distressed Condos: At the right prices, these projects can be transformed into profitable rentals. Properties in urban areas near transit hubs make the best bets. Once markets recover, units can be converted back for sales.
Dire Effect of Jobs Market: The dreary jobs picture stirs particular apprehension about the country’s ability to bounce back from its current slump. Although overall U.S. employment had been healthy from 2002 to 2007, job creation and wage growth trailed other economic expansions. High-paying manufacturing jobs continued to migrate overseas, replaced
by lower-wage/lesser-benefit service sector “discount store” jobs. At the margins, many white-collar companies steadily transferred more “knowledge-based” work overseas to lower-cost markets thanks to telecommunications and Internet technologies. While high-tech jobs have rebounded off 2001 lows, the important financial services industry “is a train wreck” and its prodigious Wall Street bonus machine in shambles. To make matters worse, the government sector will scale back in 2009, as state and local agencies face severe declines in tax revenues. Slashed budgets translate into reduced government hiring and layoffs as well as reductions in contracts to private firms and funding for nonprofits. For the short term, rising unemployment and additional consumer distress appear unavoidable. Interviewees, meanwhile, continue to
scratch their heads about new job growth engines; most mention energy, health care, and education. Initiatives to recast the country’s increasingly obsolete infrastructure (roads, rails, transit, airports, electric grid, water/sewage systems) as well as securing greater energy independence through new technologies may key an eventual resurgence. But such programs have no chance to gain immediate traction, given various political, business, and financing roadblocks — certainly not in time to help in 2009.
Check out deals on Commercial real , single-family homes and even cheap hunting land.
Saturday, January 17, 2009
Funds Copy Buffett!
Fancy the opportunity to invest with international investment gurus such as Warren Buffett, Mark Mobius or Bill Gross? Krung Thai Asset Management wants to give local Thais the chance.
The KTAM Investment Legends Fund (KTIL), the first equity foreign investment fund launched this year, is a feeder fund investing in Warren Buffett's famed investment holding company Berkshire Hathaway, the Templeton Emerging Markets Fund run by Mark Mobius and Pimco's Total Return Bond Fund under Bill Gross.
Somchai Boonnamsiri, the chief executive of KTAM, said the fund will hold its initial public offering from Jan 19-30, with an investment strategy aimed at undervalued stocks worldwide and a projected long-term return of 7 percent per year.
The KTAM fund will invest in the Investment Legends Fund, a subfund investing in Celsius Fund run by Barclays Capital Fund Solutions.
The master fund aito maintain 40 percent of assets in equities, 40 percent in commodities and 20 percent in fixed income. KTIL will invest at least 80 percent of assets, and also structure investments in the Singapore dollar to avoid future weakness in the US dollar.
Somchai said the market volatility of the past year offered a "tremendous opportunity for investors".
He said current low valuations across most asset classes, the solid track record of investors such as Buffett, Mobius and Gross and the diversified structure of KTIL made the fund a solid option for investors.
"This will be the good time to buy high-quality assets at low price. We expect the economy to begin to recover starting in the second half, and equities always rebound faster [than the broad economy]. So investors should begin taking advantage now," Somchai said.
KTAM is co-operating with Citibank to promote the new FIF. Citibank is also serving as a selling agent for the KTIL fund.
Pavin Rodloytuk, retail banking director for Citibank N.A., said the partnership with KTAM reflected the bank's confidence in ample investment opportunities currently in the markets.
Jas Lim, investment and marketing head for Citibank N.A., said the investment outlook for next year would be a year of two halves.
"Following unique turmoil in the global financial system, the world is now in the middle of a slowdown, with major industrial economics expected to contract well into 2009," she said.
Slowing economic growth, tight credit conditions and deleveraging will dominate the first half of the year, resulting in uncertain equity and credit markets.
But some relief was expected in the latter half of 2009, as credit conditions and risk aversion ease.
Lim said Citi recommended investors to consider infrastructure and distressed assets as key investment themes, together with value investing in equities and fixed income.
The bank maintains a global investment portfolio recommendation of 44 percent in developed-market equities, 36 percent government bonds, 9 percent corporate bonds, 6 percent emerging-market equities and 3 percent high-yield bonds.
"From a total wealth portfolio perspective, investor needs to stick with the basic principles of investing like dollar cost averaging," Lim said.
"We remain overweight on equities for numerous reasons, including attractive valuations and fiscal stimulus policies. As seen in past recessions, it is the best time to build and accumulate and one should not miss that a diversified approach to investment will protect you for now and lead to handsome yields once the market eventually recovers."
The KTAM Investment Legends Fund (KTIL), the first equity foreign investment fund launched this year, is a feeder fund investing in Warren Buffett's famed investment holding company Berkshire Hathaway, the Templeton Emerging Markets Fund run by Mark Mobius and Pimco's Total Return Bond Fund under Bill Gross.
Somchai Boonnamsiri, the chief executive of KTAM, said the fund will hold its initial public offering from Jan 19-30, with an investment strategy aimed at undervalued stocks worldwide and a projected long-term return of 7 percent per year.
The KTAM fund will invest in the Investment Legends Fund, a subfund investing in Celsius Fund run by Barclays Capital Fund Solutions.
The master fund aito maintain 40 percent of assets in equities, 40 percent in commodities and 20 percent in fixed income. KTIL will invest at least 80 percent of assets, and also structure investments in the Singapore dollar to avoid future weakness in the US dollar.
Somchai said the market volatility of the past year offered a "tremendous opportunity for investors".
He said current low valuations across most asset classes, the solid track record of investors such as Buffett, Mobius and Gross and the diversified structure of KTIL made the fund a solid option for investors.
"This will be the good time to buy high-quality assets at low price. We expect the economy to begin to recover starting in the second half, and equities always rebound faster [than the broad economy]. So investors should begin taking advantage now," Somchai said.
KTAM is co-operating with Citibank to promote the new FIF. Citibank is also serving as a selling agent for the KTIL fund.
Pavin Rodloytuk, retail banking director for Citibank N.A., said the partnership with KTAM reflected the bank's confidence in ample investment opportunities currently in the markets.
Jas Lim, investment and marketing head for Citibank N.A., said the investment outlook for next year would be a year of two halves.
"Following unique turmoil in the global financial system, the world is now in the middle of a slowdown, with major industrial economics expected to contract well into 2009," she said.
Slowing economic growth, tight credit conditions and deleveraging will dominate the first half of the year, resulting in uncertain equity and credit markets.
But some relief was expected in the latter half of 2009, as credit conditions and risk aversion ease.
Lim said Citi recommended investors to consider infrastructure and distressed assets as key investment themes, together with value investing in equities and fixed income.
The bank maintains a global investment portfolio recommendation of 44 percent in developed-market equities, 36 percent government bonds, 9 percent corporate bonds, 6 percent emerging-market equities and 3 percent high-yield bonds.
"From a total wealth portfolio perspective, investor needs to stick with the basic principles of investing like dollar cost averaging," Lim said.
"We remain overweight on equities for numerous reasons, including attractive valuations and fiscal stimulus policies. As seen in past recessions, it is the best time to build and accumulate and one should not miss that a diversified approach to investment will protect you for now and lead to handsome yields once the market eventually recovers."
Tuesday, November 11, 2008
GM Stock Downgraded To Zero
Continuing on our theme of bankrupt US Auto manufactureres, here's a report from MarketWatch:
Deutsche Bank downgraded General Motors Corp. to sell from hold, with a price target of $0, saying the car maker may not be able to fund its U.S. operations beyond December without government intervention.
Deutsche Bank said it believes the U.S. government will be compelled to intervene through a capital infusion or loan. "Without government assistance, we believe that GM's collapse would be inevitable, and that it would precipitate systemic risk that would be difficult to overcome for automakers, suppliers, retailers, and sectors of the U.S. economy," the broker said.
Even if GM avoids bankruptcy, equity shareholders are unlikely to get anything back.
Soon after General Motors announced a huge third-quarter loss of $4.2 billion, and that it was burning through an additional $2.3 billion a month, CNBC host Larry Kudlow said automakers should not be given any more taxpayer cash.
"We should not be pouring bad money after bad money" Kudlow said on the financial news channel.
"They should have to make major, surgical, structural changes."
Kudlow's comments follow a report in The New York Times that automakers would ask Congress for double their previous request to as much as $50 billion in government-backed loans so that they can build more fuel-efficient cars.
"The taxpayers cannot possibly finance their burn rate cash problems," Kudlow said. "They need to go into bankruptcy."
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