4/26/2010
Friends and Colleagues
The economy continues to move forward….with some Good News and some Bad News.
This week our friends at Wells Fargo Securities (WFS) share their insights to help us to make some sense of it all.
First Some Good News:
• Currently the economy is growing with low inflation.
• Consumer spending is exceeding expectations.
• Equity prices are up, providing a boost through the wealth effect.
• The WFS outlook remains one of positive growth based on leading indicators.
And Some Bad News:
• Job and wage growth remain slow relative to trend.
• Consumer confidence is low.
• There are reasons to be cautious about future consumer spending.
Employment: Not-So-Good
• WFS remains bearish on employment growth for the following reasons:
1. Strong capital expenditures despite no job growth suggest fundamental changes in production with more capital and less labor supporting a rebound in profits.
2. There is a structural shift in labor demand toward higher educated, tech-savvy workers and away from low and semi-skilled manufacturing jobs.
Housing: Cautiously Troubling
• WFS is very cautious about the housing recovery beyond the end of the tax incentives in June.
• In their view, the housing recovery has been on a very shaky foundation of tax incentives, artificially low mortgage rates and unprecedented assistance to struggling homeowners, none of which are sustainable.
• Three fundamental problems may plague the housing market going forward:
1. Home sales were too strong during the boom years, and demand was effectively pulled forward.
2. Credit underwriting has tightened considerably, effectively shutting out many potential buyers.
3. The deep recession has led to a sharp reduction in household formations and fundamentally reduced the demand for housing.
• There is no quick fix to any of these problems, and WFS predicts that the recovery in housing is likely to be longer and more arduous than many expect.
Consumer Spending: Surprisingly Good
• The rebound in retail sales growth the last few months has been stronger than expected.
• Fundamentally it seems that consumers should not be spending as they due to the following:
1. Unemployment remains near 10%
2. Foreclosures are still rampant
3. Credit is still extremely tight
4. Real wages are stagnant
• But consumers are spending……So what is driving this improvement in consumer spending? Our friends at WFS suggest the following:
1. The housing market is stabilizing, thanks primarily to the homebuyer tax credit. (Will this continue after the rebate expires in June?)
2. The stock market has rallied roughly 70% since the March 2009 low, lifting the wealth effect.
3. There are preliminary signs that the labor market may finally be entering the early stages of recovery.
4. Individual tax refunds are running ahead of 2009, which is padding consumer's wallets.
5. Perhaps after a long winter, warmer weather is drawing consumers out of the house and into the stores.
Interest Rates: More Good News
• If the U.S. economy continues to post above trend growth rates, then the Fed may begin to tighten policy before most investors expect.
• However, WFS believes growth will slow somewhat over the next few quarters as the temporary boost from the inventory cycle fades.
• Therefore, they predict that the Fed will be on hold until late this year.
So that’s the news on the economy for this week.
As always, our story continues to evolve…..so stay tuned.
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With great pride, I am pleased to share that my wife Betsy has just had her third children’s book released.
This one is a picture book for young children entitled, “Which Shoes Would You Choose?”.
Please visit her web site at: www.betsyrosenthal.com for more details on this and her prior books. You can purchase this book in local book stores, or on-line at Amazon or Barnes and Noble.
Betsy will be holding a book signing next Saturday, May 1 from 2:00-4:00 at Village Books, 1049 Swarthmore, Pacific Palisades, CA.
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THOUGHT FOR THE WEEK
Over-Committed……
"Sure, I’ll be there.”
"Yes, I can do that.”
"Count me in!”
We have so many opportunities to commit our time….to work, to family, to friends, to good causes.
But our time is a finite resource.
"Looks like another late night at the office.”
"I need to re-schedule our meeting.”
"Lunch at our desk...again.”
Sometimes our plates get too full.
Our commitments pile up.
Our time and attention are squeezed.
Did we schedule in some unencumbered time along the way?
Did we leave ourselves some slack time to relax and recover from the hectic lives we lead?
The world we live in makes so many demands of us…and it is up to us to carefully choose the things we commit to.
Do we really have the room to take on that next challenge?
In the days and weeks ahead, as those around us make demands on our time, may we each take a moment to weigh carefully the commitments we choose to make.
May we remember that the road ahead is a long one, and we need to maintain our balance along the way.
May we be kind to ourselves, and make room in our busy lives to carve out some time to appreciate the moments of wonder around us.
Make it a great week.
David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc.
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2/22/10
Friends and Colleagues
Last week the Fed raised the discount rate by 25 bps, citing "continued improvement in financial market conditions."
Why did they raise rates now, and what does it mean for businesses and consumers?
What are the latest economic fundamentals? What's happening with credit availability and demand?
This week we address these and other key issues with some help from our friends at Wells Fargo Securities (WFS).
Why Did the Fed Raise the Discount Rate?
- Just a week ago Bernanke stated that "before long" the Fed would raise the discount rate and return it to the spread over federal funds that existed before the crisis.
- WFS believes this quick move indicates the Fed intends to stay very close to the script Bernanke laid out to reverse the extraordinary actions the Fed put in place to fight the financial crisis.
- Those actions contributed to an enormous expansion of the Fed's balance sheet.
- They also led to concerns about whether the Fed could adequately reverse this stimulus without putting the recovery at risk or creating inflation.
- Bernanke noted that returning the discount rate to its normal relationship to the federal funds rate should not be seen as a tightening move but rather a return to a more normal monetary policy.
- Specifically the Fed noted its policy actions were "not expected to lead to tighter financial conditions for households or businesses and do not signal any change in the outlook for the economy or monetary policy."
- It does however look like the beginning of the end of an era of extremely cheap money.
What are the Latest Economic Fundamentals?
- Industrial Production rose 0.9% in January, with solid gains across most categories.
- Manufacturing Output rose 1.0%, with consumer goods and business equipment rising solidly.
- Production of IT equipment remains a bright spot, climbing 1.7%.
- Utility output, which surged in December, rose a more moderate 0.7% in January.
- Inflation data were mixed: the Producer Price Index climbed 1.4%, while the Consumer Price Index rose 0.2%.
- Consumer Confidence rose 2.3 points to 55.9 in January, its highest level in nearly 1½ years.
- Consumers' ongoing concerns about current conditions reflect worries about the labor market.
- Employment - Layoffs appear to have topped out, but hiring remains sluggish.
- WFS projects consumer confidence and spending will likely remain constrained through early 2010.
Availability of Credit
- The WFS Senior Loan Officer Survey shows that the "net percentage of banks tightening standards" in Q1 actually fell to -5%, meaning more banks were easing, not tightening, credit.
- The net % of banks increasing spreads declined to 9% compared to 100% during last year.
- TED spreads (LIBOR - Treasuries) have returned to pre-Lehman levels.
Consumer Spending and Credit Demand
- Continued weakness in the job market is bringing further delinquencies and charge-offs.
- Private sector jobs (not counting construction) are up, and there have been gains in the average workweek and temp help.
- However, the absolute loss in jobs and continued high unemployment are putting stress on households that will struggle paying bills and will continue to fall further behind.
- Saving rates have moved up since April 2008 which means the pace of consumer spending and credit demand will be lower than in prior recoveries.
- The dynamics of household credit usage are changing and with them the pace and character of growth.
So what can we expect and how can we plan for the months and years ahead?
As always, stay tuned.....
THOUGHT FOR THE WEEK
To See Ourselves As Others See Us
In our ultra-connected world we touch scores of people daily, but so many of the connections are fleeting...and often trivial.
What do we really learn from knowing who just got back from the gym, or who remembers "My Favorite Martian"?
Yet each of us has a great gift available, if we would only embrace it.
It is the gift of people who know us well enough to see our blind spots, and care enough to give us candid feedback.
When was the last time we asked for and embraced constructive criticism?
"How am I doing?"
"How can I do better?"
These are powerful...and sometimes scary questions.
Asking them means opening ourselves up to critique, and acknowledging that we are not perfect.
It also means accepting that we are human and we have much yet to learn.
In the week ahead, may each of us seek out someone who knows us well.
May we create a safe space for them to give us honest feedback on how we are doing and how we can do better.
May we embrace the great gift of their perspective, and by doing so may we each grow to be a better version of ourselves.
Have a good week.
David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc.
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1/25/10
Friends and Colleagues
The government and the press keep telling us the recession is over....so why does it still feel like a recession?
Bernanke said last Sept. that "from a technical perspective the recession is very likely over at this point," but he also acknowledged, "It is still going to feel like a very weak economy for some time."
This week with some help from our friends at Wells Fargo Securities (WFS), we look at some good news and some bad news in the economy to help us understand where we are and where we are going.
We also look at what is happening in China, since the state of their economy is becoming more and more relevant to our world.
First some Good News:
- Q3 real GDP was positive and the WFS forecast looks for growth to pick up substantially in Q4 2010, at a torrid pace of more than 5%.
- The Leading Economic Index (LEI) has posted gains in each of the last 9 months, and has already returned to pre-recession highs.
- Multi-family starts jumped another 12.2% in December after a steep 70% increase in November.
- Housing permits have risen for two consecutive months, gaining another 10.9% in December.
- Total housing permits are now up 15.8%, with single-family permits up 37.3% vs. Jan 09.
- The Conference Board's Leading Economic Indicators (LEI) rose 1.1% in Dec after gaining 1.0% in Nov. Per WFS, this signals continued expansion and growth in the second half of 2010.
- Core PPI has only increased 0.9% over the past 12 months.
Now some Bad News:
- Per WFS, recent gains in the LEI are more reflective of government efforts to kick start the economy (yield spread, increase in the money supply) than they are of strong domestic demand.
- WFS does not project a huge spike in consumer spending or big business fixed investment spending.
- Businesses are not yet hiring in earnest...which continues to be a problem for the 10.0% of Americans who cannot find work.
- Housing starts took a step backward in December dropping 4.0%.
- Rough weather seems to have hampered single-family starts, which dropped 6.9%.
So what does it mean?
- While GDP and LEI may seem to overstate the strength of the U.S. economy, WFS tells us the recovery is gradually taking hold.
- According to WFS, a bottom seems to have formed in residential construction, industrial production is picking up steam, consumers are starting to loosen purse strings, and jobless claims are coming down.
- While the recovery may look better than it feels, WFS contends it is a recovery nonetheless.
WFS Economic Projections for 2010:
- The Fed will continue its current target federal funds rate at 0-25 bps for an "extended period"... likely through Q2.
- The Fed will then hike rates by the end of the year.
- As the Treasury continues to issue debt, long term rates should rise...10 year Treasuries projected to hit 4.40% by the end of the year.
- Inflation will remain below 2%.
- Unemployment will remain above 10%.
- The real test for policy and the markets will be if/when the Fed ends mortgage-backed securities purchases currently scheduled for March 31st.
- Overall, WFS projects slow and steady growth ahead.
Enough about us....What's Happening in China?
- Chinese real GDP growth rose from 9.1% in Q3 to 10.7% in Q4!
- Growth in retail spending strengthened from 15.4% in Q3 to 16.5% in Q4!
- Fixed investment spending rose 30% last year!
- China's exports appear to have risen significantly in Q4.
- The overall rate of CPI inflation jumped from 0.6% in Nov to 1.9% in Dec.
- Based on strong growth and mild inflation, the Chinese government is scaling back some of the emergency stimulus measures that were put in place more than a year ago.
- Two weeks ago the central bank raised reserve requirements by 50 bps to 16%.
- This week, the Chinese government announced that it is directing the nation's banks to scale back the pace of new lending.
- WFS predicts that in the months ahead:
- The Chinese government likely will raise reserve requirements further, hike interest rates & slow loan growth.
- GDP growth will slow from 10.7% currently to 9.0% by late 2010/early 2011...a slowdown but not really a "hard landing."
So the US economy is on simmer while the Chinese economy is boiling hot.
What impact will that have on the US property markets in the months and years ahead?
As always, stay tuned.....
THOUGHT FOR THE WEEK
Taking Ownership
We are all very good at owning our achievements.
Our shelves are filled with trophies from sporting victories and our walls hold diplomas and certificates from our academic successes.
But what about owning our mistakes?
Making mistakes is part of being human.
Owning our mistakes is what makes us adults.
As children it was so easy to say, "It's not my fault".
Excuses abounded as we looked for ways to avoid the pain of disapproval.
But now we are adults...and being an adult means taking ownership for our actions...both good and bad.
Being an adult means saying, "I made a mistake and I am sorry".
Being an adult means understanding that owning our mistakes allows us to earn the respect of others.
In the days and weeks ahead, may we each choose to be an adult when we mess up.
May we let our colleagues and spouses know that we are responsible for our own actions.
May we remember that we earn trust and we earn a good name when we take ownership for our mistakes.
Have a good week!
David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc
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11/23/09
Friends and Colleagues
Making sense of this "economic recovery" is perplexing at best.
This week our friends at Wells Fargo Securities (WFS) help to guide us through some of the conflicting signs.
We begin with a bit of bright news...and maybe some hope for the holidays.
NEWS FLASH: Globe St.com reports that Developers Diversified Realty Corp. recently sold $400 million of debt backed by shopping centers in the first offering of commercial-mortgage bonds through the Term Asset-Backed Securities Loan Facility program. Are more deals on the way?
An Odd Recovery - Good News and Not So Good News
Some Good News
The leading economic index increased 0.3% in October and has risen for the past 7 months.
Per WFS, this implies modest growth will continue into next year.
Some Not-So-Good News
WFS tells us that two elements of the gain don't look quite like the usual recovery:
1. The pace of improvement fell sharply from the 1.0% average monthly gain over the prior 6 months.
2. Much of the recent growth was based on short-term government efforts rather than longer-term sustainable private sector recovery.
WFS's outlook for the next two quarters is for sub-par growth of 2.4%.
Overall, according to WFS this "recovery" does not look like the typical "V" shaped recovery, given continuing softness in housing starts and retail sales.
Housing starts fell in October as the 1st-time home-buyer tax credit ended, showing that housing, traditionally a booming business in a recovery, is flat without federal band-aids.
"Core" retail sales are below the pace of the first year of the 2002 recovery, and WFS projects another disappointing season for holiday sales.
Unemployment is higher while confidence is down.
Consumer credit usage is likely to be constrained on both the demand and supply sides.
Inflation Concerns
Another odd aspect of this recovery is inflation. With interest rates so low, even minor inflation has a significant impact.
As of October, for the last 3 months, core CPI goods inflation is up 2.3% and overall CPI is up 3.7%.
Consumer Confidence Remains Low
Consumer confidence remains low due to its strong correlation with the health of the labor market.
While layoffs have clearly decelerated, hiring shows no sign of improving.
Per WFS, consumer confidence will not likely rebound until hiring picks up.
Where Are Interest Rates Headed?
Four fundamentals will shape the range of possibilities for interest rates in 2010: growth, inflation, the dollar and fiscal policy.
1. Economic growth signals are very mixed. Leading indicators signal growth but housing starts and industrial production have been disappointing.
2. Core inflation data has picked up a bit, which is counter to the assumption by the Fed and the capital markets that inflation will remain low while unemployment is high.
3. The outlook on the dollar has huge and growing implications for capital flows and thus interest rates, given the size of the U.S. fiscal deficit which makes the U.S. dependent on foreign buying. A shift in dollar expectations could quickly change the outlook for interest rates.
4. Fiscal policy will be critical in early 2010 as President Obama presents his budget outlook for fiscal 2011 and the years ahead. Investors, both domestic and foreign, expect some suggestion of long-term fiscal discipline. A failure to deliver on those expectations could lead to a large and destructive market reaction, sending interest rates higher and the dollar lower.
Conclusion - Interest rate expectations remain unsteady.
Where are we headed?
That remains to be figured out....so as always, stay tuned......
THOUGHT FOR THE WEEK
LEGACY...
The day will come for each of us when our journey here will be done.
We will leave behind for our children and those we have touched, the wisdom, the lessons, the memories we have shared.
This will be their legacy.
So what legacy are we creating for them?
Will they remember that we said the kind word...that we did the good deed...that we were patient and thoughtful?
Or will they remember that we worked too much...that we blamed others....that we were overly critical?
Every day we are building the legacy that we will leave behind.
Our good habits will be remembered.
Our bad habits will be remembered.
Our willingness to change will be remembered.
As we head into the Thanksgiving holiday, may we each consider the legacy that we are creating.
May we choose the qualities we want our heirs to inherit.
And may we make the time to create more of the memories we want to be remembered.
Have a good week!
David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc
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