February 12, 2009

• The news of the week is a big surprise in US pending homes sales, +6.3% and existing home sales +6.5%!
• Bond market winter thaw is on as Cisco seizes the opening in the credit markets to raise $4 Billion, GE raises $10 Billion, ConocoPhillips raised $5.95 Billion, AT&T $4.48 Billion, Verizon $4.23 Billion, Altria $4.22 Billion, GE Capital $3.94 Billion, Caterpillar $3 Billion, Proctor Gamble $1.99 Billion and Amgen $1.99 Billion
• Junk Bond Funds begin buying the best of the worst to drive yields down from near 18% to slightly above 12%.
• Per the Wall Street Journal Inventory of Homes For Sale in the US drop in January in 18 of the 29 areas down an average 2.5% nation-wide; which includes the Bay Area.
• Tax Credit for new home buyers going soon to the President’s desk for signature as a part of the new rescue package
• Gold continues to rise as investors seek a safe-haven ending near $950 an oz. ending at the highest level in 7 months.
• Pending sales in the past 7 days are: Palo Alto 24, Redwood City 58, Menlo Park 32, La Honda and surrounding area 1, Portola Valley 5 and Woodside 3.
• Mortgage rates per CNN 30 year fixed at 5.27%, 15 year fixed at 4.96%, 5/1 ARM at 5.61% (see me for detail rates for your situation and home search)

Comments: The Credit markets are thawing and faith has returned back to the credit markets. Investors are moving out of US Treasuries into corporate debt. Home buying has picked up both on a local level and national level. The fact that credit worthy companies are raising record amounts of capital through debt sales tells me that they believe rates are too low and will go higher. Cisco has a cash horde of $29.5 billion; of which, only $3-4 billion is in the US (more on this in “Where is the Growth Coming From, see below) From a safety of capital basis and store of value gold continues to rise in value as I believe the demand for real estate will continue to rise. The increase in junk bond purchases from High Yield Funds tells me investors now feel comfortable with the high yields to commit funds. This is shown in the rise in yields on 30 year US Trsy Bonds to a near term high of 3.75% in the past 5 days. Watch for this to continue with securitization of mortgage resuming soon.

WHERE IS THE GROWTH COMING FROM?

Going back 40 years or so to the last big recession gives a method of looking back and looking forward and the same time, one becomes the mythical God Janus.

Since 1974 the growth in the market and the economy has been spectacular. But, along with the growth comes “bubbles”. We went through a number of them recently, but let me take you back to the one that most particularly hurt our area, the DOT COM BUST. From the DOT COM BUST we had an excellent look at our area and area companies’ strength and growth potential. The Key word here is “Platform Company”. A Platform Company has a fractionalized production process, keeping knowledge intensive activities like design and distribution in-house, while outsourcing low-value added physical production They develop new product, new markets, and new products for new markets. They aggressively invest in foreign countries, that investment accounted for 10% of total non-financial corporate assets and generate some $4.7 trillion in sales per year and $700 billion in earnings. Allen Sinai in his Decision Economics concluded that if the US lowered tax rates it could lead to the repatriating of US$545 billion.

The precedent and the growth in California real estate from that action can be seen in 2004 when $360 billion came home as a result of a 5% temporary tax rate contained in the American Jobs Creation Act.

The result can be seen in the chart below, complement of the California Association of Realtors and Eric Trailer at Absolute Mortgage.



The dramatic rise in 2004 to date is my belief that our Bay Area Platform Companies brought home the Bacon in more ways than one.

Gary McKae