Posts Tagged ‘Dow Jones Industrial Average’

QE3 A Boon to CMBS

Tuesday, November 13th, 2012

If history repeats itself, QE3 will be good for commercial mortgage-backed securities (CMBS). The Fed’s third round of quantitative easing – which is purchasing $40 billion of residential mortgage-backed securities (RMBS) each month from Fannie Mae and Freddie Mac – will free up money for the commercial real estate market and lure investors away from other vehicles in their hunt for maximum yield.  QE3 is expected to last at least until 2015.

“The primary difference between 2012 and 2010 is that commercial property prices in healthy markets are stronger than they were just two years ago.  At its peak, CMBS constituted 40 percent of all commercial real estate loans,” said John O’Callahan of CoStar.  O’Callahan notes that “Investment returns of 40 percent or more for riskier assets during QE1 were largely a result of a bounce-back from the lows caused by investor panic in late 2008 through early 2009.  The overall impact of QE becomes clearer upon examining QE2.  Prices of equities and high-yield bonds, including CMBS, gained a respectable 12 to 15 percent.”

Low interest rates mean that returns will narrow to as little as 150 basis points, forcing investors to look elsewhere for respectable yields.  Currently, B-piece CMBS investors are achieving 20 percent and higher yields.  By contrast, the Dow Jones Industrial Average’s yield has remained below three percent each of the last 20 years.

CMBS has “been a boon for us,” said Kenneth Cohen, head of CMBS at UBS Securities.  “You’ve seen a fairly good size increase in loan pipelines.  Our pipeline has increased probably 50 percent over the last six weeks.”  Borrowers also are cashing in on the favorable loan terms.  According to Fitch Ratings, loans in 2012 are averaging 95.7 percent of a stressed property’s estimated value; that’s up from 91.6 percent in 2011.

Despite the good news, industry experts don’t expect the resurgent CMBS market to resolve all financing woes.  For example, the encouraging loan terms are of minimal help to commercial real estate owners who are under water, nor will new issuance be adequate to refinance the $54 billion in CMBS loans coming due this year.  Additionally, some ratings firms warn that the credit quality of CMBS loans could increase risk for some investors.  In response, Moody’s Investor Services’ now requires that senior bonds have expensive credit protection.

2012 Stock Market Off to a Promising Start

Monday, February 6th, 2012

As the stock market moved between negative and positive territory on the last day of January, 2012, the Dow Jones Industrial Average was nevertheless poised to close with their biggest January gain in 15 years – despite closing down a few points for the day.  In fact, it could be the best January for Standard & Poor’s (S&P) and Dow since 1997 and since 2001 for the Nasdaq.

“Everyone is cautiously waiting for the close today to see if we can put this on the board,” said Frank Davis, director of trading at LEK Securities.  “It would be a pretty darn good foothold to start the year.”  Stocks initially rose after European Union leaders agreed to strengthen their financial firewall.  Additionally, most members have agreed to sign a new fiscal compact.  Even so, 2012’s first summit ended without new solutions to resolve Greece’s debt crisis.  “There’s positive news coming out of Europe, but it’s still very tenuous with Greece,” said Jeffrey Phillips, chief investment officer of Rehmann Financial.  “Every time we see something positive there, we seem to see it reverse in four or five days.”

The S&P 500 rose 4.3 percent in January, which is its best performance since the 6.1 percent gain that occurred in January of 1997.  One year ago, the market added a respectable 2.3 percent in January.  Following a trying 2011, investors had such low expectations that it’s easy for the year’s earliest reports to come in better than expected, said Jerry Harris, chief investment strategist at the brokerage firm Sterne Agee.  “I don’t see anything really glamorous or tremendous about the economy or earnings,” Harris said.  “But I think they’re very acceptable, and things are grinding along.”

“Longer-term investors should not be fooled by what appear to be attractive valuations for financials,” said Brian Belski, Oppenheimer & Co.’s chief investment strategist.  Any investor should look three to five years into the future and invest less money in these stocks than their S&P 500 weight would suggest because they account for roughly 14 percent of the index’s value.  The financial index was recently valued at 12.4 times earnings, which is about twice as high as it was two years ago.  “Most of these companies operate in a ‘whole new world’ of increased scrutiny and regulation,” Belski wrote, noting that more restrictive capital requirements, imposed as part of that shift, will hurt profitability.

The European debt crisis is a major culprit in the market’s volatility. Confidence that American markets can remain relatively unaffected by Europe’s difficulties has fueled gains in 2012.  Money managers, some of whom missed the upward move, seem to be willing to buy on day-to-day declines.  “The action that we’ve seen today is very similar to what we’ve seen throughout most of the year so far,” said Ryan Larson, head of equity trading at RBC Global Asset Management.  “We see the resilience showing in U.S. markets and I think that’s a theme that we’ve seen throughout 2012.  The U.S. appears to be slowly, slowly in the early stages of a decoupling from the Eurozone,” he said.

Chris Cordaro, chief investment officer at RegentAtlantic Capital, a wealth management firm, believes equities will finish sharply higher this year as Europe’s problems are resolved and investors buy into stock valuations that were beaten down through much of last year.  “We could definitely end the year much higher on equities,” he said.  “We have been favoring equities in our portfolio. We have just increased our exposure to emerging markets.”

More bad news came January 31 when the Conference Board’s consumer confidence index fell to 61.1, missing the forecast 68.  December’s level had experienced a slight upwards tick to 64.8 from 64.5.  “The US consumer has still seen a very firm turnaround since October, this also is likely to reflect the increase in gasoline prices since the start of the year,” wrote David Semmens, U.S. economist with Standard Chartered.  “While the U.S. consumer is feeling better, the turnaround is still likely to be volatile.”

“Most market participants will raise their glasses to usher out what has proved to be a decent January for performance, data and sentiment,” said Jim Reid, a global strategist at Deutsche Bank AG.

Rick Mattoon on the Economy: On the Brink or On the Mend?

Tuesday, August 30th, 2011

Emerging from a financial crisis of the enormity that the United States has lived through the last several years, it is natural that the road to recovery is slower and bumpier than in a typical recession.  This is the opinion of Rick Mattoon, a Senior Economist and Economic Advisor at the Federal Reserve Bank of Chicago,  Previously a Policy Advisor to the governor of Washington, he is also a lecturer at the Kellogg School of Management at Northwestern University.

According to Mattoon, the irony of the Monday after Standard & Poor’s downgraded the United States’ credit rating from AAA to AA+ is that while the Dow Jones Industrial Average nosedived by 635 points, investors were still putting their money into Treasury notes.  Treasuries, which theoretically should have been affected by the credit downgrade, remain attractive to savvy investors.  The most significant impact of the credit downgrade is its effect on municipal bond issuances and the cost of certain kinds of credit that historically have been backed by the United States’ AAA standing.

From the Federal Reserve’s perspective, Mattoon says the central bank is going to continue making it easy for people to borrow and lend money to create the favorable conditions that will turn the economy around.  At present, he says the issue isn’t so much one of supply but demand.  A lot of people would like to take advantage of the current low interest rates, but can’t because they are not considered creditworthy due to tighter lending standards.  The Fed’s policy of quantitative easing (QE) has had some success, primarily — and until recently – the stock market rally and low interest rates.

The expression of “stall speed” is used to describe the pace of economic recovery as compared with the five percent rate of growth the country needs.  Mattoon says that this is a difficult process that has not been helped by other one-time shocks to the economy.  A case in point is March’s Japanese earthquake and tsunami, which caused supply-chain disruptions.  Another was the unanticipated spike in oil prices that dampened consumer spending.

The slow pace of job creation – just 117,000 created in July after two months of little employment growth – is also negatively impacting the economy.  The way the public sees it, job creation is currently the # 1 economic factor – particularly to the approximately 50 percent of the unemployed who have been jobless for six months or longer.

One game changer lies in the fact that Americans are currently saving more money than they did in the past – as much as six or seven percent of income when compared with a few years ago.

In terms of commercial real estate, the 1st half of the year saw tremendous amounts of capital raised for acquisitions, primarily for core $100 million transactions.  The market’s comeback depends on job growth.  According to Mattoon, if office employment ticks up, there will be greater demand for commercial real estate, especially in gateway cities like New York.  Retail will be the most difficult sector to recover, especially in strip malls, which were significantly overbuilt.  The demise of some big-box retailers – most notably Circuit City and Borders – is opening significant retail space that often anchored shopping centers.

To listen to Rick Mattoon’s full interview on whether the economy is on the brink or on the mend, click here.

icon for podpress  Rick Mattoon on the Economy: On the Brink or On the Mend?: Download

Will the Stock Market Recovery Continue in 2011?

Tuesday, January 11th, 2011

Will the Stock Market Recovery Continue in 2011?  With the stock market ending its best December since 1987, there is hope that 2011 will see a strong Wall Street recovery.  One source of hope is the fact that the Standard & Poor’s 500 Index has returned to its pre-Lehman Brothers level.  It joins the Dow Jones Industrial Average, the Nasdaq Composite Index and the Russell 2000 in seeing strong improvements in their levels.  Stocks have risen 20 percent in just four months.

The recent surge was helped by performance chasing.  The proportion of money managers lagging their benchmarks by five percent has increased from 12 percent at the end of October to 22 percent in the middle of December and trimming their risk exposure “on the presumption that the markets had reached the upper end of a trading range,” said JPMorgan’s Thomas Lee.  BTIG’s Mike O’Rourke, chief market strategist, believes the purchase of hard assets as a hedge against depreciating currencies has helped drive the price of oil to above $90 per barrel.  He also points to high silver and copper prices – with the latter at an all-time high.  “There is no doubt commodities have performed well even though the dollar has not broken down, but the question is how long will it take before speculators bail on the trade,” O’Rourke said.

Wall Street market strategists are consistently bullish, generally forecasting 2011 gains of 10 to 17 percent, with Deutsche Bank forecasting gains of as much as 25 percent Main Street investors are equally upbeat: Recent polls indicate the greatest level of optimism since 2007, with the bullish crowd surging to 63 percent of those queried, with just 16 percent claiming bearishness.