This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, August 17, 2009

Real estate questions haunt economy

The last few weeks the markets have seen more questions than answers. Among the potentially most horrific questions is whether there will be a second downdraft in real estate. After everything that happened last year, real estate hasn’t exactly been an industry cast in the most positive light, but it is still a significant portion of the U.S. economy.

Lately there have been some big development projects that were started before the collapse that are nearing completion. And buyers who put down deposits in prefabrication stages are walking away from their deposits at an alarming rate. A good number have done the math and figured out that it’s cheaper for them to forfeit their deposit than to actually take possession of their units and try to flip them.

I heard about one company who recently got certificates of occupancy for finished projects in both New Jersey and South Florida. Immediately, prefab buyers walked away from both, leaving buildings totally vacant. The developer’s solution is to offer these condos at a two-for-one rate — buy a home in New Jersey, get the vacation spot in Florida for free!

Of course, residential real estate is only half the puzzle, and lately it’s probably been the better half. Inventory is finally starting to be absorbed, albeit at deep discounts. These discounts will ultimately have a negative effect on county tax receipts, which trickles down through funding for schools and other local projects.

But don’t forget about commercial real estate. Attempting to cut costs, many big corporations are trying to consolidate their real estate portfolios. Cited in a Wall Street Journal article Wednesday, JPMorgan is one such company trying to cut down on the overhead that comes along with real estate (Feeling Roomy, J.P. Morgan Shops Its Space).

Another sector of the market that is seeing its recent hope quickly fade is energy. After a relatively weak summer season that ended early due to lack of travel, the outlook for crude oil isn’t too good. Already OPEC is beginning to report inventory creeping back up, and lately the price has been sliding.

Aside from oil, there’s electricity, which was featured on the cover of Wednesday’s Wall Street Journal under the headline “Electricity Prices Plummet.” This is yet another HORRIBLE sign for the economy when electricity demand falls. This usually indicates that manufacturing plants, who are major consumers of electricity, aren’t running as much.

All of these signs should signal investors that, regardless of whether the market has bottomed, there will be no quick recovery for U.S. economy. That’s the story the economic numbers are telling, and it’s being backed up by the stock market, which doesn’t appear to be anticipating a major turnaround. In fact, the perception seems to be that the future of manufacturing in this country is remains questionable at best.

Of course, the financial industry isn’t exactly insulated from turmoil in the economy. Consider, for a moment, the world a broker lives in. The last twelve months have seen the death of Lehman Brothers and its partial-absorption into Barclays Capital, the sale of Bear Stearns to JPMorgan in an overnight deal, and the sale of Merrill Lynch to Bank of America, and many other deals.

It should come has no surprise that big brokerage houses are having trouble servicing clients because there’s so much turmoil within the companies. After all, most brokers, at least in a corporate setting, care far more about own jobs than their customers. With all the unrest within the major firms, smaller investment firms, where brokers are more independent are flourishing lately. With greater job security, brokers at these firms have much more ability, and inclination, to dedicate time and effort to doing what they do best — helping clients.

Back to the broader market, another big surprise this week is that the Fed remains the biggest buyer of Treasury bonds. Thankfully, at least someone is buying. With the Cash for Clunkers program expanding through additional funding and “rain-checks” and healthcare reform looking likely to be pushed through Congress, despite the public outcry, the big question is how the government intends to fund all its promises.

If there is anything positive that can be said about everything going on in Washington, it’s that that it seems to have finally woken the long-silent majority. And it’s about time the American people started caring. As much as our country is touted as the greatest country on Earth, with liberties and freedom that can’t be matched, for far too long we have seen far too much of the one thing worse than tyranny: apathy.

At this point it may be too late to make much difference on healthcare, so let’s assume that it’s going to pass. With a new mountain of expenses and tax receipts down, how can the government possibly come up with the funding?

The most likely solution, higher tax rates (a high probability) will only hurt our economy. Remember Reaganomics? Among other things, Reagan lowered the top income tax rate from 70 percent, where it had been since Kennedy, to 28 percent by the time he left office.

Contrarily, Obama has been quoted recently as saying that a tax hike on America’s middle class, the very people that got him elected, isn’t off the table. Talk about biting the hand that feeds you.

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