Archive for June, 2008

I think that we’d all agree that the last couple of weeks have been brutal ones for our various markets: the stock market closed Friday at 2004 levels, Oil is at an all-time high, and the real estate market here in Michigan continues to plunge to new lows.

And all I keep hearing is doom and gloom from the chicken-littles here. And it’s not just the media that’s perpetuating and worse yet – AMPLIFYING these problems – it’s people too young to remember what a recession looks like and those that are old enough to remember but simply choose not to.

And I have to say that I’m tired of it. Sick and tired, as my folks used to say. From the Newsweek cover that shouted about the Post-American world to the young kid working at his first job in Downtown Detroit that I argued with online for a couple of days because he was wailing that Michigan “is coming to an end”. What a bunch of crap.

I had been doing some research to compare this economic downturn with the one that we lived through in the 70’s. My plan involved coming up with irrefutable evidence and a brilliantly structured logical argument that the 70’s were much worse than what we’re facing today, and by the sheer brilliance of my argument thousands would be convinced and start to think differently.

Then I came to my senses.

I realized that too many of the doomsayers are so caught up in their own beliefs that not even my most well researched and written factual arguments could convince them otherwise.

So I said screw it. Because I happened to find something that succinctly delivered the message that I have been trying to get out for months. It’s an ad for Harley-Davidson.

And the message? Fear Sucks. This area WILL come back, sooner than everyone thinks and stronger than it was before. It always has.

I thought that this was appropriate for the week of July 4^th.

The text says:

We Don’t Do Fear.

Over the last 105 years in the saddle, we’ve seen wars, conflicts, depression, recession, resistance, and revolutions. We’ve watched a thousand hand-wringing pundits disappear in our rear-view mirror. But every time, this country has come out stronger than before. Because chrome and asphalt put distance between you and whatever the world can throw at you. Freedom and wind outlast hard times. And the rumble of an engine drowns out all the spin on the evening news. If 105 years have proved one thing, it’s that fear sucks and doesn’t last long.

So screw it. Let’s ride.

Captain Obvious reporting. I was reading the Wall Street Journal yesterday and saw how bad things are right now in terms of available returns on investment.

You can tell the bad news by just reading the headlines and some of the charts:

• Steep Fall for High-Flyers  (China and India stock markets are down over 50%)
• Even Defensive Names Take Hits  (Merck and Pfizer at multi-year lows)
• The Dow is down 10.7% this year and 11.7% vs one year ago.

How about some Consumer-type Rates of Return:

• Money Market Accounts (average):       2.41%
• Five year CD:                                       3.85%

And the kicker – take a look at the average annual Return on Investment for the major stock indexes over the last three years:

• DOW:                3.7%
• Nasdaq:            4.8%
• S&P 500:           2.7%
• Russell 2000      4.2%

Now think about what happens to these anemic returns when you consider the impact of  inflation, which, according the Wall Street Journal is now 4.2%.

How many opportunities are there to actually break even right now much less make money?? 

By the looks of these numbers, there aren’t many. If you follow the crowd and “conventional wisdom”.

But now let me run some other numbers by you:

Scenario #1:
Total Cash Investment:            $14,000
Annual Cash Return:                $3,529
Annual Cash ROI:                      25%

Scenario #2:
Total Cash Investment:            $70,000
Annual Cash Return:                 $5,873
Annual Cash ROI:                      8.4%

So what are these investments? Hedge funds? Private equity? Made up case studies? Wishful thinking? MLM?

No. Real estate.

Both of these are examples of actual returns on properties that I own. Boring, unsexy, single family rental homes. And the best part is – you can invest your IRA savings in real estate.

So how would those returns look growing tax-free in your retirement account?

So stop following the crowd and start doing the opposite of what they do. That’s where the money always is.

If Scenario 1 caught your eye and you want to know more, I just launched a special free coaching program to show you how it’s done. You can see an overview here: http://cashflowmercenary.com/cash-flow-coaching/

If Scenario 2 is more your speed, then take a look at my Silver, Gold and Platinum programs here: http://greatlakesinvestmentfund.com/

To your higher returns . . . . .

Thomson financial published a good article** on this this morning. Commercial real estate is (and has been) dead here in southeastern Michigan now for a while, except for apartments, which keep going strong. I’m seeing low vacancies, strong rental demand, and healthy rents. This combined with fantastic cap rates and upside potential make this a great time to own apartment buildings here – if you can get them financed or buy them on a land contract. (You can read more about my financing experience in my Apartment Quest series). Here’s the article:

Thomson Financial News
Slowdown, credit crunch now hurting commercial real estate
06.18.08, 11:15 AM ET

WASHINGTON (Thomson Financial) – The economic slowdown and the credit crunch are beginning to cause significant damage to the commercial real estate business, the National Association of Realtors (NAR) said in a report Wednesday.

Until recently, the commercial side of the business had been steady in contrast to the housing collapse. Now, ‘tight credit availability has significantly slowed the volume of commercial real estate transactions,’ said Patricia Nooney of the Realtors Commercial Alliance Committee.

Investment in commercial real estate has fallen dramatically to $48.2 billion in the first four months of 2008, down 69.5 percent from the $157.8 billion during the same period in 2007 when credit was easily available.

Also, vacancy rates are rising and rent gains are slowing according to the report.

NAR chief economist Lawrence Yun said: ‘Slow economic growth is lowering demand for commercial space, mostly in the office and industrial sectors.’

One bright spot in the picture is that because of the decline of the dollar, there has been growing interest among foreign investors in US properties.

**Thanks to my colleague Bob Woods for telling me about the article. He’s at http://blog.sibdu.com/

Call it blinding flash of the obvious number, what? 87 or 88 for me at least? But after spending the last 25 years or so always looking out toward the future, I figured out a couple of weeks ago that the journey is really the thing.

Those of you that have already figured that out are wondering what the big deal is and why I’m writing about it.

Those that haven’t figured it out are thinking that it’s silly and that it’s not worth writing about.

But it is worth it.

The last couple of weeks have been pretty interesting and a lot of fun. I attended all the kids sporting events that didn’t have a time conflict. I hung out with the kids after work and helped with homework and projects, heard all the stories about the classrooms, the lunchroom, and the playground. We even caught a couple of episodes of Star Trek Voyager before dinner.

I did all of this instead of running into my home office after work and burying myself  in my business like I usually did.

And the funny thing was – everything still got done for the business, and I had a blast with the kids.

Now I’m looking to outsource more work for the business to get more time back.

This whole point of doing this got driven home to me last Saturday during a canoe trip on the Au Sable during our annual cub scout and family camping trip.

We had a serious canoe accident with two of our kids that could have been catastrophic. Only God’s grace and quick thinking prevented a truly horrible result, and for the life of me I still don’t know how we avoided the catastrophic result. But we did, and both of them came through it fine. Shaken up, but fine.

Now as a bare-knuckle Type-A personality I’m really not much of a philosopher, but this experience last weekend was an eye-opener to say the least.

All I can say is this – believe me when I tell you that the Journey really is the thing.

When I first began this blog ten months or so ago I began writing about the irresponsible action that the federal reserve was taking to prop up the American stock markets.

My point was that in the past, when the fed acted to impact the economy in one way or another they had always targeted some economic metric like inflation or interest rates, and their actions were not targeted to impact any one group over another, but were instead intended to have a pretty direct but also broad-reaching impact on the overall economy and thus benefit everyone.

What was unusual about their actions last fall was that when they started to act to prop up an over-bought stock market, they began to act in the best interests of a small subset of American citizens – those with brokerage and retirement accounts.

What’s more, as I argued at that time, their actions were actually detrimental to the rest of the population because it would cause a rampant increase in inflation, and among other things, a severely devalued currency.

But they decided to take a populist approach and act anyway, and ignore the fact that there so many other variables impacting the stock market that there was no way that they could be sure that their actions would work, while at the same time knowing that the downside risk was almost guaranteed.

So here we are 10 months later. The federal reserve has dumped hundreds of billions of dollars into the economy. To what end? 

• When they started to act the DOW was just over 14,000. As I write this it’s just over 12000.
•  At that time the dollar was worth 0.75 Euro. As I write this it’s down to 0.64.
•  The US Dollar is now at risk of being replaced as the international currency of trade.
• Inflation is up sharply – oil and food prices have doubled (although part of these price increase are due to our devalued currency).
• Real estate markets nationally are still a disaster.

All for naught. Their actions have failed. Miserably.

Unfortunately this isn’t the end of the story. No. There is a price to pay for the fed’s irresponsible behavior last fall.

And we’re starting to see the impact right now.

Interest rates are going up. And they’re going to go up fast. They’re already up to their highest point in the last five months, and the brilliant fed chairman, after all of the emergency rate cuts over the last 10 months, now says OOOOPS!. Inflation is back so we’re going to have to raise interest rates further – and FAST.

And this will mean the death of real estate.

We had an uptick in existing home sales in April, a large part of which was driven by the extremely low interest rates that resulted from all of the rate cuts. But the party is already over. I’ve been chasing an exceptionally clean and profitable commercial real estate deal since April, and every time I turn around the interest rate has gone up.

Significantly.

When I started the financing process I was looking at a rate of about 6.2%. Last Friday it had jumped to 7.4%, which put us back at the negotiating table and may yet kill the deal. And my mortgage broker says they’re still trending higher.

These real estate markets can’t bear another burden like this.

For the last year I have been bullish on a relatively short 3-4 year time horizon for the return of the first time homebuyer market. If the fed ratchets rates back up it will be anyone’s guess as to how long it might really take.