What’s Driving the Stock Market? NoCal CCIM Meeting December 8, 2009

Commercial Real Estate Agent with Commercial MasterMinds

An interesting discussion by Todd Weaver, the 2010 Vice President for CCIM Region 2 and President of Synergy Commercial Real Estate, Inc. was enthusiastically received as he spoke about the commercial real estate market conditions. Todd used a simple relation between Net Operating Income, Capitalization Rates and Present Value to explain the downturn in the commercial real estate market. How the numbers relate to each other is academic- it is why the numbers are moving and where our economy continues to move that sheds light on our economic future. Please contact me directly for further discussion.


As Programs Director for 2009, I wanted my last speaker to be an expert in the stock market to explain how and why the stock market is rallying. Rich Arzaga of Cornerstone Wealth Management was my “go to guy”. By the way, Rich is the only Financial Planner (that I know) who understands commercial real estate as a form of investment. In fact, he teaches a class on commercial real estate through the UC Berkeley extension program. If you haven’t consulted with a financial planner lately, you owe it to your family to investigate whether you are maximizing your investment dollars. Rich still does a complimentary first session and I highly recommend a review.


Rich invited Steve Olson of JP Morgan Asset Management to speak to our members. Steve distributed a 55 page hand out to methodically and eloquently explain “What’s driving the Stock Market?”. First 5 comments to this blog will receive a copy of the handout Steve shared that the market fell out of fear and economic uncertainty and that today’s market is rebounding because of job cuts. Ninety percent of companies met or exceeded earnings expectations because of job cuts in November. This of course is a short term improvement- can we fall again?- of course. Page 13 of the handout illustrates the expected time to recovery from an equities perspective. Because commercial real estate (CRE) is the most lagging index, CRE is last to fall and last to recover. As Steve explained, people + stuff = CRE. Without jobs people don’t buy or need stuff. Page 22 of the handout referenced the unemployment situation and Steve noted that these numbers are not inclusive of the “underemployed” thus the unemployment numbers are actually higher. Steve shared that it could take six years to reach full employment again. Full employment is considered to be 5% unemployment.


Steve referenced page 12 of his handout as he spoke of past recessions and showed how this time is different given the timing of the market low. Also discussed was the Fixed Income Market and mutual fund flows (page 4) as well as the bond market (page 50). Bonds which are expected to be “Safe, Stable, Predictable and Consistent” will be more risky than ever because today’s interest rates are relatively zero. Further, as our forthcoming inflation continues the economic cycle, bonds will lose their appeal. How much of your portfolio is in bonds? Estimating the inflationary period, where interest rates will rise to curb inflation is an educated guess… Steve is predicting 18 to 24 months.


On a worldly comparison, Steve referenced page 41 of the handout to compare the GDP growth of the US against the world. The world outperformed the US in three of the last four decades with a notably wide margin in the last decade. The weakening dollar is illustrated on page 39 of the handout as foreign investors are looking outside the US for investment opportunities.


With all the government efforts to curb recession, Steve predicted there will be no strengthening of the dollar in the near term. As for the residential mortgage debacle; “We should have seen it coming”. States hardest hit include California, where workers average salaries compare to average salaries across the US, yet the cost of living in California is multiples as compared to the rest of the US. What can we expect looking forward?.. a slow residential recovery.


The Commercial Crisis is forthcoming. The (stock) market acknowledges it is coming and regional banks are the highest threat because there is not enough time to prepare for commercial loans that will need to be refinanced. Steve indicated that the commercial real estate crash will NOT be as bad as residential because as a lagging index, we have more time to prepare than did our residential counterparts. The biggest unknown: What is the government going to do about commercial loan defaults? In conclusion, Steve indicated that the market trend is ever upwards. Those who will get hurt the most are those on the sidelines. Consider reviewing your equities positions and as indicated in an earlier blog, now is the time to operate real estate efficiently and weather the economic storm. Please post your comments- I look forward to your review.


To learn more about my background, visit Consult Pete. To learn more about my company services, visit Commercial MasterMinds. I can be reached via email at Pete@CommercialMasterMinds.com or just call (925) 719-3569

Continued Success, Pete


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