American recession and global impact

Global unemployment :

Retail Business

Positives :

* Clothing - firming up up 2.3% three of the past four months.
• Electronics — rising 1.1% but that followed a 1.0% decline in July.
• Food/beverage stores had their best sales month, up 0.5%, since January.
• Drug stores also had their best month since March — up 0.4% last month and up in three of the past four months.
• Sports/music/book stores - a huge 2.3% run-up last month.
• Department stores - posted a 1.6% Month to Month surge

Negatives :

• Restaurants — up 0.3% and this followed two months of decline.
• Furniture stores - 0.2% sales loss — sales have been down now for six months running.
• Building materials - a huge 1.2% decline, the third large falloff in a row.

Consumer hunkering down further

As part of the de-leveraging process, household saving rate must increase; However, every ONE percent increase of saving consequently translates to roughly FIVE percent decline in consumer spendings.

1% Saving ----------> 5% retail sale decline -----------> Store closings

So far, the government is willing to pump enormous amount of liquidity and credits to bail out the bursting of real estate and financial bubbles. The end result will be a ballooning federal budget deficit. We are not curing those bubbles, we are transferring private debts to public liability for all citizens to shoulder.

On the other hand, what choices do we have that would avoid more pains and hard ship ?

Are we willing to risk the prospects of a depression to flush out all of financial excesses ?

Old Math :

Appreciation = income

Credit = Wealth

Spending = Growth

New Math :

Asset = Risk

Credit = Liability

Spending = Necessity

Joe Long

Labor Day week-end 2009

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The twin busting of commercial real estate and Regional Banks

The number of bank closures this year continues to grow at an alarmly rate as the fallout of the recession taking heavy toll on local financial institutions. Record banks failure in the first half of 2009. FDIC is rumored to be running short on liquidity/cash to cover so many bailouts.

Many of these regional banks have invested heavily in the commercial real estate market with much higher rates of return ( riskier of course ) during the boom times. Other big players in this CRE market also include insurance companies, private equity, and REITS.

After three years of steep slump beginning with residential mortgage, then now commercial mortgages are the next monsters to crash with many regional banks holding the (empty) bag.

Steady flow of trophy properties in default are being paraded out :

* The St. Regis Monarch Beach hotel, an Orange County luxury resort in Dana Point

* The Four Seasons Hotel in San Francisco.

* The Stanford Court Hotel, also in San Francisco.

* Sunstone Hotel Investors's 366-room Embassy Suites Chicago,

* 284-room Marriott Del Mar in San Diego, or the 299-room Ontario Airport Marriott.

* The 469-room Marriott in downtown L.A.

* The W hotel in San Diego.

At the moment most CRE lenders have been reluctant to realize/recognize these losses on their book yet, praying for some kind of recovery in consumer spendings, and probably more help from Obama administration.

The dearth of CRE activities :

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Time is NOT right to invest in real estate

10 Reasons why time is NOT RIGHT to buy real estate :

1.Declining Values : While we might see signs of market stabilization in some previously devastated markets such as San Diego. A flat line recovery might be at best one could hope for, another zig-zag double-dipping volatility could still be possible. Lenders are holding huge number of foreclosed properties, concocting the next scheme to dump those units onto the market.

2. High foreclosure rates : the housing bubble was busted two years ago with the crash of sub-prime mortgages. However, more and more prime mortgages, borrowers with excellent credit history, are being foreclosed because of negative equity after 5 years of precipitous market decline. It is called strategic voluntary foreclosures when home-owners, with amble ability to pay, simply walk away to unload a debt investment burden.

3.High unemployment rates : once a home-owner losses his/her job, it is only a matter of time that home-owner will become unable to meet his/her mortgage obligation, a time delay effect. Un-employment both increases housing supplies and decreases housing demands. Pools of potential buyers are being reduced.

4.Credit squeeze : Banks continue to maintain extremely tougher standard for mortgage qualifications, borrowers do not have many choices of lenders any more. Many buyers have to resort to raise down-payment, or even all cash deal to complete transaction. Congress is drafting new legislature to permanently restrict risky loans and strengthen financial verification. Speculative investments could only be carried out by big private equity concerns.

5.Low interest rate : the current housing market now can be characterized as declining price at low interest rate. What will happen when easy money stops ? When the Fed ceases accommodating policy to stimulate the economy. Higher interest rate must be instituted, which means lower valuation of all assets. The current ballooning federal deficit is a harbinger for tighter money policy by the Federal Reserve to curb future inflation expectation. Interest rate has only one way to move, which is up. Another housing bubble is out of the question, or another housing crash is more likely.

6.Concentrated market : low-end markets show sign of brisk pace of sale, due to lower price range, pinned-up demands and investment speculators. These market forces are temporary ( all cash deal can not last for ever ), and no move-up advancement ( Sale with no net profit for seller to transfer to the next bigger house ). A growing perception of positive cash flow for rental investment might soon evaporate with local property tax increases, high transaction costs, high mortgage costs, and high maintenance expenses.

7.Baby boomers are retiring or being forced to retire in drove. One third of them have zero savings to count on. The only source of money is equity in the house ( whatever remains ), so selling is the only choice. Move-down is an emerging trend for the future. They become net house sellers, moving to smaller adult community units in the sun belt states.

8.Jobless recovery : the most optimistic prognoses for the current economic calamity is an anemic stabilization/stagflation for the next 3 to 5 years. Frugality is the new mantra as consumers try to reduce heavy debt burden by saving more, re-discovering joy of living within one's means. Neighbors do not need to compete for the biggest plasma TV, or the latest model car. Too many cars, too many houses, too many TVs. Over-capacity of everything, excess inventory of merchandise. Do we make anything that could be sold to the world ? or do we still make any thing ? or is everything made in China ?

9.Center of capitalism, used to be on Wall Street, is moving to Washington DC. Greed and fear used to be the human dynamics for stock market , now political fund raising and lobbyists dominate agenda of the day. Entrepreneurship is now deemed too risky, greed is a four letter word. Stimulus programs are the new code word for pork spending, for political horse trading.

10.According to Federal Reserve 2009 Flow of Funds Report, household net worth is now off $14 Trillion from the peak in 2007. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages).

I want to repeat that we have lost $14 trillion dollars in the past 2 years. That money would no longer be available for spending, or investment. It is an astronomical amount of wealth destruction.

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Cash for Clunkers : A quack or a cure ?

Was it a boondoggle quack or a quick cure for our economic malaise ?

Rarely has such a red-taped-ridden federal program received with so much circus-like attention and headline.

One thing for sure is people stampeded into showrooms to trade in an old beater for a check of $3,500 or $4,500 to buy a new and more fuel-efficient car. They flocked in car dealership with strong motivation, ready to deal, after months of vanishing traffic and lackluster sales. A noticeable change in consumer psychology, from fear and uncertainty to opportunity and urgency.

Reducing current inventory to clear the way for new 2010 models, and also generating potential interest and awareness of new products are important for dealers.

Junking out old clunkers should also help used car market as well, since the program essentially eliminates about half a million junkers from old car lots.

A good portion of buyers are college-age with old beat-up gas-guzzler, given to them by parents, now trading in for a smaller and more efficient car.

One particular car-maker that benefits handsomely should be Hyundai Auto. This Korean company was, last year in the middle of the crisis, first to offer customer assurance (a program in which customers could turn a car back into the dealer if they lost their job with no hurt to their credit rating), the marketing champaign was a spectacular success, with huge internet traffic and inquiry. Sales Hyundai continued to climb as the economy spiraled down. It is also important to note that top selling carmaker Toyota will receive about 40% of the fund.

The costs of the program should total around 3 billion dollars, which is just a drop in a bucket, comparing to 780 billion dollar bank bailout package.

The program was intended to reverse waning and pessimistic sentiment. It is now up to the car dealers to fulfill consumer expectations with attractive products. It is a real shot in the arm for not only auto industry, but also for general economy with more optimistic consumer confidence. A surge of interest could spread into other segments and industries, we just have to wait three more months to gage the roll-over effects.

Top selling cars under the program : Toyota Corolla, Ford Focus, Honda Civic, Toyota Prius, Toyota Camry, Hyundai Elantra, Ford Escape,Dodge Caliber, Honda Fit and the Chevrolet Cobalt

Top 10 Trade-ins as clunkers :

1. Ford Explorer (four-wheel drive)

2. Ford F-150 pickup (two-wheel drive)

3. Jeep Grand Cherokee (four-wheel drive)

4. Jeep Cherokee (four-wheel drive)

5. Dodge Caravan/Grand Caravan (two-wheel drive)

6. Ford Explorer (two-wheel drive)

7. Chevrolet Blazer (four-wheel drive)

8. Ford F-150 pickup (four-wheel drive)

9. Chevrolet C1500 pickup (two-wheel drive)

10. Ford Windstar (four-wheel drive)