MCF Market Watch
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In the interest of keeping our clientele educated and well-informed in a trying economy, MCF issues bi-weekly market assessments.
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Thursday, April 11, 2013
The Four Clients, Which Are You?
Saturday, March 16, 2013
Is It Time To Break Up The Big Banks?
There is a growing,
bi-partisan movement on Capitol Hill to pass legislation to break up the big
banks. When was the last time that
Democrats and Republicans worked in a bi-partisan fashion on anything? But I digress.
Former Federal Reserve
Chairman Alan Greenspan said recently, “if push comes to shove… I would be in
favor breaking up the banks.”
Conservative columnist George Will recently wrote a persuasive editorial
urging conservatives to support legislation proposed by Ohio U.S. Senator
Sherrod Brown (D) to break up the big banks.
Before we look at this proposed legislation, let’s look at the facts.
How many financial institutions are there in the U.S? As of 2010, there were about 7,700
financial institutions with insured deposits from the Federal Deposit Insurance
Corporation (FDIC).
How are assets distributed among these 7,700 banks? The top 12 banks currently hold 69
percent of the total assets of the banking industry. Community banks, which total about 5,500,
have about 12 percent of the banking industry’s assets.
What are the problems associated with large financial institutions?
- They are too big to fail. We cannot allow them to fail because of the negative consequences to our economy and to the world’s banking community. So this means that we socialize the losses (taxpayers pay the bill) but when they are profitable, as they are now, the banks are allowed to keep their full share of the profits.
- They are too big to manage and too complex to regulate. The recent bank scandals – LIBOR manipulation, money laundering, robo-signing, the “London Whale” – prove the megabanks are out of control. Though there are a lot of good things in Dodd-Frank, it can only do so much to regulate bad behavior in the banking industry.
- They are given preferential treatment. The 20 largest banks pay between 50 to 80 basis points less when borrowing from The Federal Reserve than what community banks must pay.
- They are too big to prosecute. Attorney General Holder stated in recent
Senate testimony that “some of these institutions are so large that it becomes
difficult for us to prosecute them.” So
in essence, they are too big to jail. To
prove this fact, no one all Wall Street was found guilty on any charges stemming
from the 2008 financial meltdown.
- It would provide sensible limits on the amount of debt that a single financial institution could hold. No bank could have more debt than 2% of U.S. GDP; and no investment bank could have non-deposit liabilities exceeding 3% of GDP.
- Their funding would be required to come from more stable sources, with about $3 of deposits for every $1 in volatile non-deposit funding.
- Banks in excess of this limit would be given three years to comply by drawing up their own proposals to meet this requirement.
Now that the economy is improving and there are no immediate crises at hand, we need our legislators to push this bill through Congress on a bi-partisan basis for the president’s signature. This is something that all of us should want to have enacted. This is good legislation. Let’s do it!
Friday, March 8, 2013
Are we experiencing a stock market bubble?
The
Dow Jones Industrial Average closed today (March 8th) at another record all-time
high of 14,397.07. On the surface this seems like great news. At long last we are emerging from the Great
Recession of 2008. I read an article in
today’s Oregonian which stated that with the recent rise in home prices and the
robust increases in the stock market that most Americans have regained the net
worth they lost five years ago due to the collapse of the economy. Wouldn’t that be good news if it were
true? It makes me want to sing a round
of “Happy Days Are Here Again.”
The
question that is on my mind, and a lot of like minded people is, “Are we
experiencing a stock market bubble caused by The Fed’s quantitative easing
policy? Federal Reserve Chairman Ben
Bernanke says emphatically “no.” He
recently told the Senate Banking Committee that he "does not see much
evidence of an equity bubble." Yes,
stocks are high he says, but that’s because The Fed’s recent policies, which
have kept interest rates near zero since 2008, are working to spur
spending.
So
let’s begin with the facts. I think
there are three possible reasons for the stock market surge:
- First of all the economy is not as weak as we have been led to believe. We have seen modest growth in autos, housing and manufacturing activity. Today’s employment report shows improvement in the private sector employment resulting in a downward tick in unemployment to 7.7%. Not great but improving, nonetheless.
- With The Fed’s policy of keeping interest rates at near zero is making it impossible to get an honest return on bonds, savings accounts, money market funds or CDs. I believe investors are putting their money in equities because these other traditional forms of investment have been taken away from them.
- There is some evidence to suggest that investor confidence is surging because we have avoided the serious crises in Europe and the United States from imploding. The euro zone crisis and the fiscal cliff crisis in the U.S. have worked their way out and investors feel more confident that we will continue to somehow muddle through.
- Profit growth has been slowing. The growth rate in the S&P 500 has slowed from 6.0% last year and is projected to be 1.2% the first quarter of this year.
- The best long-term measure of value is the price-earnings ratio. Currently the PE ratio is at 22.9 which is 39% above its long term average. In other words stocks are significantly over priced. An old rule of thumb is when investors buy assets at above average valuations they will suffer below average future returns.
Friday, February 22, 2013
Sequestration – Will it be as devastating as predicted?
You’ve heard it from both
sides of the aisle – Nancy Pelosi, John McCain, President Obama, Mitch
McConnell – sequestration will be “devastating.” “We’ve got to avoid it, we’ve got to stop
it,” said John McCain. He is being
universally echoed with similar quotes by all of the Democrat leadership in
Congress. Let’s begin this discussion
with the facts.
What is sequestration? Sequestration
is a budget law that requires across the board spending cuts amounting to $1.2
trillion over 10 years or $109 billion per year.
How much will be cut in 2013? The
last minute fiscal cliff deal in early January included cuts of $24 billion for
2013, so in the remaining seven months of this fiscal year the government must
cut another $85 billion.
How much is the federal government’s budget for the current fiscal
year? $3.8 trillion
Where would the cuts come from?
Equal amounts would come from the Defense Department and discretionary
social spending. The Defense Department
makes up about one-quarter of the total federal budget; discretionary social
spending comprises about half of the total budget, and non-discretionary social
spending and the interest on the debt making up the balance.
So who will be most affected by the cuts? The cuts on a percentage basis would be
deepest in defense spending because it represents a quarter of the budget but
half of the cuts.
What programs won’t be cut?
Social security, Medicaid, the food stamp program and veteran’s benefits. Active duty personnel would also be
exempt. Interestingly, Medicare is not
exempt.
When does sequestration begin?
Officially it begins March 1st but in reality it will roll
out over a period of several weeks.
So those are the
facts. Now let’s look at what the impact
of these cuts in spending will have on our economy. The Congressional Budget Office predicts that
the sequestration cuts will reduce public- and private-sector employment by
750,000 jobs and will reduce our GDP by 0.5%.
In other words, our GDP, which is growing at about 2.0% right now, would
slow to about 1.5%. Depending on who you
listen to the list of programs that will be affected is long and deep
including:
- the Federal Aviation Administration,
- the National Parks,
- the Pentagon,
- Health and Human Services,
- Humanitarian Aid,
- Border Security,
- Education,
- Disaster Relief
- Law Enforcement
Sadly, there are very few politicians in Washington who are willing to make modest cuts in spending, and make no mistake about it, that is what $1.2 trillion is over 10 years. A cut of $85 billion in fiscal 2013 represents 2.3% of the total $3.8 trillion federal budget. Do you actually believe that a 2.3% cut in spending is going to be “devastating?” Have you had to make cuts in personal spending that have been much greater than this over the past several years? I certainly have.
The sequestration cuts are not perfect, they’re a blunt instrument to cut spending, rather than a deliberate plan that sets priorities, trims entitlements, and cuts other spending. It would be better to replace them with better cuts but the reality is that Washington does not have the will to make spending cuts. There is no political block in Washington that represents the constituency of the overburdened taxpayer. In contrast, there are thousands of lobbyists on Capitol Hill that visit our congressional representatives in order to make sure that they’re constituency, whatever that may be, is getting their fair share of the spending pie.
Don’t buy into the hysteria. The cuts will not be devastating. If the sequestration cuts actually happen, six months from now you’ll hardly notice.
Sources: Sequestration Q & A, Money Watch, by Jill Schlesinger, February 22, 2013; Sequestration: The Facts About the Policy, BeforeItsNews.com, February, 19, 2013; The GOP Divide Over Sequestration (and Everything Else), The Atlantic, by Molly Ball, February 15, 2013.
Saturday, February 9, 2013
Three Things to Consider When Choosing a Property Management Company
From
time to time investors ask me to refer property management companies to them. I’m glad to do it as one of the advantages of
being a commercial mortgage broker is that I come in contact with lots of
property management companies.
Years
ago, it seems like another lifetime, I was a property manager. I managed three Class A apartments totaling
over 500 units. I had 23 employees under
me. Being a property manager was the
longest three years of my life. I will
never do that again. So I have a lot of
respect for those property managers who do their jobs well. It requires a certain type of personality
that I frankly do not have.
In the
course of my work as a mortgage broker, I inspect lots of properties, talk with
a lot of on-site managers and get to review many different types of operating
statements. Over the years I’ve gotten
to know the good property management companies from those that are grossly incompetent. So what makes a good property management firm?
There
are lots of questions you could ask, however
I would focus my questioning on three broad categories:
How do you charge for your services? I’m aware of at least three different ways
that property management firms charge their clients:
1.
The most common is a property management fee
based of effective gross income. Is their
management fee competitive with what is being offered in the market?
2.
Sometimes property management companies will
charge you a hidden fee when using their maintenance personnel. This can happen when a property doesn’t have
a full time maintenance man and the management company’s maintenance man is
contracted out at an hourly rate whenever needed. Does the management company charge the owner
of the property an hourly rate equal to their cost of employing their
maintenance man or do they charge the property owner at an hourly rate that’s
well above what it actually costs the property management company to have this
person employed by them? Many times the
property management company is charging the property owner an hourly rate that
is well above what it’s costing them to have this employee on staff. If so, they are making money on you every
time a maintenance item is being fixed on your property. Just by looking at the Maintenance &
Repair costs I can usually tell which property management companies are
charging an excessive hourly rate for their maintenance personnel.
3.
Do they charge the owner of a property an asset
management fee? If so is the fee a
reasonable expense for the services rendered and again is it really a hidden
profit center for the property management company?
Are their operating statements easily
readable and disclose all important information? The quality of operating statements I see
varies widely from hand written to very detailed computer generated
reports. Income and expense items to
watch:
1.
Do the operating statements begin with gross
potential rent or do they begin with effective gross income? In other words do the statements show
vacancy, bad debt, and concessions? If
the statements do not show gross potential then owners can’t determine quickly
how much vacancy the property is experiencing.
2.
Do the operating statements show all payroll
expenses including free rent?
An
owner cannot make informed decisions on his property without having accurate
and detailed operating statements that show the “good, the bad and the ugly.”
Can I help select my on-site manager? No matter how good the property management
company is, the on-site manager has the most influence on a property’s
performance. And the only way to
determine the quality of an on-site manager is to observe how well they do
their job. I would focus on these issues:
1.
How is the property’s curb appeal? Is trash found lying on the grounds picked up
regularly? Are trash enclosures hidden
and well maintained so as not to be an eyesore?
Are flower beds weed free and attractive?
2.
How well do they stay on top of collecting
monthly rents? Some managers are passive
about collecting rents which over time will cause collection problems. Other managers promptly post notices and stay
on top of renters who pay slowly.
3.
How quickly do they get a unit ready to be
re-rented? In a tight rental market that we are in, every day a unit is waiting to be cleaned is money out of your pocket. Ask the manager what type of system she has for getting units market ready.
A good
on-site manager is worth their weight in gold and can have a significant impact
on the property’s cash flow. The old
adage, “You get what you inspect, instead of what you expect” is very true in
property management.
Choosing
a property management company and an on-site property manager in many instances
can make the difference between a property that does well and one that limps
along. Call me if you need a
recommendation.