Acorn, Fannie Mae and the Housing Bubble: Who is Responsible?

In a recent WSJ piece, Edward Pinto links the housing bubble to liberal advocacy groups like Acorn.  The argument goes something like this: government polices aimed at increasing home ownership forced entities like Freddie Mac to lower lending standards and acquire large amounts of risky mortgages.

“The flood of CRA and affordable-housing loans with loosened underwriting standards, combined with declining mortgage interest rates—to 5% in 2003 from 10% in early 1991—resulted in a massive increase in borrowing capacity and fueled a house price bubble of unprecedented magnitude over the period 1997-2006.”

Groups like Acorn lobbied for “innovative and flexible” lending practices and helped “ignite” the housing bubble. Acorn is a large political advocacy group that pushes issues for low-income earners.  Pinto links Acorn’s efforts to increase homeownership to the recent housing bubble and financial crisis.

Does he have a case? First we should recognize his bias.  Mr. Pinto was chief credit officer at Fannie Mae from 1987-1989. Not surprising then that he would defend his former professional affiliation.  However, a massive increase in loans made without due diligence over the past 15 years is an undeniable cause for collapse.  As Pinto points out, loans made with less than 5 percent down increased from 9 percent in 1991, to 29 percent in 2007.  Default rates also increased.  Government-sponsored enterprises’ high-risk loans faced a 10.3 percent default rate.

Bankers and regulators should have known better.  Barney Frank, Chairman of the Financial Services Committee, argued to switch the focus from home ownership to rental properties.  This would have isolated the mortgage industry from reckless lending practices.  He made his argument back in 2002.

Lack of due diligence is the real crime here.  Why did the nation’s largest mortgage lenders ignore a fundamental principle of finance?   The answer to that question will help us avoid another meltdown.  You cannot blame a poverty-advocacy group for a banker’s lack of competence.  Yes, policies aimed at increasing homeownership failed.  But that is only part of the puzzle.  Financial innovation, de-regulation, derivatives, Glass-Steagall, China and Fed policy where other factors.

Though I agree with Pinto’s analysis, blaming community groups for advocating loose lending standards is a bit harsh.  Bankers need to take some responsibility.

Tom Powell

 

Real Estate, Retirement and the IRA

Retirement Planning Meets Real Estate (And Really Hit it Off) You are never too young to start saving for retirement. On the other hand, only your specific life circumstances determine if you’re too old. Although earlier is best when it comes to retirement planning, later is still better than never. Whenever you choose to start, it is important to know your options and limitations.

It is difficult to find an employer that offers a consistent pension plan.  Those approaching retirement rely primarily on IRAs to assist in saving for retirement. However, most people never take control of their retirement accounts and passivity can be costly for your nest egg. The majority of IRA money in our country is invested in stocks, bonds and mutual funds. According to MSNMoney.com, about 97 percent of IRA money is dedicated to these traditional investments. That means only 3 percent of our IRA money is dedicated to alternative investments, such as real estate, that have the ability to produce higher returns.

The rules governing allowable investments by IRAs only exclude three classes of investments: collectibles (such as artwork, gems, antiques and most coins), life-insurance and S corporations. All other types of investments are permitted, which makes for seemingly endless investment options. One trend that is beginning to gain popularity is using IRA money to invest in real estate.

Investing in real estate through an IRA widens the range of alternative investments available for individuals planning their retirement. Introducing real estate into your retirement portfolio has obvious benefits. For one, it can act as a means to diversify your portfolio, which can help to hedge against the volatility in the stock market or government-backed investments. Also, for those who are experienced in real-estate investing, or those who seek help from a professional who is, real-estate investments have the potential to protect against principal loss. Real estate can also generate better-than-market-rate returns through income production and capital gains. With the help of a Registered Investment Advisor, your income and capital gains could also be stuffed back into your IRA either tax-deferred (as with a traditional IRA) or tax-free (as with a Roth IRA).

Arguably, the easiest way to incorporate real estate into your retirement plans is to have your IRA purchase the asset and you treat it strictly as an investment. This means you cannot use the property for personal reasons, which excludes the options of purchasing and frequenting a vacation home or purchasing property from relatives. There are no complex issues involved when you treat the asset only as an investment as long as your IRA pays cash for it. But, this is not a feasible option for everyone.

If you have to leverage a mortgage, things get a bit more complicated. For instance, you cannot personally guarantee a loan for your IRA. Also, your IRA will pay tax on something called Unrelated Debt Financed Income, which is the income that can be attributed to the leveraged portion of the loan. If you are not well-versed in real-estate investing, you can run into some major tax complications when trying to use your retirement accounts to purchase real estate. I highly recommend seeking the help of a professional for two specific reasons. First, a professional helps eliminate headaches and complexity. Second, he or she can help to ensure that your retirement account has the best chance to bloom and remain fruitful throughout your entire retirement.

To help simplify the complex process of introducing real-estate investments into your retirement plans, I have uploaded an e-book that you can download for free at www.ThePowellPerspective.com. Inside the “Real Estate Risk and Retirement Planning Pt. 1” e-book you will find:

– How to decide if real-estate investments are right for you right now

– Helpful guidance for introducing real-estate investments into your retirement plans

– How to navigate the different options you have when it comes to real-estate investing

– The importance of holding a diversified retirement portfolio

– How to use real-estate investments as a hedge against inflation 

I have compiled information from a variety of sources to create an e-book that can help readers take the unknown out of a complex topic. It is my hope with this two-part e-book, that readers will find the information they need to take control of their retirement planning and stop putting it off. Retirement can be filled with relaxation, travel and free time to complete a number of your life goals. There is no reason to be worried about your finances later on in life when you can easily take the right steps toward financial security today.

All My Best,

Thomas J. Powell

For the free eBook, please visit www.ThePowellPerspective.com 

Commercial Real-Estate Crisis Squabble

For the past few weeks, financial news has been mixed on commercial real estate.  On the one side, fear mongers like Randall Zisler expect crisis in the next few years.  The meat of their argument is that high default rates and high unemployment will keep the market depressed.  On the other side, high profile investors like Sam Zell  say that the crisis is a myth. 

I’m leaning toward Zell here, and agree with Sheryl Nance-Nash.  She referenced a report that found commercial real estate markets are likely to bottom in 2010.  Notice the verb there- bottom, not crash.  The report calls 2010 through 2012 a “cyclical low” period in the market.  In other words, there will be great opportunities for prudent investors in the next few years.  As the rest of the economy picks back up, capital will flow into commercial real estate and bring prices back up to normal, or at least 70 percent of recent highs.  The report is worth taking a look at.

The federal propensity for bail out clouds the issue.  The FDIC announced last week that it would allow banks to report underperforming loans as performing.  Many properties are worth less than the debt owed on them, and this legislation gives banks leeway for renegotiation.  There is little evidence on how much refinancing is actually taking place.  Instead of selling properties off, banks are keeping them on the books.  As long as seller is kept from buyer, the market is on freeze.  In the short-term this policy prevents a crisis by avoiding a panicked sell-off.  However, the regulation prevents the market from functioning, perhaps even prolonging recovery in the long-term.

Fed Policy

Don Bauder at the San Diego Reader links, correctly, the troubled commercial real estate market in California with its budget problem.  He then argues that recent stock gains are not based on ‘reality’ but a low federal funds rate: 

“The Journal’s lead sub-headline Tuesday morning was “Cheap Money Sends Shares to 2009 High” — a stark warning that liquidity is buoying various markets, not reality. The Federal Reserve promises to keep interest rates around zero for the indefinite future. This emboldens investors to gamble…. — watch out.”

Under Greenspan, this was a fair argument.   However, today we are at the ‘zero-lower bound’ of interest rate policy. Any increase in the funds rate is seen as devastating for recovery. It’s important to recognize that the source of growth today may not be interst rate policy- since monetary policy has become ineffective.  Also, liquidity is welcomed by the Fed during recessionary periods.

Thomas J. Powell

 

 

 

Rebuilding Your Wealth with Real Estate

              As our economy slowly recovers, many investors are concerned with recouping the money they lost during the crisis. Pulling your funds out of investments all together will do nothing to bulk up your savings, while sinking your money into risky funds can do further damage. So, with black-and-white options not offering solutions, where can investors put their money to work?

Many investors are turning to investments that they feel are safe, such as bank CDs or money market mutual funds. The problem with these “safe havens” lies in the low returns. “The average money market fund yields .05 percent, or $5 on a $10,000 deposit.” With rates of return this low, these investments may not be able to keep up with inflation, let alone fill the gaps left by the losses experienced over the last 24 months.

Another option is to do nothing. Yvon Chouinard, founder of the Patagonia sports outlets, says, “There’s no difference between a pessimist who says, ‘Oh it’s hopeless, so don’t bother doing anything’ and an optimist who says, ‘Don’t bother doing anything, it’s going to turn out fine anyway.’ Either way, nothing happens.” The idea of holding on to your portfolio “as is” and wishing for the stocks you currently hold to rebound may work in some instances. But, if time turns out to be your enemy, your retirement years will be funded only by the amount you currently have, minus the effects of inflation.

As investors actively search for ways to re-energize their portfolios, many are returning to real estate. The real estate market is hovering around the bottom, interest rates remain near record lows and a large inventory gives buyers an abundance of options. On the residential side, many foreclosures and bank-owned properties can now be purchased for a fraction of their value. The same opportunities are becoming available in commercial real estate as owners are unable to pay off or refinance their loans.

As I have mentioned before, real estate can help your portfolio win the battle over inflation. Real estate’s value will return at some point.

Shaking Our Stone Age Tendencies  

Letting our emotions dictate our investment decisions is a risky behavior. Out of instinct, we all get emotional when we earn or lose money. It is in our wiring to feel connected with the money we have accumulated. We tend to panic when our money is in jeopardy.

We make a connection between money and safety. Psychology suggests that we are programmed to protect our safety the same way our ancient ancestors were. Even though we encounter vastly different problems than our ancestors did, we still attempt to solve them in the same way. Moving with the herd used to be crucial to staying alive. Today however, moving with a herd of investors can weaken your portfolio. Pushing money into an investment simply because the majority of others are is usually the exact opposite of what you should be doing.

In the same vein as the herd behavior, is our tendency to make investment decisions based on past success. Just because a strategy worked in the past does not necessarily mean it will work in the present. Markets change dramatically from week to week. Strategies you used in the Dotcom boom of the late nineties may lead to an unpleasant outcome in today’s market. Sticking to market fundamentals is one thing, but taking on blind risk a second time because it worked out the first, is nothing more than a gamble. It is the same concept behind betting on red because the roulette ball fell in a red pocket the previous spin. No matter what your past performance, prudent due diligence is always necessary to gauge the current market trends, analyze risk and make sound investment decisions.

I have encountered a number of studies that suggest we remember the bitter feeling of losing money more acutely than the feelings we have when we earn the same amount in an investment. A few lousy investment decisions and an investor can be turned off indefinitely. It is important to learn from our mistakes and use the knowledge to our advantage. Our emotions can lead us to make decisions that, in hindsight, are horrible ideas. A bad decision is bad no matter what the outcome. Making money out of an emotional decision is lucky, but the decision itself was still the wrong one.

There is no way to completely escape our tendencies to invest based on emotion. But, by being aware of the negative impact our emotions have on our investment decisions, we can limit their influence. Wise approaches such as hiring investment professionals, practicing prudent due diligence and planning sound exit strategies can all help us become better investors. 

Bank Closures v. the FDIC 

Last week, federal regulators seized seven more banks- three in Florida and one each in Georgia, Minnesota, Illinois and Wisconsin. The bank failures brought the year’s total to 106, which is the most since the savings and loan debacle brought about 181 failures in 1992.  Plus, with 416 banks on the FDIC’s watch list, the number of bank failures is expected to rise before the end of the year. With bank closures quickly absorbing millions of dollars from the FDIC’s Deposit Insurance Fund, is it possible that our savings accounts are realistically still protected?

The FDIC operates like a basic insurance policy, except banks are the customers instead of individuals or groups of individuals. Banks pay insurance premiums to the FDIC in exchange for its commitment to protect their depositors’ money. In the late 1920s, when banks closed at an alarming rate, depositors had no protection from bank failures. Between 1929 and 1933, banks lost an estimated $1.3 billion of their customers’ money. Today, the FDIC protects several trillion dollars worth of deposits. But as of June, it only had $10.4 billion in its deposit insurance fund—down from about $45 billion earlier this year.

The FDIC’s reserves have quickly depleted as the cost of bank failures outpace the fees the corporation collects. Last month, as bank closures continued to mount, the FDIC’s board of directors considered four ways to bulk up the insurance fund. The options considered were: borrow from healthy banks, borrow from the treasury, levy a special fee on banks or collect regular premiums early.

Borrowing from healthy banks would reduce the amount of money available to the private sector. Borrowing from the Treasury could send the wrong message to the public and have adverse effects on the banking industry. Levying a special fee on banks could push those on the edge into failure. The last option, albeit not particularly attractive either, is to collect regular premiums early. Deciding to follow through with this option, the FDIC stated it “adopted a Notice of Proposed Rulemaking that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012.” The press release indicated that the FDIC estimates prepayments will total approximately $45 billion.

Once approved, the proposed prepayments could give banks a bill for three years of premiums by the end of this year. While the requirement would put banks in a tough situation, the FDIC does not seem to think banks will find it too cumbersome. The FDIC believes that “the banking industry has substantial liquidity to prepay assessments.” As stated in the press release, “As of June 30, FDIC-insured institutions held more than $1.3 trillion in liquid balances, or 22 percent more than they did a year ago.”

The FDIC does have the capability to protect our deposits. However, initiatives that charge banks three years’ worth of premiums at once could help the FDIC weather an onslaught of bank closures without requiring the government to print more money…I hope.

All My Best,

Thomas J. Powell 

Take Advantage of the Future by Investing Now

              Investors at all levels have been tempted to stash their savings away in what they view as safe places: federally-insured banks, gold, their mattresses. But, as retirement creeps closer, or for some of you, continues on, it is difficult to protect the value of what you have. It is even more difficult to take what you have and get it to work for you. However, difficult does not mean impossible. There are tremendous opportunities in this economic climate and these opportunities can do wonders for your future.

              There is no direct financial path to retirement safety, but putting some basic concepts to work can give your investment portfolio a boost and start you in the right direction. A 60-year-old investor needs to plan for at least 30 years of financial security, so investing in the short-term is not sufficient. Planning for the long-term comes with one major obstacle: inflation. Shoving your cash into a large, everything-proof safe will ensure that the cash is always available, but inflation is resistant to safes and will still eat away at your value. Inflation adds to the puzzle of retirement planning, but keeping a stash of conservative investments can help save your portfolio from being deteriorated by inflation.

              Investors do not have to fear that most conservative money-market funds or bonds issued by the federal government will lose their money. But, these are short-term protection strategies. The returns offered by these investments are likely not enough to stave off inflation. If the cost of living significantly rises, you are going to want your savings to do the same. Many investors are turning to TIPS (Treasury Inflation Protected Securities) for peace of mind. TIPS can be very helpful in side stepping inflation woes, but in a low-inflation environment, your returns will be lower than many other fixed-income securities. So, do not go overboard with TIPS.

              Your best weapon is diversification. Having a diverse mix of investments is a great strategy for both conservative and more risk-adverse investors. Diversification will always be your best hedge against inflation. Setting up a brief meeting with a registered investment adviser will help you to build a diverse portfolio that meets your needs. Playing it too safe now is not something you want to try and correct years after retirement. Running out of money later in life is something you can, and should, protect against now. And, again, this economic climate is filled with long-term investment opportunities. 

Living Vicariously Through Predictions

              Despite grim news reported for September that housing starts came in lower than expected, they rose from August rates. The tendency to be disappointed when expectations are not fulfilled adds to the bad news already being forced on us during these difficult times. When a report from the Commerce Department was released in Washington earlier this week, newspapers jumped at the chance to report that the glass was half empty. All predictions aside, housing starts still showed improvement.

              According to The Wall Street Journal, “The rise in housing starts came in at 0.5 percent, climbing to a seasonally adjusted 590,000 annual rate compared to the prior month.”[1]  Housing starts improved, but major media outlets pumped out headlines such as “Bummer for Housing Starts” (Forbes) and “Housing Starts Miss Expectations” (CNNMoney.com). The media ignored projections made by 76 economists in a Bloomberg survey. Their estimates predicted that housing starts would rise somewhere between a rate of 582,000 to 630,000. But, their estimates were made at a time when the August rate was thought to be 598,000. When a correction to the August figures brought the number down to 587,000, the predictions had already been made. If the numbers the economists were using were off by 11,000, then you could assume most of them would have lowered their expectations by the same amount. This would have made the average of the 76 predictions stand at 595,000; which is very close to the recently reported 590,000 figure.

              The point of all of this is that our economy still showed a humble sign of improvement. With the amount of slack still present in the housing industry, it is a small feat to break ground on any amount of new homes. Looking through rose-colored lenses will not do us any good, we need to be realistic. In that same vein, hammering out pessimistic stories when they are not realistic will only bring down the confidence upon which our markets rely. A group of surveyed economists who were making predictions based on false numbers should not have a drastic impact on our economic situation. As Charles Mackay wrote in his well-noted “Extraordinary Popular Delusions and the Madness of Crowds” in 1841: “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

              Negativity spreads quickly. We have enough to go mad over without becoming disappointed when a group of “experts” do not have their predictions come true. I think the real worry here should be in our experts’ ability to make accurate predictions. Instead of “Bummer for Housing Starts” how about “Experts off Again” or “The Facts the Experts Couldn’t See Coming”?  

Oh! I Didn’t See You There, Small Businesses

              Small-business advocates have criticized the White House for not giving more attention to small businesses. But, on Wednesday the Obama Administration announced that it would use funds leftover from the $700 billion bailout package to aid small businesses. Discussion of the new program came in response to dissatisfaction with the initial wave of bailouts that aimed at helping large financial firms and neglected small businesses. Many policy makers have argued for months that the $700 billion stimulus was only used to balance the books of large banks.

              The new plan, which is still nameless, will aim to increase lending at small, community-based banks. As was the case when individual states were dealt federal funds, the banks will be required to submit somewhat-detailed plans outlining how they plan on using the money. Since the new program will aim to get funds into the hands of small business owners, the banks’ plans will need to detail how they will play a part in this.

              After a number of meetings with community banks that will be scheduled through the end of the year, officials hope to determine the amount of capital that will be distributed. The funds are only to be available to small institutions with less than $1 billion in assets. 

              In his announcement in Washington on Wednesday, President Obama said he was prepared to “shift the government bailout efforts from larger banks to smaller banks because small business owners still have too little access to credit.”[2] Officials behind the new program hope that increasing credit to smaller institutions will energize job growth, which is something that has been reported on relentlessly, but has received little government attention.

              Although the exact amount of the remainder of the stimulus funds is unknown, federal officials agree it is enough to support this new initiative. Having the funds already available and not having to wait on them to be raised will help get the program off the ground. The life of many small businesses could depend on the government’s ability to act quickly. Taking months to consult community bankers may delay the program and inhibit small businesses from acquiring much-needed capital. Small businesses have been ignored thus far and, through innovation and flexibility, they have been able to survive.

Thomas J. Powell

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[1] See http://online.wsj.com/article/BT-CO-20091020-709265.html

[2] See http://www.reuters.com/article/governmentFilingsNews/idUSWAT01385420091021

 

The discussion of investment strategies in this article should not be considered an offer to buy or sell any investment. As always, consult an investment professional to assist you in meeting your investment goals. 

Isn’t It Ironic? Bailed-Out Banks Pulling in Huge Profits While Business Struggles

It has been very interesting the past several days in the stock market.  The Dow pushed over 10,000 last week and sits at nearly 10,100 today.  The weak dollar can share part of the claim reaching this important mark, but another, more interesting part are the reports by some of the country’s largest banks of very solid earnings for the past quarter.

JPMorgan reported a profit between July and September of $3.59 billion.  Goldman Sachs earned $3.19 billion during the same time period, reporting the most it has ever made in three months, with each of the bank’s employees earning an average of $700,000 EACH.  Citigroup has reported a profit of $101 million; we’ve gotten so used to the “B” word, millions seem like chump change.

I am happy to know that some companies out there are actually making a profit and helping to create some positive news out there in the market place.  However, it strikes me as completely ironic that most of these institutions are the same organizations which 1) Helped create the economic mess in which we find ourselves; 2) Were bailed out by the taxpayers, meaning the 51% and mainly the top 5% of our population which pay the majority of taxes; and 3)Have stopped the flow of capital into the market, cutting off businesses from their credit and capital lifelines, all the while paying their people unbelievable amounts of money.

Don’t get me wrong.  I am all about capitalism, free enterprise and  entrepreneurship.  Those who make it on their own and with their own drive and tenacity deserve every dollar and every success they can collect.  What I am absolutely opposed to is the organization which has an open check and safety net from the government, hoards its money by investing in T-bills, stops the flow of capital and the monetary cycle to the market, all the while rewarding itself in the process.

No matter what positive signs the media is portraying, the every day reality is that business is hurting.  My circle of friends consists of nearly all business owners; not one of them I know is looking to hire anyone soon, and may still have more downsizing to go.  Nearly all of them need capital, and nearly all of them cannot find it, leaving them with dwindling options to keep their doors open.

I look forward to the flow of capital back into the market.  Until then, it’s going to be up to us as individuals to keep projects and businesses moving forward.  If you see a project or have a business you like, consider investing in those entities in addition to traditional investments.  I can assure you the gratitude from the business or project owner will far surpass that of a stock certificate, not to mention the potential returns may be very rewarding.

All my best,

Thomas J Powell

 

Market Breaks 10,000- Don’t Get out the Champagne Yet

The good news on Wall Street lately has little meaning for the rest of us.  Yesterday, the Dow topped 10,000.  The numbers signify a return to stability more than a return to growth.  Though the market enjoys a modest up swing, hold off on the celebration.  I see at least two explanations for the bullish performance: a market bubble and penny pinching companies. 

A breakingnews.com story put yesterday’s Dow into historical context.  If you take out the dotcom and housing bubbles and assume a nominal annual growth rate of four percent since 1995 (two percent real growth and two percent inflation), the Dow “valuation today would be just north of 7,800.”  Today’s numbers, according to historical analysis, reflect higher than average growth rates.  

Cost cutting companies provide another explanation for recent highs.  Facing devastating market devaluations, companies cut inventories and eliminate jobs.  Profits will then rise relative to previous periods of poor performance.  As companies post gains- stocks rise.  What we are seeing could be more of a new status quo: low growth and smaller companies. Smaller companies mean fewer jobs, sustained, institutional unemployment and lower living standards for all.  

A Lesson in Personal Responsibility- Okay, Get out the Champagne

Congratulations to 76-year-old Elinor Ostrom, the first women to win a Nobel Prize in economics.  Ostrom found that individuals can manage common resources more efficiently than government or private institutions do. 

“What we have ignored is what citizens can do and the importance of real involvement of the people involved — as opposed to just having somebody in Washington … make a rule,” Ostrom told reporters. 

Her work focused on public land and resource use.  Her insights tell us not to rely on government or the private markets to solve our problems.  Those conclusions may be a little abstract, but I agree with the first part.  Efficient economies balance personal incentive with public outcomes.  Governments cannot regulate every aspect of the economy.  Individuals need the freedom to adapt to changing conditions without waiting for a bailout. 

What can citizens do?  Focus on personal initiave.  We, the participants of a private marketplace, can solve our problems by building private industry.  Governments cannot efficiently fund the recovery.  Look at what AIG did with its money.  Cash that didn’t go to sustaining a flawed securities industry went to paying out huge bonuses.  Little of the bailout, or stimulus for that matter, has actually reached worthy projects.  The path to real growth begins when private banks, investors and entreprenuers create capital flow. 

There’s much more to this story.  I just wanted to take a moment to cheers Ostrom and her lesson of personal reasonability.

 

Reno’s ELP Capital Seeks OK for Investment Vehicles

BY JOHN SEELMEYER

ELP Capital Inc. of Reno seeks regulatory

approval for two investment funds that will

target well-heeled sophisticated individual

investors.

Thomas Powell, the chief executive officer

of ELP Capital Inc., says the funds mark an

effort to jump-start the northern Nevada economy

by channeling local investment dollars

into local projects.

The company last week filed a notice with

the U.S. Securities and Exchange Commission

that it believes the two funds are exempt from

securities regulations because they will be sold

to a limited number of investors or to buyers

who meet the SEC’s standards for accredited

investors. (Those standards include net worth

and annual income for individual investors.)

The ELP Strategic Asset Fund LLC has

raised $450,000 so far, the company said in an

SEC filing. There’s no maximum size on the

fund, and minimum investments are set at

$250,000.

A second fund, ELP Opportunity Fund 1—

GBLL LLC, is planned to raised $2.3 million.

So far, $100,000 has been raised.Minimum

investment in the fund is $50,000.

ELP Capital, incorporated in 2004, has

managed debt and equity financing of real

estate. The company traces its beginnings to

IntoHomes LLC, a residential mortgage lender

launched by Powell in 1999.

Along with Powell, its board includes Jesse

Haw, president of Hawco Properties of Spanish

Springs, and Bob Barone, chairman of Ancora

West Trust Co. in Reno.

Powell, who’s also an author of books and

articles, has argued recently that private

investors can play a major role in getting the

construction and development markets moving

again if they’ll fund stalled quality projects.

“This recession … left a stockpile of quality

real-estate projects to collect dust.Without

proper funding, the projects remain undeveloped,

unproductive and severely underemployed.

Placing our private capital into quality

projects will bolster the number of available

jobs in our communities and get people

behind a meaningful cause,” he wrote in an

essay this month.

ELP Capital expects to charge an annual

management fee of 1 percent of the funds’

assets, and it also may collect a performance

fee.

Along with the two investment funds, ELP

Capital last week filed SEC paperwork for

exempt offerings of securities in two real estate

funds.

One of the filings covers ELP Mortgage

Fund III — The Ridges LLC. The company

said $2.1 million of the $2.5 million fund has

been sold to accredited investors.

The second filing covered ELP Acquisition

Fund—Citi Centre LLC, which has raised

about $3.28 million of a $4.5 million offering.

Some Good News for all of us Starbucks Fans, and Even Those Who Aren’t

This morning while visiting my local Starbucks, I was given a sample of the latest product to come from the caffeine giant: a packet of its new Via instant coffee. While I have yet to try it I was told by employees how it can be mixed with hot water, cold water or milk to create an instant, great tasting cup of coffee.

My town was one that had a few Starbucks close down during this past year, including one in our downtown area which I hoped would make it. One in a shopping center in which I am part-owner never made it past the lease. When people stop feeding their caffeine addiction, you know something serious is going on.

However, there are some positive signs which may have the public going for the leaded fuel again. Schultz just exercised nearly $20 million in stock options and rather than cashing them in, he is taking the $15 million paper profit and holding them for the long run. I always like seeing when a CEO can take the easy road but puts his or her money where their mouth is, believing in their own company and its potential.

Starbucks stock is up over 120% year to date as well trading at 20+ times EPS looking at future earnings projections. Schultz says he is incredibly bullish on his company and its outlook.

I’ve always had the view of stock purchases in one of two ways: either you should look at buying stock in a product you use or stock in a company of which you are a fan. Based on that thought process, I am also very bullish on Starbucks and its future, as I’m sure are the folks who I see every morning in line at my local store.

In addition, with my wife being from Seattle, the land of coffee houses on every corner, we cannot help but be fans of Starbucks. No matter how large the company gets, there is still a sense of the local kid making it in the big time.

Here’s to you, Howard Schultz, and to your success and the success of Starbucks. I’m rooting for you.

All my best,

Thomas J Powell

Pulling the Unemployed off the Ropes and Into the Fight

As markets continue to produce signs of stabilization over the next quarter, it is unlikely that unemployment figures will show much improvement. With figures the highest they have been in more than 25 years, unemployment appears to have neared its peak. Lowering the rate to levels our economy can adequately support will prove to be a daunting task. But, with a little encouragement the corporate sector certainly has the power to handle it.
Last week, Federal Reserve Chairman Ben Bernanke was quoted by multiple major news sources after he told the Brookings Institute, “The recession is likely over at this point.” According to Bernanke, the economy appears to be growing, but not at a pace that will be sufficient for lowering the unemployment rate. Historically, economic upturns after recessions have been stamped with consumer demand. This time around, however, many Americans may not have the ability to help lead a recovery because they have been completely wiped out financially.
In order to spur consumer-led demand, the corporate sector will again have to make jobs readily available. The unemployed are not the kind of consumers that are needed to invigorate our economy and induce growth. We do not need to turn to an economics textbook to tell us that our broken economic cycle can be patched with more available jobs—this much we know.
Corporations large and small have been forced to adapt to this constricted economy and the majority of them were required to do so through downsizing. Now, company leaders are reluctant to increase their workforce until they are confident there is a significant increase in demand for their products and services. But, one strong possibility that could provide the encouragement needed to get company leaders hiring again is a temporary change in corporate tax policy.
A temporary tax break aimed at equaling the payroll costs of adding new employees would strip the risk for companies that are awaiting a full-blown recovery before they hire. Plus, according to a recent article published in The Wall Street Journal:
“The impact of a two-year program on the federal deficit would be relatively modest. Using a conservative set of assumptions, an $18 billion annual program, which represents 10% of estimated corporate tax receipts in the next fiscal year could create nearly 600,000 good-paying jobs …”

Before they commit to hiring, companies are waiting for consumers to spend. But, before consumers commit to spending, they are waiting for companies to hire. The cycle is stagnant and will remain so until one side is persuaded to change their behavior. A government-sponsored tax break for companies that agree to hire could be the first action taken during this recession that encourages our country’s government, companies and individuals to work together.

Capital River is Frozen; We Can Thaw it

Because of the severe impact of the recession, the stream of capital that once flooded our economy has been reduced to a trickle. The majority of the flow evaporated when banks were forced by the Fed to tighten their lending standards as delinquent loans polluted their books. Consequently, failing to restore the flow is making it extremely difficult for the Fed to take progressive measures toward recovery and has the potential to drop us back into another recession.
According to Bloomberg.com:
“The Fed’s second-quarter survey of senior loan officers, released Aug. 17, showed U.S. banks tightened standards on all types of loans and said they expect to maintain strict criteria on lending until at least the second half of 2010.”

With dropping values in commercial real estate, rising unemployment numbers and a seemingly unending onslaught of delinquent mortgages; banks are not lacking reasons to practice strict lending measures. Earlier this year, through a series of stress tests, the Fed found that 19 of the country’s largest banks needed $75 billion in new capital to protect themselves from mounting losses.
With all of my recent writings and blog postings concerning the benefits of getting our private capital back in the game, I am by no means hiding my agenda for restoring capital flow. The economy will only be repaired once the flow of capital is rejuvenated. It is much easier to lead capital tributaries back into the main stream if they are first flowing. Over the next couple of quarters, banks will continue to deleverage and work toward a balanced lending system. But, without raising more private capital, banks will not be able to establish a lending system that enables credit-worthy individuals and businesses to acquire reasonable loans; which puts an enormous restraint on economic progress.
Our economy is already positioned to attempt to force a jobless recovery, which will certainly create complications in sustaining a recovery. Trying to force a credit-less recovery will only exacerbate our struggles. Dragging our banks through a painful recovery without sufficient capital will only position them to break and lead us right back through more of the same. By identifying ways to put our private capital back into the equation we are positioning our financial system to rise from this recession stronger and more efficient. By investing in private enterprise, we are sparking long-term, mutually-beneficial relationships between capital-producing businesses and banks (while also earning gracious returns on our initial investments). Now is the time to put our private capital back to work.

Without Our Capital, Banks Get the Axe

Our private capital plays an integral part in our local economies—which then all collectively have crucial roles in our country’s financial stability. Because banks have become over-reliant on easy credit, they are now struggling to keep their businesses running by raising capital the old fashioned way. Without our capital, our banks (and more importantly our communities) cannot function properly. Not able to fulfill their debt obligations, banks are closing their doors and falling under the control of the FDIC; which “estimates bank failures will cost the fund about $70 billion through 2013.”
Banks are necessary to ensure that money circulates in our communities. They distribute the money of their depositors to borrowers who have a worthwhile purpose for the money. The banks secure our savings and lend the money to companies or individuals. Banks provide a convenient location for borrowers to acquire funds. Without banks, companies would find it very difficult to borrow large sums of money.
While banks perform their role as intermediaries, they also essentially increase the supply of money. By accepting deposits from its customers and loaning the money to worthy borrowers, banks “create” money. Consider the following simple example. Imagine a customer deposits $20,000 into her bank account. Even though the bills are no longer in circulation, the amount of money in our country does not change as a result of the deposit. Allowing the money to simply sit in the bank’s safe would not earn the bank anything. Therefore, the bank lends $10,000 to an entrepreneur in return for an additional interest fee. The depositor still has a $20,000 credit in her account and the entrepreneur has $10,000, therefore the money supply has increased by $10,000. The entrepreneur purchases supplies with the money and creates a product that he sells for a profit. As long as banks have depositors, they are able play their crucial role of increasing the money supply by making funds available to those looking to find backing for their ventures.
The word “bank” itself is derived from the Italian word “banca,” which referred to the table on which coins were counted and exchanged in the middle ages. “Bancarotta,” from which the word “bankrupt” was derived, means “broken bank.” Originally, if a banker was unable to pay his debts, the authorities arrived to smash his table in half with an axe. Today, the FDIC seizes failed banks and seeks buyers for their branches, deposits and faulty loans—all, for some reason, without smashing anything with an axe.

All my best,

Thomas J. Powell