TKG weBLOG

1 ) Employment consultants Challenger, Gray & Christmas see the worst jobs market since the Great Depression in 2009. We have lost 732,000 jobs since November, and another one million are to go during the first half of next year. There are now 2.2 million workers who have been looking for jobs for more than six months. Financial services, housing, construction, automotive, and retail have taken the biggest hits. The bright spots are to be found in health care, education, food, and agriculture.

2 ) There are 100 million cows in the US, and each one emits 4 tons of methane gas a year, from both ends. Environmentalists want to impose a carbon tax of $175 per dairy cow to slow down the global warming this is causing.

3 ) I thought you would like to have the specs on your next car. The current generation of hybrid cars uses a heavy nickel metal hydride battery to get it up to 20 mph, where the gasoline engine takes over, doubling gas mileage to the 40-50 miles/gallon range. The next generation plug-in hybrids will use lighter, more powerful lithium ion batteries to power the car full time for the first 40 miles, where a small gasoline engine then takes over. Cars will obtain most of their power from an overnight plug in to a standard wall outlet, which will only cost $100-$200/year in extra electricity bills. Toyota (TM) estimates that 90% of drivers won’t use gasoline at all! Notoriously secretive Toyota was supposed to bring out its plug in Prius in January, but that has no doubt been delayed by the economic crisis and the cheap price of gas. And General Motors (GM) has a pipedream of launching the Volt, using similar technology, in two years.

4 ) Investment banks saw a record 1,309 mergers and acquisitions transactions worth $911 billion cancelled in 2008, as financing became as difficult to find as a McCain bumper sticker in Berkeley . This used to be a major profit center for the industry, and is expected to make a big comeback next year.

5 ) The volatility index (VIX) is at last retreating from its historic, lofty levels: it’s down from 89% to 41% since November. In case you’ve forgotten your integral calculus, take the current VIX level, divide by 16, and that gives you the anticipated move in the index for the next 30 days. So a 41% VIX presages a 55 point move up or down in the S&P 500 in January. The big question in traders’ minds is: will the slow bleed in volatility continue through the holidays, until the Obama inauguration, or through all of 2009? Nuclear winter anyone?

6 ) San Francisco is now the third largest banking center in the US, thanks to Wells Fargo’s (WFC) acquisition of Wachovia Bank. Charlotte, North Carolina is number two, thanks to the strength of Bank of America (BAC), originally another San Francisco bank. New York is still number one, but fading fast.

7 ) The S&P 500 index has brought in a zero return for the past 12 years. Very bad for index funds, like Vanguard, as investors get discouraged and give up on equities. Some $200 billion has left US equity funds this quarter.

8 ) With sterling at $1.48 and falling fast, and the euro at $1.38, the two are rapidly approaching 1:1 parity. This would be an ideal opportunity for the pound to enter the euro bloc seamlessly. But just as the UK may enter, Italy could leave, because it can’t adhere to the debt ceilings imposed by the European Central Bank. In the meantime, Germany is still obsessed with inflation. Can you blame them, being the home of Weimar era hyperflation, where it took a wheelbarrow full of paper Reichmarks to buy a loaf of bread. This is the euro’s first real recession, and it may not survive.

9 ) Banks are trying to max out their Treasury bond holdings on their balance sheets at year end to prove to investors how conservative and well managed they are. The dam will break on January 5, when bankers rush to extend loans to better quality credits to beat the heat from Washington. I suspect the bulk of this will initially be refinancings.

10 ) Nine out of the last ten bull markets were lead by a sharp recovery in consumer discretionary stocks. Think Home Depot (HD), Comcast (CMCSA), Best Buy (BBY), Urban Outfitters (URBN), American Eagle Outfitters (AEO), or for wimps, the Consumer Discretionary Select SPDR ETF (XLY).

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) Existing home sales plunged 8.6% in November to 4.49 million, according to the National Association of Realtors. The median sales price fell by the largest amount on record, plunging 13.2% in November to $181,300, from $208,000 a year ago. That was the lowest price since February 2004 and the biggest year-over-year drop since the index began in 1968. If anyone tells you the real estate market has bottomed, just turn around, and politely walk away.

2 ) The French distributor of Bernie Madoff’s funds, Rene De la Villehuchet, committed suicide in his New York office this morning, slashing both of his wrists with a box cutter while he was sitting at his desk. His Luxembourg based Luxalpha fund suffered a total loss of $1.4 billion, and the man had his entire net worth invested in the fund. The scandal is creating the Permanent Employment Act of 2008 for lawyers. Anyone who redeemed the Madoff funds in the last six years, and some have taken out up to $500 million, will be targeted by the bankruptcy trustee with a fraudulent conveyance suit and a claw back. This establishes a new performance benchmark for money managers. If you end the year breathing, you had a good year.

3 ) There is more speculation that China may lead any upturn in the global capital markets. China’s holdings of US government bonds leapt by $250 billion last week through capital appreciation alone, taking their current market value to roughly $1.25 trillion. To finance a domestic reflationary program, China need only sell some Treasuries, not print money, as the US must. This would involve converting a chunk of the Middle Kingdom’s productive capacity away from US oriented exports to domestic consumption, particularly accelerated and much needed infrastructure spending. This would be painful in the short term, to say the least, but is necessary for the long term. This would enable the Chinese stock market to lead the world out of the current morass, something the chart below clearly suggests. I like the iShares FTSE/Xinhua China 25 ETF (FXI). If you want a high beta single name, go for Baidu (BIDU), the Google of China. This would also be good for major American exporters like Boeing (BA), Caterpillar (CAT), and Microsoft (MSFT).

5 ) The Belgian government fell on the back of the scandal that emanated from the Fortis Bank bankruptcy. Expect this crisis to claim more governments.

6 ) The troubled REIT Prologis (PLD) dumped its China holdings for a fire sale price of $1.3 billion. GIC Real Estate was the buyer. The stock jumped 15% to $10.50. This should help the entire REIT sector of the market. Prologis had lost 95 percent of its value this past year and was dragging down the entire REIT industry. It has a huge debt rollover problem beginning in 2009 and the market was anticipating it would not be able to manage its debt and would end up in Chapter 11 Bankruptcy. General Growth Properties is going through a similar experience.

JOKE OF THE DAY

“Recession-Plagued Nation Demands New Bubble to Invest In,” says a headline in The Onion, a satirical publication.

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!

Fifteen years ago I had a meeting with the country manager for Proctor and Gamble (P&G) in Warsaw, Poland. The purpose of the meeting was to discuss whether P&G would like to lease a brand new modern warehouse near the international airport in Warsaw. The country manager told me, much to my surprise, that he had no interest, and not because they did not need a warehouse. They were shipping truck-loads of Pampers Diapers into Poland and had no place to put them. It was because they never lease from anyone. They always own.

The country manager then explained to me that the reasons P&G always owned their real estate. First, they needed maximum flexibility in the term of their occupancy. They did not want to be tied to the terms of a lease agreement and have to negotiate with a landlord if their needs changed and they had to depart early or if they wanted to extend their lease. Second, they needed to be able to use the space without interference. If they wanted to tear down a wall or construct offices, they needed to do so without having to negotiate with their landlord. Thirdly, they considered owning real estate to be like putting money in the bank. If P&G needed to raise capital, they would compare the cost of borrowing money in the mortgage market to borrowing rates in the corporate bond market to the value of the real estate in the equities market. In times of volatile credit, they had three different capital markets to go to for additional capital. Finally, because of the relatively small amount of equity required to purchase real estate, all of this flexibility came at a very small premium, most of which was recovered quickly from the tax benefits that go along with purchasing commercial real estate and the balance of which was recaptured when the building was sold.

These same principals apply to the small business owner today. The choice is to lease space from a landlord and face the restrictions and limitations inherent in the lease, or to own one’s own space and suffer from none of this, meanwhile enjoying the reduced occupancy cost and flexibility of ownership. Ownership also gives the option to raise capital from multiple sources at economical rates if and when it’s needed.

If a business is trying to cut overhead and contain costs in an uncertain economy, the owner needs to consider owning his business location. It will lower the overall cost of occupancy and give the flexibility to adapt to the unforeseeable future. If business contracts, he can stay put at the lower occupancy cost, or lease out the space and become a tenant in a smaller premises. If business expands, he can stay put and adapt the space to changing needs, or either lease it to another company or sell and relocate to a larger facility as a tenant or owner. No matter what direction the economy goes, or what happens to a business, the owner is in control and can make the adjustments that will allow him to remain in business.  Our project, Vineyard Hills Business Properties, offers just this type of opportunity for small business owners.

Control of one’s own destiny at a substantially lower cost makes ownership the logical choice for the small business owner.

If you enjoyed this post, make sure you subscribe to my RSS feed!

Given the spreading gloom in the marketplace, where are the potential bright spots?   This is a question, along with ‘when will it get better,’ that everyone is surely asking. Much ink has been spilled contemplating how our current economic difficulties are like those of the Great Depression, and of course how the new administration will emulate FDR’s efforts in addressing those problems. See this article from last week’s NY Times. Meanwhile, there is, in my opinion, more reason to have hope about our prospects in California, being the progressive and technologically advanced place that it is.  This is particularly true of potential for moving forward with the development of a ‘green economy’.

The reason for my optimism centers on the fact that it’s already happening. According to another article in the Times, “California’s energy-efficiency policies created nearly 1.5 million jobs from 1977 to 2007.”  While Detroit has steadfastly maintained that  higher fuel economy standards would bleed them dry, and cost thousands of jobs, it’s pretty evident that precisely the opposite is true.  Far from being a fad, or flavor of the month, green is the way forward economically as well as for the health of the planet.

If you enjoyed this post, make sure you subscribe to my RSS feed!

1 ) Detroit gets $17.4 billion in life support, and the markets go to sleep. It’s a Band-Aid over a stab wound through the heart. Industry analysts figure the real cost of a desperately needed ground up remake of Detroit is closer to $125 billion. Toyota announced its first loss in its 71 year history. The Bank of Japan cut interest rates to 0.1% to stem the furious inflow of capital by panicky Japanese banks dumping foreign investments, which has driven the yen ($XJY) up to a decade long high of ¥87.

2 ) Crude at $33! Who would have thought it possible? With gasoline on its way to 99 cents a gallon, it’s back to gridlock as usual in the San Francisco Bay Area. The morning back up at the Bay Bridge extends to an hour again, and there are never any parking spaces at the BART station. Hummer drivers are no longer wearing their disguises. A lease on a Prius has gone for $550/month in July to only $200/month. United Airlines (UAUA) is now considered a model of management savvy, while those irresponsible dopes at Southwest Airlines (LUV) recklessly hedged three years worth of fuel consumption at $51/ barrel. That’s the way the markets are right now; hero one moment, goat the next.

3 ) If you think the 77% collapse in crude is a big move, look at it in Euros and the yen. Texas tea denominated in Euros has plunged 79% since July, and a staggering 87% against the yen. Crude has dropped from €238/barrel to €45/barrel, and from ¥16,600/barrel to ¥2,870/barrel.

4 ) The Federal Reserve says that the net worth of Americans has shriveled by $7 trillion in the past year. According to Zillow.com, a residential real estate website, the value of US housing stock alone has dropped by $1.9 trillion in the first three quarters of 2008. One out of seven mortgages is now under water.

5 ) With the Fed now committed to unlimited buying of Fannie Mae and Freddie Mac long dated paper, interest rates on conventional 30 years mortgages have suddenly hit an all time low of 5.17%, and are almost certain to drop below 4% quickly. This is consistent with the Japanese experience, which saw mortgages drop to 3.5% with the discount rate at zero at the bottom of the Japanese deflation in the late nineties. The no brainer for consumers here is to refinance and lock in 30 year fixed rates when we hit the 3% handle, if they can, because we will see 12% mortgage rates after inflation rears its ugly head.

6 ) New York’s serendipitous governor David Paterson is struggling with the decision of who to appoint to fill Hillary Clinton’s vacated Senate seat. President John F. Kennedy’s daughter Caroline Kennedy is the emotional favorite, but is too inexperienced. New York State Attorney General Andrew Cuomo has paid his dues, but doesn’t inspire the masses. Want to hear an outlier? Put underemployed Bill Clinton back to work! Everything else bizarre has happened this year, so why not? You heard it here first.

7 ) Senior management at Credit Suisse was offered the choice of a fruit cake or an illiquid collateralized debt obligation derivative for a Christmas bonus. They ran out of fruit cakes in the first hour. Really!

8 ) Traders have noticed a fascinating correlation in the markets. Whenever President elect Obama speaks, stocks rally. When President Bush or Treasury Secretary Paulson speak, they dump. What are the markets trying to tell us? When Bush does speak, he has the expression of a naughty, recalcitrant schoolboy who has been caught and is awaiting punishment.

QUOTE OF THE DAY

“The depression is over,” said President Herbert Hoover in May, 1930. It still had eight more years to run.

This is not a solicitation to buy or sell securities.

If you enjoyed this post, make sure you subscribe to my RSS feed!