Don Tishman's Real Estate Development and Investing Solutions

Let’s start December with good news   Nov. 29 (Bloomberg) — U.S. stocks staged the biggest weekly rally in more than 30 years.  Last year consumers spent an average of $890 Xmas shopping-let us see what this season will bring

*Based on your questions, let me add the following to the fact situation in my last edition, before we begin today’s blog- The three bedroom two bath house was originally sold for $400,000. After the purchaser defaulted on the mortgage payments, it took the Bank 18 months to foreclose and evict the occupants. By that time, the house was a wreck. The Bank decided to board up the broken windows and put this house on the market  ”as is”.   The City inspected the house telling the Bank that before this house could be occupied, the city would inspect after the building permit work was finished to determine if the house conformed to the present building code requirements.  You show the bank the recently obtained rental survey of the area. You want a loan based on a 5% vacancy factor and using 80% of the projected NOI.

HERE IS TODAY’S  EDITION OF THE BLOG- Who will be the users of our future development?

Let us examine figures from a revised 2004 study by Harvard’s Joint Center for Housing studies on new household projections: Revised Interim Joint Center Household Projections Based Upon 1.2 Million Annual Net Immigrants, This revision was made because the original projections did not allow for new immigrants.

Here are some typical figures. The annual total U.S. household growth for 2005-2006 was 1,430,953 , with 66.2% of the total being the share of minority groups. The figure for 2008-2009 is 1,457.625 with 67.1% as the minority share. The figure for 2010-2011 is 1,492,740 with 67.7% . The total new household formations increases between .5% to 1% each year, while the % of the total that is minority household growth steadily increases each year.  According to Appendix A of this study the largest number of household by age bracket for the non-hispanic white households was the over 75 age group. While for the minority groups the largest age bracket was 30-39.

A further breakdown is annual owner Household Growth. Here are some typical figures, 2005-06 is 1,253,196 with the minority share 49.3%, 2008-09 is 1,271,805 with the minority share 50.7%, and for 2010-11 is 1,266,739 with the minority share 51.5%.

The breakdown for Annual Renter Household Growth: for 2005-6 is for non-hispanic whites(NHW) a negative (-148,812), for minorities 326,569 ,the minority share is 183.7%, For 2008-9, for NHW is a negative (-148,107), for minorities 333,928, or a share of the growth of 179.7%. For 2010-11 for NHW is  -131,422 while the minorities are 357,423 or a share of the growth of 158.2%.

Because we are consultants for a large residential development in India, we had to throw out what we thought  a typical U.S. homebuyer in specific locations would both desire and need. Here again. we must start with a clean slate. Each minority group may be similar or very distinct.

 Unlike Feng Shui, in India Vaastu has a religious aspect in that much of the reasoning behind placements and architectural “prescriptions” is based within Hindu iconography. The heavens are represented on the Earth plane very precisely, with different directions being ruled by different gods or aspects of godhead. For example, a person who is unwell may benefit from an entrance placed in the North, which is the direction of healing as it is ruled by Soma, Lord of the Herbs. This ancient belief of “as above, so below” is utilized in Vaastu through a mandala. A mandala is a diagram which Vaastu practitioners consult to find the best way to design a building.  For instance, in our homes in India, the floor plans pursuant to Vaastu must include a prayer room. If we are in a part of the U.S. where many of our prospects were into Vaastu, we would include Vaastu features, but also design these features in such a way that they would have necessary  alternative uses for others. Good market research will tell you what your prospects desire and what they need. 

During this housing debacle, the pressure on cash starved owners has forced them to reduce sale prices and in some cases below their costs. Despite this, there has not been a corresponding reduction in land prices. Units that will be built in ensuing years must be at lower prices than those offered in 2005. In order for these homes to be financed, the developers must have at least a 15% profit margin. How will these units be offered at lower prices? Today many building materials are a record lows. Copper and lumber to name a typical few. When the building cycle returns to normal- say 1,5 Million homes a year- the prices will return. With the tight immigration rules, the labor pool will be reduced. This will not reduce the labor costs.   Today, the prevalent language on many construction jobs is not English, but Spanish.  

The only answer I see is making the units more compact, and denser. One exciting concept is using a room for more than one function. Imagine a studio apartment with a Murphy bed that comes out of the wall at night. During the balance of the day, the room is a combination, living room, dining room, and work place.  In today’s houses, this has meant a bedroom, living room, dining area and den.

Twenty  years ago, I worked with a very innovative Bay Area architect. He designed a 13 foot wide townhouse for San Francisco that contained  2 bedrooms 2 baths, with a loft . The total unit size was 750 square feet. The units had 10 foot ceilings and great windows.  This was in the late 1980′s when the market had disappeared. Few sales were closing. In spite of these conditions, these units sold out. At the same a good friend of mine told me he was going to convert a San Francisco abandoned warehouse to New York style lofts. I told him he was nuts. He sold all 82 units on the first day they were first offered. This too was in this terrible market. Valid innovation is a great attractor of buyers.!!

While engineering spends a fortune on research, architecture spends little or nothing on research. Strange since residential construction is the largest part of the Gross National Product after health care.  Maybe that is because 90% of all homes are NOT designed by architects. That is why an individual developer has a great advantage over large corporations. The listed companies are under great pressure to produce quarterly profits. Their formula for success is build the same unit where ever they go with little or no alternates for the buyer. There is no room in their tight budgets for research and development. 

Put your thinking cap on!!!

Remember-Every crisis has a silver lining!!!

YESTERDAY, I showed  Harvard’s Joint Committee on Housing Studies Outlook for future housing opportunities. The problem is that the only federal “affordable housing” program, low income housing tax credits, is not working today.

Why? The principal buyers of these tax credits were banks who offset their income tax obligations with these tax credits and also received  “THE COMMUNITY REINVESTMENT ACT” (CRA) credits. When banks apply for new branches, they have to show whether they have been making loans in lower income areas. The CRA credits are proof of this. Unfortunately, today banks are losing money, so there is no need for tax credits and they are closing branches instead of opening new branches. With the banks dropping out of the bidding for tax credits, the price of a $1 of tax credits went from $0.95 to $0.67 . This 30% reduction in price kills most proposed tax credit developments. There is a solution I will explain later. First let us get all the immediate bad reports out of the way.

Hanley-Wood is the leading publisher of market intelligence of housing markets. Here is an excerpt form their President’s November news letter:

“some 1.6 million Americans will lose their houses this year, and almost half of those foreclosure filings occurred in the third quarter, during which time the rate of foreclosures was 75 percent higher than it was during the same period last year. To make matters worse, Mark Zandi, chief economist for Moody’s Economy.com, estimates that as many as 2 million more Americans will lose their houses next year. And, to make matters even worse, the Center for Responsible Lending calculates that more than 40 million homes will lose value because they’re in neighborhoods where foreclosures are clustered.

It’s that sort of housing price deflation that paralyzes all but the bravest home buyers. Why buy now, most others figure, after they read reports of overall housing prices declining by as much as 20 percent this year. Those same reports generally anticipate an additional decline of 10 to 20 percent next year, and foreclosures will be a big factor in those further declines.

In other words, foreclosures either cause or act as a powerful catalyst to deflation. Deflation in turn flattens housing demand. With demand decreasing, supply—that is, housing starts—has nowhere to go but down.

The housing industry is now waiting in line behind the auto industry for help from Washington. The nation’s biggest builders, along with many building product manufacturers, are calling for a housing rescue plan that would try to trigger housing activity by offering home buyers a big tax credit. (For more information on the builders’ plan, go to fixhousingfirst.com.) That might work to drive demand; a similar plan did work in the 1970s. But foreclosures and deflation weren’t problems then. Now they are. So, if housing gets a handout (and frankly I hope it does), I think a plan to stem the tide of foreclosures would pack more bang for the buck and bring relief not only to the housing industry but to 2 million or more American households in danger of losing their homes.”

There you have the problems facing the owners of American homes and the difficulties facing those who need a new place to live. Add to this that International Energy Commission states the gas prices will rise again, eventually oil will be over $200 per barrel. This translates to over $5 and $6 per gallon for gas.

How can you contribute to solving these crucial housing problems and at the same time  make this an opportunity for you?

The million of families that are  being forced out of their homes will have bad credit ratings and few assets to purchase another home. What can they do?  They will need to rent. What? The national vacancy rate for apartments for October, 2008 according to Bloomberg.com was 6% while the average rent was $1053. This is a vacancy rate of almost full occupancy.  So the present apartment inventory will not help many of these families. Besides most need larger than 2 bedroom apartments.  Their present alternative is to rent a vacant foreclosed home.  The problem here is that many of these vacant homes have been vandalized and in some cases cannibalized. Here is the FIRST new opportunity- buying foreclosed houses that need work before they can be occupied. 

 Before you jump in with both feet -first consider several caveats. -how much rent can you reasonably expect? Look back in my previous blogs and find the one that deals with determining the rents you can expect by doing a quick market study.  This is one of the key basis for what you can spend to convert this wrecked house to habitable home. The other is the cost of this conversion. This assumes that much of the work will be done by you or your spouse.  A little sweat for a big pay day. The next hurdle is to show the bank your figures that include what it might cost if others do the work. Remember, with gas prices due to rise again, choose your location carefully.  The nearer to employment centers the better.

Here is an example of an opportunity>

The house you are considering is a three bedroom, 2 bath with a one car garage. A conservative estimate of the rent is $1,700 per month rent.  Annual rent-$20,400; vacancy 5%-$1020, taxes, insurance- $2,430. Tenant pays everything else- Net Operating Income(NOI)  -$16,950. Assume that you get a loan that uses 80% of the NOI at 7.25% for 30 years. This could be a loan for about $208,000.

If the rehab will cost $10,000-$4000 for parts and the balance,$6,000 for labor. You pay $200,00 for the wrecked house. If your total cost is $210,000 and you get a 90% loan of $189,000- the cash flow each month is $131. If you do the labor, your cash outlay is $15,000 . This would give you at least a 10% return on your investment each year.  This would only be an attractive deal if:   the rent goes up at least 3.5 % per year and in 5 years you sell for at least $250,000. This means if you take annual depreciation equal to the cash flow, the cash flow is tax free until you sell when you pay capital gain tax.  After you sell and have paid capital gain tax, you receive $53,861. Your internal rate of return is 48% per year.

Before we gone on to other opportunities. Go over the foregoing-any questions? send them to me

Today we had some relief that may stop the market from being further eroded by more foreclosures

WASHINGTON (Reuters) – The U.S. Federal Reserve, in another massive life-support

intervention for the U.S. financial system, on Tuesday announced a $600 billion program to buy

mortgage-related debt and securities and a $200 billion facility to buy consumer debt securities.

The U.S. central bank said it would buy up to $100 billion in debt issued by Fannie Mae, Freddie

Mac, and the Federal Home Loan Banks, the government-sponsored mortgage finance

enterprises.

The Fed also said it would buy up to $500 billion in mortgage-backed securities backed by

Fannie Mae, Freddie Mac, and Ginnie Mae.

After Friday’s huge upbeat stock market, on Saturday Barack Obama told of his plans for a program that will create 2.5 million jobs by 2011. I am anxious to see the effect that these Obama announcements will have on confidence of Americans about their future and,more specifically, how the “wizards of Wall Street” would react. The readings of the stock market were very positive after the CitiCorp rescue on Sunday. The market continued to rise after President Elect Obama’s Monday morning press conference. In fact , together, Friday and today market performances were the biggest two day rally in 21 years. Soon we will know if those on Main Street believe Hope is on the way

The very prestigious Wharton Business School at the University of Pennsylvania publishes a quarterly WHARTON REAL ESTATE REVIEW. The Fall 2008 edition has a very thought provoking article called “Is This the Worst Ever?  the executive summary of this article states:

“Every time the U.S. economy slows, pundits claim that it is the worst recession ever and will drag on much longer than past recessions.  These claims are frequently made when it is not even a recession, or after the recession is over and the economy is in the early stages of a recovery. The “recession” of 2008 is no different. By comparing 15 macroeconomic indicators in 2008 to the same metrics during the previous six recessions, the authors show that the Great Capital Strike of 2008 is so far the mildest economic downturn of the last 45 years.”

I blinked after reading this incredulous summary. We have developments in several different areas. All have one thing in common- business is terrible!! Most banks commercial real estate lending operations are refusing to even look at new business.  I  decided to read past this article’s summary.

First, I learned that the definition of recession had changed from “two consecutive quarters of negative real GDP growth.” The current definition of the National Bureau of Economic Research is:

“A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.  A recession begins just after the economy reaches its trough.  Between trough and peak, the economy is in an expansion.  Expansion is in the normal state of the economy; most recessions are brief and are rare in recent decades.”

The authors used the current definition to cite six recessions in the last forty years. The authors then listed the key features of the six recessions using these 15 features: The first was duration of the recession, then:

1. change in GDP

2. change in employment 

3. change in real household net worth

4. change in auto sales

5. change in industrial output

6. change in retail sales

7. change in construction contracts for C&I buildings

8. Percent real return for S&P 500

9. change in real median home price

10. change in real after tax profit

11. lowest consumer confidence level(monthly)

12. change in housing starts

13. highest monthly inflation rate

14. highest monthly unemployment rate

Foe example ,the authors pointed out that while  the 2008 GDP grew 1.3% through the end of July, in other recessions the GDP dropped significantly. . They did similar comparisons with the other meterics.  Reasoning that this recession, based on these indices, is mild. There concluding statement is:

“History suggests that unless you think that the Great Capital Strike will yet evolve into a repeat of the Great Depression, it is a sucker’s bet to bet against the U.S. economy. The United States is fueled by too much entrepreneurship and innovation to stay down for long. So stay liquid, be patient, and focus on long term growth”.

Every crisis has a silver lining.

When larger companies have significant belt tightening, their attempt at innovative changes are stopped. Opening the opportunity of small companies to fill the void these large companies have created. During prior belt tightening periods, small companies like Microsoft, eBay and Google were started. Who will be the Microsofts, eBays, and Googles of tis belt tightening period?

Now we have huge layoffs by large companies, many of which stopped research and development of major innovative projects. Where can we look for these opportunities in real estate? The first suggestion is from Harvard’s Joint Center for Housing Studies in their 2008 study of housing sees opportunity in “affordable housing: :   

“The Outlook

The weakness of the economy does not bode well for income

growth in the short run. But even in the longer run, the housing

cost pressures on working Americans are unlikely to lighten. Much

of employment growth will continue to be in part-time and lowwage

positions. This trend, together with the high operating costs

of housing and the restrictions on building modest homes at higher

densities, makes efforts to meet the nation’s affordability challenges

an uphill battle.

Thus far, there has been little national outcry about the fact that

growing numbers of low- and middle-income families are spending

half or more of their incomes on housing, and that so many

children are living in unhealthy, unsafe conditions—or, worse yet,

forced to make their way on the streets. The grim plight of many

veterans has also failed to rally a groundswell of support to tackle

these urgent issues.

Nevertheless, housing advocates continue to press for additional

resources to assist more low-income households and to promote

programs that add directly to—or at least stave off further losses

from—the supply of affordable rentals. Joining their voices is a

growing chorus of organizations intent on drawing attention to the

insidious spread of affordability problems. These organizations hope

to broaden the political base for housing programs and spark discussion

about the need for workforce housing at the local, state, and

federal levels. Another contingent, driven by concerns about the

environment and the erosion of America’s economic competitiveness,

is working to encourage smart growth and “green” building

practices. Whether these efforts produce a coalition strong enough

to attract resources or make meaningful changes to the nation’s

housing programs remains to be seen”

We will explore other opportunity areas in subsequent sessions

President Obama’s appointments to date say much about what the incoming administration may look like. So far his appointees are: one congressman, two Senators, two governors, and two career political appointees Even though there is nobody from the private sector, so far, Wall Street greeted the appointment of Tim Geithner as Treasury Secretary with a resounding display. The Dow-Jones stopped it’s week long plunge and went up a mighty 496 points. Geithner, although a Democrat who was under secretary of the Treasury under Clinton, was made President of the Federal Reserve Bank of New York during the Bush Administration after two conservative candidates turned the job done. His only private job experience was as a research assistant to Henry Kissinger. Interesting another appointee, Gov. Bill Richardson is also a former associate of Henry Kissinger and also a former Clinton appointee as Secretary of Energy The new Attorney General, who was Deputy Attorney General under Clinton, is a career Justice Department appointee. Governor Janet Napolitano of Arizona is another former Clinton appointee.
Although Obama included the Clinton Administration in the bad record of the past that demanded a change, all of these cabinet appointees had high ranking positions during the Clinton administration. This certainly includes Senators H.R. Clinton and Tom Daschle. All these appointees have many things in common: they have been most active politically, either running for office or being on the periphery of campaigns as advisers. I would gather from this that being politically active and ambitious are very important qualifications for being a member of the Obama inner circle. Is this the change from prior administrations that Obama promised? Sounds more like a repeat Clinton administration then an a Abe Lincoln type administration. Since action speaks much louder than words, this confirms my long held belief that the true test of the thought is the act! You and I must be patient and observe, before jumping to too early conclusions.
Meanwhile-Let us take stock of where our real estate markets are today.
I receive several monthly real estate market intelligence reports. Today, I received my copy of one of the most astute- The Hanly Wood Key Indicator Alert. Here are a few of their conclusions:
On the rate of unemployment- which was 6.5% at the end of October, the 23 year average unemployment is 6.3%.
The average rate for a 30 year fixed rate mortgage in 2006 was 6.41%. In 2007 the average for a FRM was 6.33%. This year he average rate so far is 6.11%
The current annualized sales pace of existing homes are now at he highest level since August, 2007. It is also the first time since February, 2006 that existing home sales have shown an annualized seasonally increase in sales.
The volume of total existing home sales is an excellent indicator of housing demand The affordability ratio reached its highest levels since February, 1998. This means that 56.7% of the nation’s households with 30% percent of their income going towards housing expenses can afford the median priced existing home, assuming a 20% down payment and a 30 year FRM based on average rates in September. The inventory of new homes is steadily declining. In September the inventory reduced to 396,000 from an August figure of 422,000. The present inventory is a 10.4 months supply. This inventory includes multifamily.
The following is from a very extensive study of REAL ESTATE INVESTMENT TRUSTS(REIT) by Merrill-Lynch.
REAL ESTATE INVESTMENT TRUSTS(REIT) are now trading at about 83% of their Net Asset Value(NAV). This means if they sold all their real estate in this down market, the proceeds would be at least 17% higher than the total value of all their stock. Their long term NAV average is 102%. The dividend yield on the REIT sector stands at 11.35% and the spread to the 10 year Treasury yield(3.14%) is 821 basis points. Relative to the to the S&P 500, the dividend yield spread is 773 basis points(11.35% to 3.62 %). Nevertheless, the fund flow for real estate specific funds decreased last month by $43.45 BILLION.
Of the various type REIT’s, which have highest rates of return in the last five years:
1. Self Storage
2. Net Lease
3. Health Care
Surprised? for the year to date- the same three plus manufactured housing.
All of the foregoing, I hope will help you to have a better basis for real estate decisions in the coming year
I hope to have more for you Monday.
Have a relaxing weekend

In recent months, although residential building permits issues have dramatically dropped, I am surprised by the even larger drop in non-residential building permits issued. Both of these are both good and bad news. The bad news is for those whose livelihood is based on working on new developments. To name a few these would include: advertising agencies, appraisers, architects, attorneys, engineers, construction and permanent lenders, casualty and fire insurance companies, developers, general contractors and their subcontractors, market researchers, planners, title companies, and a myriad of others. The good news is for those who want to see the present inventory sold. This would include developers and those who worked on these projects in the unsold inventory and further need the inventory to be sold for them to get paid. It is probably the same categories as the bad news group.
I would conclude from this that when this inventory is depleted, we will have seasoned, experienced development teams lined up to do great developments. The first question is what developments?
The U.S. population is shifting. To better understand this, let us look at some data from the recent Presidential elections gathered by the the Washington based think tank- The Brookings Institute:

“In both 2000 and 2004, the Democrats were stuck in a demographic rut, clinging mostly to the industrial Midwest, the Northeast and the Pacific Coast. With population migrating out of these states, these areas lost 14 Electoral College seats from the reapportionments of the last two Censuses. Al Gore and John Kerry lost voters in the suburbs, most voters over age 30, middle-income voters and those with college degrees. And in 2004, Kerry seemed to lose the Democrats’ firm grip on the fast-growing Hispanic voting bloc.
Enter Barack Obama and 2008. To be sure, he had the wind at his back by running against a Republican record of stark economic downturns and a prolonged war. But he also connected the party to potent demographic trends, leading to Democratic success in the electorate’s growth sectors. He took a slew of “fast-growing battlegrounds,”—Nevada, Colorado, New Mexico, Virginia, Florida and North Carolina—complemented by the slow growing ones of Pennsylvania, Michigan, Wisconsin, Iowa and, this time, adding Ohio.
This Democratic demographic breakout owes much to shifts occurring in metropolitan areas— both cities and their suburbs. Long bastions of Democratic support, America’s cities gave even a larger margin to Obama than to his predecessors. But the fact that the suburbs also went Obama’s way underscores the role of metro areas as anchors to the new Democratic surge.
America’s growing metro identity is especially potent within fast-growing battleground states. For instance, metro Denver is driving political change in Colorado, metro Tampa and Orlando are doing the same in Florida and the northern Virginia suburbs of metro DC are the key transformative agent in Virginia’s politics. Both the cities and suburbs of metro areas are targets for new migration into fast-growing states, driven especially by young people, white college graduates and minorities – all groups with whom Obama scored big gains on Tuesday.
But now that the election has been won, work needs to begin on crucial issues these groups care about—affordable housing, good schools, health care, transportation and, for new Americans, the pathways toward achieving upward mobility and the American Dream. It’s a tall order indeed, but if the Democrats can fill that order, the stage is set to make them the rising party of the early 21st century.”

Look at these crucial issues – what will be the opportunities created by these issues?  For instance imagine what if a metropitan area has a 2% increase in downtown population?  What new opportunities do you see for housing, retail, and transportation?

REMEMBER DOING THINGS  AS  WE HAVE BEEN DOING THEM- ONLY ENTRENCHES  OUR  OLD WEAKNESSES!!!

That gem- about those who not study history are bound to repeat the mistakes of the past- suggests that the  Bush administration has never learned any lessons by studying the Hoover administration response to the stock market crash of 1929. After a very long period of standing by doing nothing, the Hoover administration finally pumped money into banks. When this did not change anything, American industries requested help, Hoover said no.  

Much to many observers amazement , the Bush administration has repeated exactly what the much maligned Hoover did. The Bush people advanced $325 Billion to major banks with no strings attached, supposedly to issue credit for loans. The major banks took the funds but did not use this injection of capital to make new loans. This is taxpayer funds to the same major banks  banks that had made heinous errors with customers money. These major  banks had induced their customers to deposit money to be used for safe and prudent investments. Instead these banks investments were neither safe nor prudent. Then came the closing down of credit by the major banks.  The Bush administration signed the Economic and Housing Recovery Act of 2008. This Act called for these funds to be used to help stop foreclosures, etc. After giving half the funds to these major banks, Bush functionaries refused to advance the remaining funds for buying home mortgages that was the express cause of thr passage of the Act, They further refused to aid industries in serious trouble.  Who is the Bush people trying to help? 

Obama has read the history of the great depression- He has said he  will aid these industries and home owners that have requested help.

It is up to us to instruct our recently elected representatives to Congress to work hard to have the Congress ,while remembering how the new FDR administration acted boldly, act boldly and pass the Obama programs to get our economy moving again. . This is what restored our economy during the great depression. Hope in on the way starting Jan.20th

Three of the world’s largest economies painted bleak pictures of their current conditions on Thursday as the United States, China and Germany all released data providing more evidence of the global economic slide.

Each day we witness the constant decline of  our economy . Our national leaders, while contemplating  their navel,  are hoping for a miracle cure-all to suddenly appear.  Our next day is like the previous day, no magic fairy appears. On Sept 30th, hedge funds received $40 billion in withdrawals. They now expect even greater withdrawals in December.

Today Secretary of  the Treasury  Paulsen announced that he was sitting on his hands. He said , in effect,  he was turning the solution of the economic problems over to President-Elect Obama, who does not become President  for another 68 days.

Reporter Tom Friedman’s new book “ Hot, Flat and Crowded”  describes a very foreboding portrait of  our planet’s future. Tom’s book has this very timely  quote    ”A calamity is something we should not waste”

According to a recent interview in the NY TImes, there are about 15,000 economists in the U.S. How many do you think had a clue about this economic collapse? Maybe 10 at best. That means 99.9% of economists predictions were completely wrong. If your advisers was wrong 99.9% of the time, would you continue to follow their advice?  The adviser would be right 7/1000 of 1%.  Pitchers who have a 1 win 15 loss record are quickly cut. These advisers are still in business hitting 1 out of 1,500 times.  

I have always felt that economic models were faulty because after the economists gave their assumptions, they added that they assume that all other factors will stay the same.  This is ridiculous on its face. Both the world and the economy are always changing..  These economists assumed  that real estate value would constantly increase. Even though, the history of real estate shows a slump every 7 years for the last 60 years. The days of economic models has passed.

All is not hopeless.

Yesterday, I heard some great news . At the Lawrence Livermore Naqtional Labortory , the Lab announced  they are developing  a cheap source of energy that is safe,clean and inexpensive.  Nuclear power plants only use  3% of the nuclear material  to produce electricity.  97% of the material is nuclear waste. The program being developed at Lawrence-Livermore  uses this waste material to make electriity. The material is makes energy until it is all used up. There is no danger of a three mile island disaster.  For instance a small anount of this waste could provide all the electricity that California uses.

Submarines and ships have been using nuclear power for years without incident.. Imagine if all motor 

vehicles were so powered.

No more being at the mercy of mid-east sultans of OPEC.

No more sending billions overseas to pay for foreign oil.

No  more constantly increasing utility bills.

No more dangers of these plants having nuclear disasters.

This is American ingenuity at its best. We can lead the world out of grip of the oil barons  Make available to the world transportation that is cheap, safe and clean.

We will not have wasted this calamity.

 

 

At the end of the third quarter, Sept. 30th, hedge funds were hit with withdrawals of $40 Billion. Hedge funds are highly leveraged. For every dollar of investors capital, the hedge fund borrows at least $9 to invest.  Their game plan to deal with these almost catastrophic demands on their capital, was to go the banks that were financing them and borrow funds to pay off the withdrawing investors. When the hedge funds turned to their bankers for funds to pay their investors refunds,  much to the hedge fund’s shock, the banks said NO!!. This lead to these funds massive dumping of  huge blocks of the stock. This began the downward collapse of the stock market. Then the mutual funds faced huge demands to immediately withdraw funds. The leverage of the mutuals was even higher than the hedge funds. The mutual fund’s bankers tuned them down. These mutuals needed money ASAP. They dumped huge blocks of stock  to become liquid enough to pay their investors demand for withdrawals.  This  caused a further collapse of stock prices.

On the real estate side, owners of Class A  office buildings, with great track records, are finding it almost impossible to get mortgages when their present loans come due.  The largest owner of U.S. Shopping Centers, whose portfolio contains some of the nation’s top performing centers, can not refinance his portfolio. 

The American automakers, huge U.S. employers, need credit desperately. The plight of U.S. auto manufacturers is now before Congress.   

Suddenly, the Treasury Department realized they had to act immediately to stop this domino effect. The Secretary of the Treasury invested $325 billion in U.S. major banks to create immediate credit at these banks.  It was assumed that the banks would use these funds for their capital reserves. As additional inducement for the banks to start lending again, the Treasury increased the amount of the subsidy Fed paid them for these reserves. The reasoning behind huge federal expenditure to the Banks was that this would allow these banks to loan up to $3 trillion. This is the shot in the arm our economy needs to turn the corner on this recession. But hang on dear friends, no such thing occurred. Believe it or not-The most of the fearful banks took your tax dollars  that made their balance sheets look much  better, but then stood still.  Unfortunately, Secretary Paulsen did not include mandatory actions that would require these banks to lend money.

As I said in yesterday’s blog, the Obama Administration must institute mandatory requirements for these banks to use this addition to their reserves as a basis for making loans.  

This is a global problem. Credit is what makes economies all over the wall work. We must consider this a global problem. The fat put in the 2008 Economic and Housing Recovery Act is ridiculous. Secretary Paulsen ignored these provisions when acting for a turn around. Thank God the election is over. Now, Congress must get serious and work to solve these problems- not to use the legislation for their reelection . This is urgent, vital legislation to get things turned around that must be passed NOW!!!