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.

Too Big to Fail? Here We Go Again…

Today marks the one year anniversary of the collapse of Lehman Brothers, one of the worst financial disasters of our time, as it nearly brought down the international financial system. Yesterday I was reading an article about how the big banks are showing signs of life with their actions and things are starting to move, signalling a possible economic recovery. This makes me wonder about the adage of being “too big to fail.” What is the right decision in this situation?

It appears to me that after the latest cycle, quite possibly and hopefully the worst we will see in our lifetimes, people are hoping that this time things will be different. That once we actually do reach a point of recovery, we won’t make the same mistakes that were recently experienced. This cycle has been painful; it has been gut-wrenching; it has been a lesson I surely don’t want to repeat, as I get it and don’t need to learn it again.

I am very nervous about this thought process. As the saying goes, history repeats itself, and that did not become a quote we all use without good reason. For generations, for decades, for centuries, the animal in human nature causes us to make the same decisions and choose the same paths as before.

Some of our largest banks, which the government determined were too big to fail, received billions in taxpayer TARP funds. Our money kept these institutions afloat and I understand the reasoning behind keeping their doors open, especially using the Lehman example. I am dismayed, however, at the actions of these institutions. By receiving government funds, they are able to continually take on high degrees of risk, knowing there is a safety net underneath them. Prudent due diligence has gone by the wayside with the knowledge of someone is there to catch them. I liken this to the casino industry. If you could borrow $1 Million dollars and gamble it, knowing you would get it back if you lost it PLUS knowing you would get to keep any winnings you made, why wouldn’t you do it? This is exactly the system we have allowed to be established.

And, what about the outrageous salaries and bonus payments we still continue to hear about? I am all for the entrepreneur earning as much as he or she can based on value and return to society, but I am not about taking from you and me, putting a chokehold on getting capital back into circulation while cutting off small business, and then handsomely rewarding the big bank players in the process.

The veritas, the truth, as I see it, is that nothing has really changed, that we are repeating ourselves and that we will all pay the price of the failure to learn what could be a valuable and useful lesson. As we continue through this cycle, which I believe still has more pain to come, I hope for and have faith in the success of the small business, for the will of the entrepreneur, and for the recovery of our great land.

Too big to fail? Ok, I’ll give the government that. But what about keeping the backbone of American capitalism healthy? I’m not saying the answer is in government bailouts for small business, as anyone who knows me knows I believe in complete personal responsibility. I’m only asking for the same access to capital for small business so that it can keep its doors open, giving it time to make the changes and adjustments necessary for its own success. In short, allowing business to help itself.

I have thoughts on how I believe this can be done without the banks, allowing history to repeat itself in the manner I believe will lead to our recovery. I will write more in the coming days, but in short I believe in private capital + private enterprise = economic recovery.

I look forward to sharing more of my thoughts and receiving your feedback.

All my best,

Thomas J Powell

Taking Control of the Things We Can

Earlier this week, after wrestling with the spate of painful economic news provided by major media, I recognized that I had no immediate control over any of the massive economic concerns. The stock market zigged when I hoped it would zag. Unemployment numbers, often reported differently, moved at different paces in the undesirable direction. Our federal deficit grew, which increased our individual debt responsibility. The problems were not confined by the pages of the newspapers. When I peered through my office window I saw quality real-estate projects continuing to sit lifeless because they lacked funding. After a few moments of reflection, I recognized that I, and certainly the majority of us, am being forcibly weighed down by all of the negative. Instead of dwelling on the uncontrollable, we should be manifesting the positive by taking hold of the reins on those things in which we can have significant influence.
I decided to start anew with more refreshing thoughts. So, I turned to a medium in which I had some control over the information that was presented to me: Google. Two main pages topped the list when I searched for the words “Economy: We Are the Answer.” The first was an informal Yahoo Answer Board on which the following question was raised: “Is there hope for the American economy or should we just drastically change the way we live?” The user went on to define “drastically change” by giving up our private houses and cars. The second most-popular page that appeared was BarackObama.com, which suggests no one within Google’s reach really believes we the people have the capacity to be the answer to our economic problems. According to my Google search, the answer either rests in the hands of President Obama or we will all be forced to live in communal frat houses without automobiles.
When our economy is running smoothly, we all welcome the opportunities to be part of a do-it-yourself world. We bag our own groceries, scan our own documents, rent our own movies and print our own boarding passes. On a weekly basis, we all most likely take it upon ourselves to deposit, track, clean, swipe, dry, spray, refill, bus, organize, pour, dispense and scan in the presence of other do-it-yourselfers in the vast public. As long as the tasks are minimal and the goal is clearly in view, we are encouraged to do everything ourselves. The responsibilities we used to let others handle, we now do ourselves (I cooked my own meal at Melting Pot earlier in the month). About half of the times I visit a gas station, there is no reason for an attendant to be present—unless I am in Oregon or New Jersey, where state officials prohibit me from pumping my own gas. But, when an issue has options that are more complex than selecting diesel or regular, our individual accountability takes a vacation. Why do we turn our focus to other superpowers to take control and eliminate ourselves from the equation?
The Problem is Passivity
This economic downturn is nothing more than a collection of intertwined problems. Although financially painful and physically overwhelming, there is no reason for any of us to hide underneath our desks and wait for the shaking to end. Think about the steps we all take when trying to overcome a timely problem—for an example, a clogged drain. We take a short period of time to analyze the situation. We look at all the factors involved and ask ourselves crucial questions: Is the water draining at all? Is the clog causing the pipes to leak? How severe is the leak? Is it causing immediate damage? Next, inevitably, it is human instinct to search for the quickest fix. We switch on the garbage disposal and rub our lucky rabbit’s foot. When we are forced to take real action we must recognize the weapons we have to combat the problem (a plunger, a drain snake, Drain-O). After we extinguish our resources, we then consult the knowledge of an expert.
Now consider the enormity of our current economic struggles. The formula for dealing with the problem is much more complex, but it should still follow the basic fundamentals. Why then have droves of investors been complacent to listen to long-winded “experts” before analyzing their situation and deducing what it is that they can do for themselves? The formula is flip-flopped when we let ourselves believe that any given problem is too big or too complex. Remember the old adage, “We can only eat an elephant one bite at a time”? Many of the intricacies of this recession are out of our control, but the sooner we take control over the issues we can influence, the sooner the complex problems begin to untangle.
If the severity of the problem is directly proportionate to the amount of time we take to analyze it, then we only need a brief moment to stare into a clogged drain. In that same vein, our economic crisis is much more complex and has required a longer period for analysis. I argue we have passed this stage of the process and action is required now. This summer brought about a number of signs that suggest we are now slogging around somewhere near the bottom. With home-improvement projects, summer vacations and outdoor entertainment, consumers typically spend more in the summer months. We are now entering what is destined to be a difficult autumn. Unemployment will continue to strain on families, foreclosures will mount and consumers will tighten the belts they let momentarily loosen over the summer.
On the other hand, as the leaves turn and nature gets stripped of its color, a buckled economy will continue to present opportunities for us to take action. It is time for all of us to stop viewing ourselves as helpless observers and again consider ourselves part of the equation. In some ways we already are important variables, but we rely on the inadvertent action we take to be sufficient. How many times have you heard an angry citizen blurt out something along the lines of “I do my part, I’m a taxpayer”? The somewhat-passive action of paying taxes funds many integral economic systems in which our country balances itself. Just as we hire plumbers to help unclog our drains and keep them running smoothly we elect (read “hire”) officials to help unclog our economy and keep it running smoothly. With our plumbers, we are responsible for paying the bill to enable them to do their job. The same is true for the officials; by paying our taxes, we essentially all pick up our share of the bill and expect them to do their share of the work. Without our capital, their positions would not exist; but this hardly means we have positioned ourselves as active parts of the recovery.
Investing to Make a Difference
To be an important cog in the recovery machine, we must put our money to work. Our money does not do any good stuffed in a mattress or buried underneath the deck. Private capital built this country and there are few economic problems that private capital cannot solve, if allocated effectively. During the Great Depression, a time when the economy constricted and the majority of construction projects were put on hold, the entire construction of the Empire State Building was completed. Thanks to funding from its principle backer, an automobile tycoon aiming to one-up a major competitor, the Empire State Building was constructed with staggering momentum. During the Depression, building materials were cheaper and workers were eager to earn a wage, much like today. The construction put people and money back to work in dire times; not to mention the mystique the building has given our country for nearly eight decades.
A project as grand as the Empire State Building might only come around once a century, but that does not rule out the need for quality projects in our own communities. When private capital teams with quality-managed projects, the outcomes can be extraordinary. But, you need both. Whereas quality projects cannot get off the ground without capital, poorly-managed projects get ran back into the ground even with all the capital in the world.
This recession has torn through our communities and 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. There are loads of individuals that could be taking charge and becoming part of this recovery. We will show great resilience when we, on our own, come out of this strong, super-charged and feeling part of something.
We have to put the days of excuses behind us. We should be searching for any project that someone says “can’t be done” and aim to defy. When the newspapers have stopped reporting stories that highlight economic blemishes, our unemployment numbers are approaching all-time lows and our government takes a permanent vacation from bailouts; we will only vaguely remember our current doubts. We will, however, remember the period of time when we all did our part to restore communities. We will remember the turning point when we took action to pull ourselves from the painful times and regained our spot as part of the equation.

Treasury Signals Pull Out, Good News for Entreprenuers

In a recent USA Today post, Rhonda Abrams compared entrepreneurship to whitewater rafting.  My favorite tip is number six, “keep paddling…you’ve got to navigate your way through tough challenges.”  In a recession like this one, you must navigate your own course.  We cannot rely on the government to get us out of this mess

Policy makers are beginning to signal the same sentiment. The Treasury Department announced today that it would be scaling back government intervention in the financial markets. They’re sending an important message- mainly, the bail-out will not last forever- just long enough to stabilize lending so the markets can take over.

Though Treasury warns of continued lack-luster performance in the short-term, today’s news isn’t all bad.  Oil production is to remain constant and trade data shows growth in both imports and exports as demand increases on international stimulus spending.  Remember, the stimulus spending is a temporary fix.  The real rebound will come from the private sector, the entrepreneur. 

So I agree with Abrams, make your own plan, get the advice you need, and hold on in troubled times.

Thomas J. Powell – Reasonable Regulation: That’s Allstate’s Stand

Reasonable Regulation: That’s Allstate’s Stand

            Many companies involved in financial services cower when an official of any stature mentions the threat of national regulation, but Allstate has decided to embrace it. Since late April, Allstate has been pushing an advertising campaign that is rooted in support for creating a national regulation agency for all players in the financial industry, including insurance companies. Each ad in the four-part series, which runs in major magazines such as The Atlantic, touts the common theme of calling on “Congress to act boldly and quickly in drafting strong, comprehensive and clear federal regulation.”[1]

             Under the current system, insurance companies are regulated on a state-by-state basis, something that Allstate CEO Tom Wilson thinks needs be changed. In a national press release, Wilson argued:

 The American consumer is burdened with a patchwork of insurance regulatory systems that are cumbersome and ineffective in managing risks in an era of rapid change and innovation. American families need better protection from systemic risks and access to products and services that will help better manage their financial futures.[2]

 

            Allstate’s push for a national regulation system is bold. The campaign appears to be having an impact as the Obama administration has started tackling a number of vital decisions that could ultimately lead to national regulation for all financial services. President Obama himself may not have been directly affected by Allstate’s campaign, but according to PRnewswire.com at least one Congressperson has received more than $20,000 in campaign contributions from Allstate over the past four years. Clearly Allstate has identified the potential benefits that would come bundled with national regulation.

            One group that stands to be trapped and bound by the regulatory net of a national system is the stock brokers on Wall Street. The Obama administration has proposed a plan that would hold brokers to the stricter fiduciary standards of registered investment advisors. Under this plan, brokers would be required by law to act in their clients’ best interests, not their own. Also, with each piece of investment advice, brokers would be obligated to disclose what they stand to gain personally. A plan to implement a complete regulation overhaul is sure to be cumbersome and will take time to be implemented effectively. The Obama administration would be wise to have patience with this reform and comb through all of the complexities before attempting to have anything signed into law.

 At the end of the day, the federal regulatory overhaul will aim to force those in the financial system to be more transparent, something the Allstate campaign clearly addresses: “Only when there is transparency around valuing the risk in the financial system—including the role of insurance to help mitigate that risk—will we regain confidence in the economy.”[3]           

To view all of the Allstate advertisements in their entirety, visit allstate.com/fedreg.

 

 

Commercial Real Estate’s Role in the Next Bailout

            Banks have had little to celebrate over the past 20 plus months. Still dizzy from the debacle caused by residential real estate, banks nationwide fear the devastation that could soon be unleashed by the rising number of foreclosures in commercial real estate.

            The banks which provided the money to build endless numbers of commercial buildings originally did so because they, like so many others, believed occupancy and rent rates would always consistently rise. But, many owners of commercial buildings are now fueling another wave of foreclosures because they are not able to generate enough cash from tenants to cover their principal and interest payments. Because the loans have also been bundled and sold on Wall Street as commercial-backed mortgage securities (CMBS), the foreclosed buildings spark a ripple effect. Anticipating the severe consequences this could have on our economy, the Federal Reserve is struggling to contain the situation and prevent the need for a second wave of bank bailouts.

            According to Deutsche Bank, about $153 billion in loans that make up CMBS will come due by the end of 2012. The vast majority of these will not be eligible for refinancing through their lenders because the values of the properties have dropped so dramatically.[4] The losses will potentially cripple not only the owners of the commercial properties, but also anyone holding CMBS. Furthermore, because CMBS typically help drive pension and hedge funds, the pain will be widely spread.

            The only positive side of this mess will be the number of affordable investment opportunities for those looking to get into commercial real estate. Commercial real estate does perform in the long haul. But, because of the onslaught of new commercial buildings that sprouted in recent years, we are now experiencing an uncomfortable rebalancing of the industry. Loans that were made on loose credit and then bundled by Wall Street into dicey investment vehicles are all being exposed. However, the underlying properties are not rotten; they still make for sound investments.

            Like the residential market, the commercial real-estate industry was saturated with quick deals that turned sour because they were not thought through. Now, because the consequences stretched so far, the commercial real-estate industry has to be turned upside down and untangled. Although the untangling process will be turbulent, it will also be exposing an array of investment possibilities. Commercial real estate provides the venues for consumer spending. As the economy slowly recovers, so too will the demand for prime commercial real estate—something that will be readily available and reasonably priced in the immediate future.  

 

Keep Health Care in Our “Best Interest”

            I have been reluctant to bring the argument of national health-care reform to the Powell Perspective because it does not necessarily pertain to real estate, finance or investing. But, national health-care reform has the potential to have drastic impact on our economy, and for this reason I believe it deserves attention here.

            I have been convinced to raise this issue after overhearing a 20-something at the gas pump discuss the issue with someone of similar age. “Man, the whole thing is no big deal, I mean how often do we really go to the doctor anyway?” he said. As I drove off, I realized that the young man, healthy and probably feeling somewhat resilient, was simply not interested in the topic. He wanted to be able to disregard the topic so he could have more attention to focus on the issues that had a more immediate impact on him.

            This week will bring an important turn in the debate over national health-care reform. The Obama administration has committed itself to rethinking the plan before the President is scheduled to address Congress on September 9^th. President Obama is now going to be leading the arguments that he has been able to mostly sidestep thus far. What has me concerned is that the administration will recognize what I did while pumping my gas: The youth do not care. If the Obama administration addresses this and rebrands the issue to somehow get the youth behind it, then the approval rating for health-care reform could skyrocket. The same demographic that helped the President win the office, could now help direct a national issue that they may not be truly interested in for another 20 years. On the other hand, maybe it is time to address the demographic who will still be paying for this change long after we are gone. After all, the people that currently have a vested interest are at a standstill after becoming equally heated on both sides of the issue.

            Since its appearance in the Obama administration’s limelight, health-care reform has done nothing but become more complex. The plan is unclear. No one knows what it will look like, we only know what the media reports: We’re currently 37^th in the world in health-care quality. Death panels will dictate how long we live. The President will personally pull the plug on our grandma. If there are details to this administration’s plan, then they have all been shadowed by heated talk show hosts’ attempts to get the public screaming about something no one knows about.

            On September 9^th President Obama is going to be forced to add some structure to his administration’s plan. Thus far, no one has been able to dissect and discredit the plan because it has only taken shape through various town hall meetings and informal gatherings. In his first address to Congress since February, President Obama will be talking exclusively about health care. This national issue is going to take rigid leadership from the President. If he wants to make any progress he is going to have to involve the nation by getting the young to care and the old to stop shouting at one another and listen.

           

 

 

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[1] See http://www.allstate.com/about/advoc-insurance-fed-charter.aspx

[2] See http://allstate.com/content/refresh-attachments/Advoc_FedCharter.pdf

[3] See http://www.allstate.com/content/refresh-attachments/FedREg_Pool.pdf

[4] See http://online.wsj.com/article/SB125167422962070925.html?mod=rss_whats_news_us

Thomas J. Powell – Be bold while others are being scared! It’s time to load up on alternative investments

In today’s Wall Street Journal there is a great article about thinking differently about your portfolio.  In it, the article talks about the traditional 60-40 stock to bond split and how the traditional investment idea is yesterday’s thinking.  As we all know, stocks have been battered, and the chances for recovery at any time in the near future is slim.  Many of the experts in the article are recommending bonds in your portfolio, but also now being frequently mentioned is the alternative asset class.  In our case, as you know, that class is real estate.

Why real estate, and why now?  I believe it’s time for you be bold while others are being scared.  Everywhere we look, the press is telling us the economic situation in our country is scary and the sky is falling.  However, I believe that if you act decisively now with confidence, you will come out surviving and thriving, as I say in my book Standing In The Rain.  I am encouraged by the articles in the press that are supporting ELP Capital’s beliefs in recovery:  Forbes says there is still a fortune to be made in real estate, housing numbers are starting to creep up, Business Week is telling you to rethink your retirement. 

I would like you to consider the contrarian view real estate investing offers at this point.  The stock market has daily volatility and uncertainty.  Real estate, while under performing the past couple of years, performs at a steady appreciation rate when on trend.  Private investing in real estate, as offered through ELP Capital, is less susceptible to daily market fluctuation.  In addition, it offers transparency, a tangible asset, and it increases your control and piece of mind when having a group of professional managers and experts behind the investment.

I hope you consider adding alternative investments to your portfolio and the benefits associated with the real estate class.  Now is the time to be bold when others are being scared.

I look forward to your comments and feedback.

All my best,

Thomas J. Powell

The Powell Perspective, by Thomas J. Powell – Stats Won’t Save Us

Stats Won’t Save Us

            Every day, and every minute somewhere on the Web, another statistic that hints at an economic recovery is reported, copied, translated, manipulated and reevaluated. It seems for every positive up tick in economic numbers, there is also a negative. We have been experiencing shaky times for the past 20 months. Every sector is not going to at once join together on an all-knowing graph somewhere and move together as one gradually-rising black arrow.

            Stats are meant to give us market indication. “Experts” on the economy make sense of the stats by attaching other positive attributes to them without any solid proof. In social psychology, it is similar to how the halo effect works: If I see Bob Somebody helping an old lady cross a busy intersection, then I automatically believe Bob to be a good person; without having any solid proof. Helping the elderly in dangerous situations is good, I saw Bob do that, so Bob must be good. Similarly, the media tells us recessions are scary and bad, positive things do not happen in recessions; therefore a positive up tick in one sector must mean we are out of the bad recession and into the good recovery. Experts link good news with other good news without any solid proof.

            Earlier this month, Newsweek ran a cover that pictured a big red balloon which read “The Recession is Over!” The cover and its related story caused a small uproar that resulted in criticism from President Obama. Although the cover story was meant primarily to sell magazines, the author did make a solid point: “… when economists proclaim a recession over, they’re celebrating a technicality: they mean economic output has stopped contracting.”[1] When the economy stops contracting, it does not simultaneously return to the rising rates we experienced in the years prior to this recession.

            The reporting of numbers, percentages, graphs and ratios should only be taken for face value. We use them as indicators, as ways to gauge where we are and the possibilities of where we could be heading. Be aware that we are approaching a period that is sure to be overflowing with economists eager to be the first to accurately predict the recovery by accident. Statistics will punctuate every news story you ingest. A small increase over a quarter is no reason to speculate and sink loads of savings into any financial market. The recovery will come. As we work towards it, I encourage you to stick with the basics. Own stocks that make sense. Consider incorporating alternative investments such as real estate into your portfolio not only because of their soundness, but also because they work as a wonderful hedge against inflation. Pay off debt. Adapt to the times. And, most importantly, focus on those things in your life that you care about the most.

Tangled in the Reins of Negative Equity

            Recent housing numbers indicate that first-time home buyers are being attracted to the market via low home prices and the $8,000 federal tax credit. But, the tax credit is scheduled to be pulled before the end of the year and declining home prices are leaving more and more home owners with the burden of negative equity.

            This month, The Wall Street Journal reported that 16 million Americans owed more on their mortgages than their house was worth, up from 10 million this time last year.[2] Furthermore, Deutsche Bank estimated that 48 percent of U.S. homeowners will be “underwater” by the end of the first quarter of 2011, as unemployment rises and house prices remain low. A prediction similar to this appears frightening, but what place does negative equity have among the gory stories of today’s economy? I see three major implications.

            For starters, if somewhere between 20 and 50 percent of all homeowners have negative equity over the next 2 years, then default rates will continue to plague the housing industry. True, not every residential mortgage with negative equity will default. But, having negative equity is frustrating for owners and the more underwater they become, the better chance they have of defaulting. 

            Next, this recession has placed a new taboo on debt, causing those that have lots of it to feel guiltier than during times of rampant overextended credit. Those with heavy debt burdens, such as negative equity in their largest assets, are less likely to spend. Our gross domestic product relies heavily on consumers to purchase. A sustained decline in consumption will further constrain our GDP growth and further ail our economy.

            Lastly, a large population of home owners with negative equity translates to a large number of houses waiting to be sold. Because no one wants to take a large loss on their home, the majority of owners looking to sell are holding on to their homes. Do not get me wrong, this is not a bad thing if the owner is looking to hold on to the home as a long-term investment or to serve as a primary residence. However, a portion of the huge supply of homes waiting to be sold will be flushed into the market every time there is a bump in prices. Each time, this will dilute the market, bring down prices and elongate the downturn. Consequently, this ever-appearing inventory will also put a damper on the demand for new construction.

            From state to state, local markets will continue to be choked by a high percentage of home owners with negative equity. Not surprisingly, the states with the greatest percentages of home owners with negative equity are primarily the states whose real estate markets were demolished by the housing burst. Nevada leads all states with 40 percent, Arizona follows close behind with 37 percent, California falls in third place with 30 percent and Colorado and Michigan round out the top five with 31 percent and 29 percent, respectively.[3]

Speaking Real Estate Today

            As it becomes more popular for investors to include real estate as an active player in their portfolios, the asset class is being talked about differently. Left behind are the days of talking about real estate as an integral part of the next speculative boom. Banks are no longer willing to take the responsibility of the loan off the shoulders of the borrower by offering zero-down mortgages. Lending is tighter, though not unreasonable, and borrowers are more educated about the risks involved with taking on a mortgage.

            The housing burst exposed the problems involved with treating real estate as a short-term investment. Unsurprisingly, investors today approach real estate differently. Dave Kansas of The Wall Street Journal recently wrote that investors are more cautious and “focused on real estate as something they can use: a solid place to live or play…”[4] Going along with Kansas’ article, investors cannot enjoy a family barbeque in the front yard of their stock portfolio or be awe struck by the view off the back porch of their bonds.

            Many investors are irritated with the roller-coaster ride of the stock market. These investors are on the hunt for alternative assets to occupy a larger percentage of their portfolio; making it long-term and balanced, with little need for sporadic buying and selling. On the other hand, some investors feel the impulse to be over active and are reluctant to leave the stock market.

            Including an alternative asset such as real estate into your portfolio allows your entire investment livelihood to not solely rely on the stock market. Alternative investments are typically not correlated with stocks, which means when the stock market is taking a dive, alternative investments are likely to be stable or even rising. Including an alternative investment such a real estate into your portfolio can also significantly lessen the impact of inflation, which is currently a concern of many investors. With the steep drop in home prices and mortgage rates hovering near record lows, a number of signs are suggesting that now is the right time to invest in real estate.

 

All my best, Thomas J. Powell

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[1] See http://www.newsweek.com/id/208633

[2] See http://blogs.wsj.com/developments/2009/08/05/more-homeowners-upside-down-on-mortgages/

[3] Ibid.

[4] See http://online.wsj.com/article/SB10001424052970204271104574290650401076352.html

Thomas J. Powell – FDIC Not Borrowing From Those It Is Protecting – Not Yet!

The FDIC announced last week its insurance fund has dropped 20 percent to $10.4 billion. Previous to the past two years, the only bank failures many of us had experienced were those talked about by our parents or grandparents, or by watching George Bailey nearly lose his family’s savings and loan business in It’s a Wonderful Life. Of course, there was the S&L crisis in the 80s and 90s where more than 700 savings and loans associations failed, costing taxpayers the then unthinkable amount of nearly $125 billion. Comparing to today’s challenges, wouldn’t we all be thrilled with that small of a number, and how unsettling is it to know that ONLY $125 billion would make us all so happy!

The FDIC is shouldering a huge amount in our current state of affairs, precipitously balancing the stifling weight of the nearly 85 banks which have failed so far this year, and hundreds more which are in peril. With the $3.7 billion lost by US banks in the second quarter alone, the FDIC’s fund is at its lowest point since 1992 when the S&L crisis was at its peak. While Sheila Bair, FDIC Chairwoman, is saying no to borrowing from you and me at this point, what happens if this current crisis continues to drag along the bottom? Will it drag us down with it, as the government is us? Will the fear of no place is a safe place for your money cause more runs on the banks, such as George Bailey experienced?

With the FDIC forecasting spending up to $70 billion on replenishing insured accounts through 2013, we all face another potentially hefty bailout. Bair says don’t worry at this point, since she does not see the need to tap the US Treasury – not yet. The FDIC is searching for options – it will attempt to replenish the fund through additional bank fees and has also indicated it is considering allowing private investors to buy failed institutions, bending rules to reduce the cash required that private equity funds must maintain in an aquired bank.

In the end, we are all “protected” by the government, which is to say, we are protected by ourselves, as our accounts are insured up to $250,000. At some point however, the bailouts come with the bill collector. Hopefully we’ll have something left in our wallets instead of turning our pockets inside out to find that they are empty.

I look forward to hearing your feedback.

All my best,

Thomas J. Powell

Thomas J. Powell – Is This Recovery Too Fast, Too Slow or Just Right?

We all know the Goldilocks and the Three Bears fairy tale and their tasting of the porridge during the story – too hot, too cold, and finally, just right!  Thinking about that popular childhood memory is reminding me of our current economic situation and wondering whether the economic recovery we are all anxiously awaiting may be happening too fast, too slow or perhaps, just right. 

Some experts believe we are poised for a strong pullout of this recession.  New data just released is pointing to some of those strong signs.  New home sales were up 9.6% in July, and durable goods rose 4.9%, outpacing the expected 3% handily.  In addition, both consumer sentiment and home prices are showing positive movement, all pointing to a desperately hoped-for recovery.   The signs are there that a bounce may be on the way sooner rather than later.

There is another path to consider, however; the thought that the economic recovery may be too slow.  That the economy may have no bounce and is going to bump along the bottom for a good period of time before finally making an upward swing.  Some things to consider that may fuel this school of thought are the unprecidented credit contraction being experienced, coupled with the wild amount of debt the U.S. is accruing on a daily basis.  On a personal note, so many Americans have lost their jobs that even when the economy as a whole shows recovery, this lagging indicator is going to take a while to catch up, as are individuals’ bank account, retirement and investment balances.

Then there’s the thought of a just right recovery.  Of course, that depends of many factors, mainly what “just right” means for you.  If you are the person out of work and you are able to find a new job, that may be just right.  If you are able to turn your business around and make it profitable when it has been losing money, that may be just right.  If you have seen the bleeding stop in your stock holdings and may even be seeing modest gains, that may be just right.  And if your home’s value has flattened out, that may be just right.

Even though the three bears eventually agreed to porridge they felt was “just right,” we know the truth is that what is too hot or too cold for one may be just right for another.  Here’s to finding the just right recovery for all of us.

I look forward to your thoughts.

All my best,

Thomas J. Powell

Thomas J. Powell – Is Social Networking Ruining Your Relationships?

As you can see, the Powell Perspective has now entered into the world of social networking.  As we continue to progress into this new area we have made the decision to go slowly, adding one concept at a time and in a way that doesn’t take us over and eat us and our time alive.  I have been reading a lot of articles lately that talk about Facebook Fatigue and LinkedIn and Twitter backlash.  Just like in other parts of society, the pendulum tends to swing from one extreme to another, and I, for one, am tired.  I am tired of always being on:  on my phone, on my email, on my text messages, on YouTube, on the social sites, trying to keep up with the latest “must do” fad in order to have success in my life and business.  I don’t wish to discount all of these remarkable tools and I do absolutely see the value in them, but I question the “must do” list.  No matter what I have published online, what I have posted, what latest internet opportunity I have seen, in the end, I really like picking up the phone or meeting someone and doing business the old-fashioned way:  person to person.  Plus, I have to ask:  truly how much business, how many sales, have occurred because of your latest twitter posting?

I watch my children with their phones, texting all day and in many cases, all night. Thank goodness for unlimited texting, as I discovered my 13 year old had sent and received 5,000 texts in one month alone!  It has become common place to hear the constant buzzing throughout family meals, at movies, in conversations.  Out at dinner, I watch our kids and their friends literally text each other while sitting next to each other at the table!  When our daughter wants to get together for the evening, she jumps on MySpace and posts a bulletin to her “friends” to see who might be available.  It used to drive us crazy with our kids on the phone at all hours with their friends; now I’m waiting for carpel tunnel syndrome from all of the pushing of the cell phone buttons.

I admit, I’m just as much to blame.  Do you find yourself unconsciously reaching for your cell phone every 5 minutes, whether or not  you’ve heard that familiar message beep?  Do you obsessively reach for your phone during meetings with colleagues, dinner with family and friends and while you are driving?  Do you sit behind your computer when people come into your office, and try though you might, watch the email messages pop up, excusing yourself to answer just this one very important message that can’t wait?  I do all of this, as I’m sure you do, and isn’t all of it sheer craziness?

Professionally, where is the quality of our real life relationships?  Thanks to Harvard University, I have a large group of friends from around the world.  It is obviously most convenient to communicate with them electronically, along with my many friends from years past who have moved away.  However, what about our friends and colleagues in our own towns?  How are we communicating on a regular basis with one another?  We claim we don’t have time to get together for dinner or a movie, and yet we’ll spend hours on the computer, conversing with our social networking “friends.”  How many of them can you really count as friends and if you pulled your finger out of the proverbial bucket of information water, would any of them notice your absence?  And, does all of this make you tired just thinking about all we do everyday just to try to keep up?  It’s no longer about keeping up with the Jonses; it’s about the impossible task of keeping up with the thousands and thousands of people in the illusionary information cloud above us.

I have decided to make the following commitment to myself:  I am turning off my cell phone when I am at home.  I am sticking to committed time with my wife, my children and my friends.  I am returning emails only during certain times of the day.  I am simplifying.  Is this all easier said than done?  You bet.  Will I miss it when I’m not on it?  Maybe the habit, but I’d far rather spend my time on the important things in life and it starts with my family.  

I invite you to join me in this challenge.  I’ll keep you posted on my progress and I look forward to hearing about yours.

Sincerely,

Thomas J. Powell