September 30, 2009: Pimco's El-Erian Warns Investors (Again)

Mohammed El-Erian, Chief Executive and Co-Chief Investment Officer at Pimco has again warned investors of the investment climate ahead.

Through an op-ed piece in the Financial Times, El-Erian warns investors to begin to think and act in terms of absolute and current facts - not the rates of projected change. He used a recent, blunt quote from the Governor of the Bank of England as the foundation of his article. "It's the level, stupid - it's not the growth rates, it's the levels that matter here." Investors have not accepted the reality that absolute levels of income, debt, wealth and unemployment are what really matters today. The outlook for major countries will continue to be driven by the levels of these key variables.

El-Erian goes on:

First, consumer debt is still too high relative to income expectations and credit availability. This will hold back any sustainable bounce in aggregate demand.

Second, many banks' balance sheets are still being manipulated for the comfort of regulators or their own managers. This will inhibit them from lending to important components of the real economy.

Third, unemployment has risen well beyond expectations and is likely to prove unusually protracted. It will take years for US unemployment to return to a natural rate. This will dampen the recovery of consumption and investment, stress social contracts that assume a flexible labor market and endanger political support for essential structural reforms.

Fourth, public debt has grown so rapidly as to spark concerns about future debt dynamics. This would inhibit the effectiveness of future stimulus measures, as well as complicating the formulation of exit strategies. It would also erode the medium-term ability of the US to fund cheaply its large deficits by undermining both the global standing of the dollar as world reserve currency and the attractiveness of US financial markets.

Taken in total, these four issues will make it tough for the global economy to attain Obama confidant Larry Summers' view of "escape velocity" - which translates to the US achieving a sufficiently high and sustained growth to propel the world into recovery.

El-Erian warns that current market valuations assume companies will be able to robustly grow earnings through higher revenues, not renewed reliance on cost reductions that have juiced up earnings over the past six months. This assumes depending on what is likely to prove to be an elusive high-growth scenario for 2010.

Investors need to focus on levels now rather than rates of change later. We are in uncharted waters and predicting a future earnings without taking into consideration the above four issues is a big mistake.

September 22, 2009: H.R 135, A Multi-Family Nightmare

Rep. Sander Levin (D-Mich) has introduced H.R. 1935 which will gut the carried interest tax treatment of multi-family housing. Carried interest is an interest in the capital gains of a partnership when it sells the property. Investing partners grant this interest to the general partners to recognize the value these partners bring to the venture as well as the risks such as recourse debt. litigation risks,responsibility for cost overruns, etc., posed by the venture. Carried interest has been an integral part of real estate partnerships for decades.

Currently, the carried interest income is taxed at capital gains tax rates - 15%. Under H.R. 1935, lawmakers seek to tax this as ordinary income, which may go as high as 39.6% by 2011. In addition to the draconian increase in the tax rate, reclassifying carried interest income from a capital gains to compensation would also subject that income to self-employment taxes.

It is estimated that 550,000 workers employed by the apartment industry as well as the 16 million apartment dwellers in the United States will be adversely affected by H.R. 1935.

Needless to say, the National Multi Housing Council and other like-minded groups are aggressively lobbying against carried interest taxation. They feel that the current tax treatment is appropriate as it represents a return on the underlying long term capital asset as risk and entrepreneurial activity.

An unintended consequence of H.R.1935 would be it's change upon the economics of apartment construction so significantly that many proposed multi family housing complexes would not be viable and thus cancelled, thus impacting in a negative way the nation's affordable housing shortage.

For information about the carried interest issue, go to:

www.nmhc.org/goto/CarriedInterest

J.B. Gray, vp of the NMHC in Washington, D.C. was a primary source for this post

September 16, 2009: More Price Cuts On Single Family Homes

Trulia, Inc. announced that 26% of homes currently on the market in the United States have experienced at least one price cut. The data was the fourth straight month of price reduction data and was 10% larger compared to June of 2009. The data on the study was current as of September 1, 2009.

As stated in RISMEDIA,the steady rise in price reductions are a signal that sellers are still trying to adjust to market conditions. Trulia, Inc. states "that the $8000.00 federal tax incentive will extend the home purchasing season beyond the summer months, continuing to drive competition amongst sellers and ultimately leading to more price reductions", creating a great buying opportunity for eligible buyers.

Luxury homes continue to be the hardest hit segment of the market. Discounts of 14% and more off already slashed prices are common. Although luxury homes represent just over 2% of the market, they are responsible, according to Trulia, Inc., of 25% of the $28.5b in home price reductions to date.

September 13, 2009: New Credit Scores Will Help Homebuyers

Does anyone remember how several States improved their student achievement test scores? Dilute the measurements to obfuscate the result, they did. And no one was the wiser.

Now, a new and improved FICO scoring scheme will allow more individuals access to refinancing their present home or buying a new one. The developer, Fair Isaac Corporation, predicts this new analysis instrument will help lenders reduce default rates on consumer loans from 5 to 15 per cent. One hangup - Fannie Mae and Freddie Mac have yet to approve the new credit score tool. Until they do, the traditional model scores will suffice.

Fair Isaac believes this new system will be a great boost to the housing market. The system takes into account the borrower's history and penalizes them less for a single "unusual" event. It also has more score card levels, allowing for finer adjustment of the credit score. It will also likely reduce the power of collection agencies since a single event will have less significance to the borrower who had that problem.

I believe that current scores, if followed, are plenty liberal to validate one's propensity to pay back a debt.

That said, if the new system is approved by the big boys, plan on a nice bump up in home sales and credit access. Hopefully, we are not planting the seeds for another credit bust down the road.

September 8, 2009: US Dollar Under Assault

Briefly. Today, the UN has recommended an unprecedented move away from the dollar as the world's reserve currency. A new Bretton-Woods is upon us. Switzerland has surpassed the US in competitiveness with other nations such as Singapore closing fast.

Our world foes are acting like sharks smelling blood in the water to dismantle our dominant economy while our politicians in power spend more, tax more and play class warfare politics. The public schools spawn more ill-prepared citizens in every respect except, perhaps, possessing the knowledge to grope for "free" entitlements.

Evidently, the majority of Americans are oblivious to the national and international train wreck just around the bend. Where are our brains??

September 6, 2009: Tobacco Stocks: Smokin'.

Tobacco companies jointly filed a lawsuit in Kentucky against the U.S. and the Food and Drug Administration, claiming a law signed by President Obama in June of this year imposes "unprecedented restrictions" on First Amendments Rights.

For instance, the law prohibits tobacco companies from jointly marketing their cigarettes with non-tobacco products. Also, they can't market or describe any products as less harmful than others unless they have approval to do so from the FDA. This includes a new generation of smokeless products, which may be less harmful than cigarettes. Or, not harmful at all.

Interestingly, Altria (MO), the nation's largest cigarette maker, oped out of the group's lawsuit. It appears that Altria is hurt less by the new law than smaller competitors because it already has a huge market share.If fact, Altria backed the new law.

True, cigarette makers have seen sales shrink over the past several years. However, I believe that several American tobacco companies will do very well in the future for several reasons.

As prohibition taught us, the more a government restricts a product, the intrinsic demand rises and the more profitable the product becomes. Well-cured tobacco leaf is still a worldwide indulgence and few areas grow tobacco of better quality than in the United States. Tobacco companies will pursue ways to cut the cost of tobacco products (such as making shorter cigarettes that are being successfully test-marketed in Florida and elsewhere). Tobacco companies will enhance their marketing offshore and offer U.S. quality tobacco and products other countries cannot match.
The huge lawsuits against Big Tobacco are winding down and the Feds and State governments, having squandered most of the billions in tobacco settlement monies, have no legal means to extort more monies from the tobacco companies.

Tobacco users in many states are creatively growing their own tobacco, which is legal. They can also sell it without Federal and State tobacco taxes if sold be the whole leaf (uncut). Some tobacco companies have shown an interest in micro-growers to support their efforts at unique regional blends - adding cachet to their product lines. In northern Ohio, for instance, good quality tobacco is being grown and used to excellent reviews by both producers and users.

Here are some tobacco companies that are likely to thrive under almost any Federal legislation:

Reynolds American (RAI) $46.60/7.30% yield/$13.7b market cap

Vector Group (VGR) $15.87/10.02% yield/$1.1b market cap

Altria (MO) $18.50/7.35% yield/$38.3b market cap

Alliance One International (AOI) $4.10/0% yield/ $356.7m market cap

Universal Corp. of Va. (UVV) $38.07/4.81% yield/$950m market cap


With prescription drugs floating about in our nation's water supply, mass killings on or southern borders and elsewhere as gangs smuggle tons of illegal narcotics into the country, meth labs and worse cooking up fatal brews for hundreds of thousands of addicts nationwide, marijuana a primary income source for many of America's rural counties and alcohol taxed and given a wink and a nod by government so long as taxes are paid, cigarettes seem to be, while not benign, certainly a less fatal avenue of relaxation that society should accept without encouraging.

Tobacco companies know this, and will adjust their product to compete positively with more sinister plants, drugs and other concoctions.

September 5, 2009: Boston Capital Corporation: Questionable Property Management Hurts Investors

Boston Capital Corporation and its affiliates operate several tax credit and loan schemes to corporations and individual clients. One of their earliest investment pitches was Tax Credit Funds, which implied a handsome return of generated tax losses and to preserve and protect the assets of the investment partnerships resulting in the eventual disposition of apartment complexes around the country that met HUD standards for subsidized housing vouchers.

These investments Funds (called Boston Capital Tax Credit Fund followed by a Roman Numeral to classify the order of these $150-200m offerings) were sold by handsomely commissioned agents, often financial planners. The tax "losses" created by aggressive financing and government tax credits would be valuable as they were used to offset gains on certain income that was taxed, thus creating a positive tax result from negative tax credit application. It made sense, especially since Boston Capital appeared to be politically connected to the Democratic Party which was writing the tax credit legislation. George Mitchell of Democratic Party pedigree was an influential member/advisor of their Board. All went well for some time and tax credit "losses" were paying off for investors. However, the cash investors invested ($1000. per "unit") is now being swept away by inept property management, fees upon fees and poor oversight of the property portfolios.

Take Series XV as a case in point.

Series XV has about forty three apartment complexes. The Fund began operations in 1992 with $38m of investor monies buying 68 properties. Investors have seen practically no return on the sales. Apartment complexes remaining have been documented to have been poorly managed, materially neglected and seem not to have a systemic game plan for resolving issues. Of course, Boston Capital has made their fortune prior to letting apartment complexes deteriorate, and continue to make money hand over fist through additional commissions, fees and "other charges".

Examples of management problems:

Lakeside Apartments: Occupancy 55%.

Livingston Plaza: Occupancy 67%.

Showboat Manor Apartments: Real Estate taxes were delinquent.



A Typical Fee Hit To Investors:

"The investment general partner transferred its interest in Wood Park Pointe to AN ENTITY AFFILIATED WITH THE GENERAL OPERATING PARTNER for its assumption of the outstanding mortgage balance and cash proceeds to the investment partner of $37g. Of the total, $1455.00 represents reporting fees due to an affiliate of the investment partnership and the balance represents the proceeds from the sale. Of the remaining proceeds, $15g was paid to Boston Capital for expenses related to the sale, which includes third party legal costs. The remaining $20,545.00 will be returned to cash reserves..."

These examples are not uncommon.

The frequency of "an entity affiliated with the general operating partner" is an interesting sales tactic, and one that hints to raise red flags somewhere. In addition, fees and management practices certainly do not appear to be in the best interests of unit holders. Perhaps Boston Capital Corporation hopes unit holders are not active investors.

In fairness to Boston Capital, tax credits for several years met or exceeded expectations, and the Reznick Group, P.C. has stated that all financial are in order. Information regarding performance of their programs appears to be readily available.

That said, the questions of extracting maximum value after the initial Lease-up of the apartment complexes remain. And initial investor money appears to be of little consequence to Boston Capital Corporation after the big money has been made.

September 3, 2009: Personality Politics - Slick Words or Substance?

As Congress, especially the House of Representatives, appears incapable to construct mature legislation, it is up to the President to become less of an orator with a persona and more of a legislator, putting all those IQ points to work.

Here are how two father/son Presidents coped, in their own words:


JOHN ADAMS:

Our Constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other.

Property is surely a right of mankind as real as liberty.

Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide.

Fear is the foundation of most governments.

Great is the guilt of an unnecessary war.

Genius is sorrow's child.


JOHN QUINCY ADAMS:

Always vote for principle, though you may vote alone, and you may cherish the sweetest reflection that your vote is never lost.

If your actions inspire others to dream more, learn more, do more and become more, you are a leader.

Posterity: you will never know how much it has cost my generation to preserve your freedom. I hope you will make good use of it.

The highest glory of the American Revolution was this: it connected in one indissoluble bond the principles of civil government with the principles of Christianity.


GEORGE H. W. BUSH:

I think I was a better President because I was in combat.

I'm conservative, but I'm not a nut about it.

I am not one who flamboyantly believes in throwing a lot or words around.

America is never wholly herself unless she is engaged in high moral principle.

We are not the sum of our possessions.

You cannot be President of the United States if you don't have faith.


GEORGE W. BUSH:

A dictatorship would be a heck of a lot easier, there's no question about it.

After the chaos and carnage of September 11th, it is not enough to serve our enemies with legal papers.

Americans are rising to the tasks of history, and they expect the same of us.

For diplomacy to be effective, words must be credible.

Government does not create wealth. The major role for the government is to create an environment where people take risks to expand the job rate in the United States.

There is no bigger task than protecting the homeland of our country.

The true history of my administration will be written fifty years from now.

I am mindful not only of preserving executive powers for myself.

It's going to be the year of the sharp elbow and the quick tongue.

Only a liberal senator from Massachusetts would say that a 49% increase in funding for education is not enough.


And, so it goes......