Is There a Mastro in Your Portfolio?
Posted by Dennis Daugs in Investing, Real Estate on October 1, 2009
For the past few months there’s been a storm brewing in Seattle over a long-time commercial real estate investor and his recent involuntary Chapter 7 filing that’s put investors in a bad place.
This past week, the local media increased its reports on Michael Mastro, his business and the $100 million loss Seattle-area investors will have to recoup. The PSBJ reports his bankruptcy is one of the largest in state history and the state’s Department of Financial Institutions is investigating his transactions with private investors.
However, many others are asking, “What’s this all about?”
Today I’d like to address the Mastro bankruptcy, and what it means for investors and the local investment scene.
Let’s start with the big question.
How did Mastro get in trouble?
The simple answer is leverage. The more complex answer takes further expansion of the structure. Throughout modern times, investors of all kinds have borrowed money at one rate hoping to earn more in interest and keep the rest as profit. We all do it everyday through home ownership, business loans and the use of credit. Mastro’s mistake was simply larger and more leveraged than most.
Several years ago, a very sharp local banker explained the “Mastro Friends & Family” program to me. Simply put, the investment process involved borrowing the down payment from a bank to acquire, develop and sell real estate. There was a time when banks would only lend 60 to 70 percent of the price, later it became much higher. As a result, certain banks would have some culpability in this mess. The rest of the purchase price came from down payments, called “equity.”
For you and me, we make the down payment ourselves. For Mastro, he further leveraged his purchase by borrowing that equity from a pool of personal investors, to whom he paid eight to nine percent interest. Using this process, Mastro had the potential to acquire real estate with no money down. The system worked very well as long as real estate increased in value and bank loans were prevalent.
Today, we find an economy that has suffered falling real estate prices and banks that need cash as badly as customers do. With banks unwilling to extend the maturity on Mastro’s loans and falling property values, the Mastro empire is now being forced to hand over properties to banks. The banks in turn will sell them off quickly to the highest bidder. I expect that within a few years we will see some of those properties change hands again for a sizeable gain while other holdings will stagnate because of poor quality. The majority of the real estate holdings in Mastro’s portfolio are not considered trophy assets that top real estate investors want to own.
This leads into our second question, did Mastro pull a Bernie Madoff in our local market?
Madoff’s story is one of deceit and deception. Mastro’s story is about the risks associated with leverage. For decades, Mastro paid his investors solid returns based on real profits. Madoff, however, never had the real profits to back up his plans.
The fascinating part of the story is the decline that the Mastro empire experienced in 1992. At that time, local real estate also went bust on its way to a boom in prices throughout the later 1990s. The word I hear is that although Mastro was bruised, he was not broken, and was able to repay his debts.
What should investors have asked and why?
The lessons about due diligence and proper investigation before you invest are similar with both Mastro and Madoff. For Mastro the issue for his investors is “where am I in the line of creditors?” For Madoff the issue is one of custodianship.
The primary reason that the Mastro Friends and Family investors will suffer losses is because they were not in first position as lenders. Let me explain what first position means.
When you acquire real estate and receive a loan from your bank or mortgage company, the lender is in first position, meaning they get their money back first. If the property owner then applies for a home equity loan, that lender is in second position, meaning they get their money second. If the property owner then gets an unsecured loan to make home improvements, that lender is in third position. Common sense suggests that you are better off being up the food chain in the strongest and safest position in line. Of equal importance is whether your lender has recorded their position or not. A recorded position means that upon the sale of the real estate the proceeds at closing must be paid to the lenders before the owners. This is such a core principal that there is rarely a situation where an investor should lend against real estate unless the loan is recorded.
The mistake Mastro investors made is that their loans were usually in second or third position and were likely unrecorded.
What is the fallout for investors, the local market?
The fall out from the crash of Michael Mastro is tremendous over the short term, yet fairly insignificant over the long term. The question many of us have been asking for more than a year is, “When will Mastro fall?”
It seemed inevitable that he would lose his properties to the banks yet surreal at the same time. Even more fascinating is how few professional real estate investors ever dealt with Mastro. The Mastro empire, much like the Madoff empire, was populated by unknown “mom and pop” types. For Mastro, his investors included the Italian club of Seattle. For Madoff, it included many Jewish cultural and religious groups.
The greater lesson here is the importance of understanding when and how to use leverage. When prices are low, expand your use of leverage. When prices have climbed rapidly and assets are at their highest values, leverage should be reduced along the way.
Resist the temptation to retain high amounts of risk simply because the media suggests that times are good.
Let Them Eat Cake
Posted by Dennis Daugs in Investing on September 1, 2009
“Let them eat cake” is a phrase we all know from high school European history class, but what about the etymology?
The phrase dates back to the 1780s, during the reign of King Louis XVI, when the people of France experienced a series of famines and crop failures that caused severe grain shortages throughout the country. Once alerted to the fact people were suffering, Marie Antoinette, the Queen at the time, is believed to have uttered those famous words – “Let them eat cake.”
So what’s the significance?
Today, it may not seem like a very important or life-changing remark, but during the days of King Louis, this simple phrase showed a blatant disregard for those living under the family’s reign. It reflected the passive approach of the royal family to their constituents and general lack of understanding of what was really happening outside of the royal walls.
While historians debate the origin of the phrase – some credit Marie and others say there are no documented reports – it does provide a glimpse into how those at the top viewed their realities.
Throughout history, there are countless examples of wrong assumptions putting people, kingdoms or companies in bad positions. Many have gone through life assuming that if they have less, someone else has more. If one assumes they only win at the expense of another, it becomes a sadly negative and vengeful landscape.
Others approach the battle as one within. “My competition is myself” might be an apt legend they live under. Challenging yourself to perform at your best, takes nothing away from your neighbors, co-workers, peers, fellow countrymen, or far off dictators.
Be it some distant banker being vilified today or the 10- year-old who beat your son or daughter in the summer swim meet, they are not the enemy anymore than you are their’s.
This all speaks to today’s dire economic environment. We are progressing down a similar path of blame for all our ills. The real estate agent who sold you your home at some previous peak, the mortgage broker who found you your loan, the bank that provided the money are all being vilified by some.
For the people of France, the blame went to Marie as the famines occurred as the French Revolution approached and the public often blamed Marie for contributing to the country’s dire financial straits due to her frivolousness and extravagant lifestyle.
For our worries today, how far back do we go? To the inventor of capitalism? The first banker?
We all take great pride in our smarts when our houses balloon in value, but do we not take some level of accountability for their decline?
Certainly some were duped – but what of the middle-class businessman who counted his home equity daily while spending little of his spare time assessing whether it made sense to have an adjustable rate mortgage?
Is it right for him to charge the castle and overthrow the king because his lot in life has been fractured? Or, should he stem the damage, sharpen his skills, put in a hard day’s work, and learn from mistakes?
By doing the latter, we take responsibility for our actions, take nothing from others and serve as positive role models for our children and grandchildren.
Thanks to You
Posted by Lakeside in Uncategorized on July 27, 2009
I absolutely believe Lakeside has the most intelligent, thoughtful and forward thinking clients in the investment business.
We owe you a great deal of thanks for your openness to unconventional wisdom, responsiveness to decisions needing quick action and for the tremendous ideas that each of you have offered to make this an even better wealth management and investment advisory firm.
Today, we want to share our appreciation for making Lakeside Capital Management successful.
In 1999, we articulated our vision of a wealth management firm – a place free from Wall Street and located outside the downtown financial district along the shores of Lake Washington. You loyally followed as we left our previous employers for a smaller, more personal experience.
Who could have imagined that a decade later Merrill Lynch, EF Hutton, Lehman Brothers, and Bear Stearns would all be gone?
In 2001, we shared less concern about the technology stocks that had fallen and placed our focus and concern about those that had yet to fall – including Cisco at $56, Sun Microsystems & EMC at $85 and Microsoft at $84. We sold millions of dollars of those stocks and helped protect your portfolios from further losses. For heeding our advice and patiently listening, we thank you.
In 2002, we asked some of you to take a leap of faith and invest in a new housing project in Seattle’s Central District. Welch Plaza was born along with Lakeside’s allocation to real estate. The new transit system assures the success of this property for many years and we thank you for your patience as a dilapidated hardware store was transformed into a model for the neighborhood.
In 2005, we began to focus on cash flow more than capital gains. Who knew that monthly income would become such a priority in these difficult times? Parting with your bank stocks and the annual dividends was difficult for some, yet the right thing to do in the long term.
In 2007, we reduced our stock market allocations substantially. Later, after a 30 percent decline we re-acquired some of those holdings. We thank you for understanding we are human and did not buy at the bottom.
Now, here we are in 2009 and a decade has gone by since Lakeside opened its doors. During this decade we’ve seen a lot – the tech bubble peaked and burst; the memory of 9/11 has faded but will never disappear in our minds; and Wall Street and Main Street bankers wanted salaries comparable to professional athletes and ended up handing their homes back to the banks. Now, you and I own those banks.
While this road will take a long time to recover from, we encourage you to be proactive now. Spend less, teach your children about money and character, invest for cash flow, meet with your advisors often, work hard and savor the rewards that come.
Thank you again for your loyalty and confidence in Lakeside. You inspire us to do our best work.
When Cash Ruled the World of Finance
Posted by Dennis Daugs in Investing, Real Estate on July 21, 2009
We’ve all heard people trot out the old Chinese proverb “may you live in interesting times.” It points to the duality that an interesting time is not necessarily a happy time, and happiness can abound in boring, routine periods.
When it comes to the credit market, and issues of liquidity, these are, indeed, interesting times.
Not to get all crazy with aphorisms, but remember “cash is king?” Well, that is the case today.
Under normal economic conditions, those who need cash turn to those who have it. If they can make a case on why they need to borrow it and how they are going to repay it, they usually walk away with money in hand.
Today, the problem is that those who traditionally had the money to lend are broke. They, in turn, are going to an even smaller group who have a bit of cash lying around.
That, in effect, is creating a maelstrom of painful activity we would not normally see. Investors large and small are cashing out of the stock market, covering their eyes at their losses, with the knowledge they need cash now, and at whatever cost. With an abundance of these sellers, and with very few buyers on the other side, stocks fall at a faster rate, compounding the sellers’ misery.
At Lakeside, we are joining with a growing number of economists and financial advisors who say that we are not likely to see these things corrected as soon as we would like – that our current financial situation could hobble our economy for as long as a decade. Recovery, we are afraid, is a long way off.
Sure, some are pointing to a few recent developments as totems of the recovery. The Goldman Sachs report of a $2.7 billion profit is oft cited as a harbinger of good news. But let’s not forget “all that glitters is not gold.” While the firm did make money, the financial index of which it’s a part is still 10 percent lower than where they were at the beginning of the year.
We also see storm clouds gathering again on credit markets. The demand for credit remains high. We’ve seen some episodic loosening of the supply of credit, but we are concerned this is only temporary. While we think it is not likely that credit markets will tighten to the degree of last fall, it is certainly a possibility.
One bright spot – for those with deployable capital – is the real-estate market. In fact, this may be one of the few areas that investors can make money absent a much broader – and highly unlikely – recovery. It is a sad statement, but we will see a big increase in the demand for low priced homes. The purchasers? A few savvy groups with cash to invest in distressed housing – as we are doing at Lakeside.
So what does this net out to for investors?
First, for non-real-estate investments, reset your expectations when it comes to returns; stop looking down your nose at investments that return three or four percent. Remember that the stock market has returned less than five percent annually over a number of short- and long-term horizons, three years, seven years, 15 years and 18 years. Be willing to suffer through low money market rates while waiting for the best opportunities and always consider the asset allocation balance when making decisions.
Success Stories in Tough Economic Times
Posted by Dennis Daugs in Investing on June 24, 2009
The world is full of success stories that emerged in tough times. If you can survive or even prosper in this era, imagine what you can do when the economy looks brighter.
Wealth is created in many forms. Over our 23 years in the investment and financial industries, we have been fortunate to witness most of them. Some people want to “Get Rich Quick,” while others prefer to be “The Millionaire Next Door” who accumulates assets slowly.
Some acquire their assets by simply being at the right software company at the right time. Others create their wealth through the diversification of family business or inheritance.
There is an additional group that will rise to the top in the next economic rebound. They are the business owners who are inventing and creating each day. Some are high tech, some very low tech. For the most part, I put my bet on the sack lunch crowd over the corporate cafeteria crowd – no disrespect intended.
Have any of you ever met Danny House? You may know him better as “Dan the Sausageman.” His story of success starts from the lunch sack crowd and inspires business owners to keep moving forward. Here’s his story:
‘Dan the Sausageman’ was born in 1963. Throughout high school, he didn’t do much except stay away from drugs and alcohol. He could famously state with a straight face that he never touched a beer until college.
Dan’s notable attribute was his love for soccer and he could be found playing in the neighborhoods around South Seattle. Dan’s soccer skills brought him to college. He usually stayed at a university long enough for the Dean to see that he was attending more social events than classes. Then, just as quickly, he would attend another university.
It ended up being a great way to see the West Coast and eventually the world. Danny played professional soccer in Germany and enjoyed the country’s many BierHaus’s along the way.
One evening, he was introduced to a nice young woman named Claudia in Hamburg who thought Dan was too juvenile to pursue a relationship. He promised Claudia he would grow up someday.
One day, while shoveling snow and tossing it at some passing school kids, Dan fell to the ground in pain. Too many tough hits on the soccer field had ended his playing days. Soon after, he found himself in a nice waterfront park in Greece with the local stray cats and dogs.
Without many choices, he answered an ad and signed on to be the “first mate and cook” on a nice French sailboat owned by a wealthy Brit named Len. After a few days at sea, Len and his wife realized Dan knew little about sailing and even less about good food. He promised that the food would improve and so would the quality of the sails. They kept him on and he developed another lifelong friend on the far reaches of the globe.
Within a few years, Danny was back in Seattle, jobless and without a degree. Now in his late 20s Dan met a salesman with a route across Western Washington selling cheese and sausage to businesses along old highway 99.
With a crate under his arms, Dan walked into car dealerships and transmission shops and yelled, ”I am Dan the Sausageman, who wants a sample?” Dan grew that business into a nice little empire.
Yet, Dan had bigger plans.
Within a few years, he developed a tidy business selling corporate gift boxes all over the world. Chocolates, pâtés, and even salmon were added to the original boxes. Crates were delivered with chess and checkers sets on the lids. Lucky recipients were known to finish all the goodies in a day and send a note saying how painful and fun eating every item in one sitting can be.
Dan sought financial security and realized he needed to own his own building to obtain his goal. Good friends of Dan’s, Ernie and Phyllis who owned the Highline Tin Shop, lent Dan some money so he could buy their building. After years of diligent payments, the building belonged to Dan. He now had room for the gift shop, packing facilities and enough space left over to open a bar and restaurant called ‘The Tin Room.’
For Dan House, the hours are long, but his commute from home is just a mile. Dan sailed for years on the Puget Sound with his boat, the Splash Down Two, yes, the same boat he learned to sail on while employed as a cook by Len the Brit and his wife.
Eventually Dan sold the boat after his extra-curricular time was taken raising two great sons, Max and Oskar, and a third on the way with his lovely wife Claudia. Yes, that Claudia, the one Dan met years before in Germany as a young misfit.
Wealth comes in many forms. Creating wealth while doing what you love is its own reward.
Hitchcock the Recession and Our Banks
Posted by Dennis Daugs in Investing on June 10, 2009
This recession is more like a Hitchcock thriller than a modern day horror movie. You know what’s coming but you don’t know when, where, why or who. Blood and guts are replaced with innuendo and heavy plot lines.
Each week, I apologize to our editors for my obsession with banks – but I really think it all begins and ends with what happens within those walls.
This thriller moves slowly, taking baby steps to the next scene; first corporate layoffs, then missed mortgage payments, next foreclosures and then bankruptcies.
The corporate version goes like this: first slowing sales, then reduced profit forecasts and next stocks plummet.
Most will agree that the real estate mess is not over. Banks will continue to incur losses and take over more properties. Then the banking regulators will step in to close down failing institutions. The plot is already written in this story. It’s the players who remain unknown.
Dallas and Detroit will fall further than Seattle and San Francisco, they usually do. Those areas that have yet to fall will also see their day. Rural shopping centers will go bust while urban ones will simply change hands at lower prices. As they say, “the pond always dries up from the outside.”
I expect that the banks that fall will surprise us. Who knew until last weekend’s Seattle Times article that a bank in downtown Seattle could make an illustrious “bottom 10″ list of the most troubled institutions in our state? Years ago, the Seattle PI had a similar bottom 10; a list of the 10 worst college football teams in the nation. Without it, the Fighting Owls of Rice University would never have sold T-shirts emblazoned with the slogan “We’re Number One!”
Fine institutions like Evergreen Bank and Seattle Bank have to dig deeper to supplant the likes of WestSound Bank. But hey, anything is possible.
What is coming next, and when you ask?
Those two unknowns are selling a lot of coffee these days as investors both large and small burn the midnight oil trying to play this chess match to something more than a draw. Some sit at the infamous courthouse steps bidding on foreclosed properties hoping to hit singles and doubles through sweat equity. Others gather with a team of analysts to map out the carnage and plan the next trophy asset ready to fall.
I have lost count of the number of players who have walked through the grand Marlborough Condo Conversion only to realize that a 100-year-old apartment building foreclosed upon in the middle of construction may be too expensive at any price.
Similarly, drawing the attention of all is the big question of who is going to be the yenta who marries a landlord and tenant to the WaMu building now that JP Morgan Chase doesn’t see the logic of an East Coast and West Coast world headquarters. The rumors continue to build and for the sake of our Northwest economy let’s hope that one of our creative capitalists completes a deal.
Here is what we do know.
There is a lot of money out there and there is no money out there. The banks who have it can’t lend if it makes capital ratios drop below 10 percent. For those of you unfamiliar with a capital ratio the simple answer is that a bank can lend 10 times its equity – 10 percent capital ratio – before the regulators want the banks to pull its expansion. My apologies to the bank executives among our readers for the fourth grade version of the problem. The banks that don’t have money are told to clean up the books and sell off those problem loans to the highest bidder. In many cases, the highest bidder is the only bidder.
The Brand Called You
Posted by Dennis Daugs in Uncategorized on May 20, 2009
Whether we recognize it or not, we all have a personal brand. The decisions we make, how we present ourselves, what we say, do and even how we dress creates an impression that others use to judge how they will respond to us.
So much of what we are able to achieve comes down to the choices we make, not the choices others make about us.
Think about your brand. In this economy, everyone needs opportunity. If you are a student, you need an opportunity to be accepted into your chosen school. If you are a recent graduate, you need an opportunity to get that first job in an area you enjoy. Once you are employed, you need the opportunity to show your talents so you can progress your career. If you have been laid off, you need to create an image of someone who others would like to work alongside. Even if you have a great job, or are running your own company, you need customers who continue to want to buy from you rather than your competitor.
I have been fortunate to have the opportunity to speak to young people in cash-strapped inner city public schools as well as to kids at well-to-do private schools. Each year, I am more convinced that the difference in success comes down to two simple elements, how you present your personal brand – The brand called You — and what you believe your fate in life should be.
I am absolutely convinced that if you give me a young person with a desire to improve him or herself I can create a person with more opportunities than they otherwise would expect, by simply making them self-aware of their personal brand and finding the desire to improve upon it. Part of that self-awareness can be tough. For example, helping a young person recognize that attire and behavior can limit potential is difficult. Is it fair that a retailer might not want to hire a teenager wearing baggy pants and t-shirt with a gang-inspired theme? Probably not, but a store manager that has to make a thousand decisions a day often can’t take the time to make nuanced decisions. If that young person wants that job, he or she needs to recognize that the brand called You plays a big part.
For those of you in college, you should start thinking about your life after graduation long before you don the cap and gown. Finding your first job is more about the connections you make during school than anything else. When you come home during breaks, start thinking of every family friend as a potential advocate or employer; you want as many of them thinking about the opportunities that can be offered to you as possible. For every young person that finds a job through the newspaper or a career Web site, dozens more gained a position through a family member or even someone who knew your parents long before you were born. They are your advocate not your adversary.
Related to that is how you feel about yourself. I believe that awareness is important, but self-awareness is critical. As embarrassing as it is to admit, in high school, I began reading every self-help book I could get my hands on, throwing it into the mix of other reading. Knowledge is power.
Once you get that job, give serious thought to how those who have input in your career view your brand. Appearance is just one aspect. Today, it is a fashion statement to go unshaven or wear your shirt untucked. That works in a tech company full of young employees as long as you don’t aspire to run the place. Because running the place means there will be board members who judge you on their standards. If you are passed up for a promotion, it is not because you are a victim of their prejudice it is because you made a choice that limits your options.
I always wore a blue suit to office jobs even as an intern. My hair was trimmed and I shaved every day. Those seemingly simple decisions were the reasons that I had numerous advocates who took the time to move me along in my career.
Attitude and drive also contribute to your brand. Today more than nine percent of all Americans are unemployed. That is the highest rate of unemployment since 1983, 26 years ago. Why is it that some people are laid off and others are considered irreplaceable? Much of it comes down to the small decisions you made leading up to that day. Did you show up for work and do what is necessary or did you come to work thinking about making your company more innovative, creative and relevant?
As you built your career, did you develop a natural network of friends and peers who you can ask for help? Did you provide those peers help when they asked for it? Do you socialize often? Do you do charity work or support non-profit organizations in your community? We are all tired after a long day at work, but while most go straight home and turn on the television, others take the extra effort to attend a community meeting, or sit on a volunteer board. On the weekends, some stay home while others coach soccer or baseball. Along the way, every time you decide to make a commitment back to your community, you increase the opportunities that come your way, enrich your neighborhood and build your personal safety net should you need assistance in some way.
Every day, in almost every interaction, we contribute to our personal brand. Whether we are making a positive contribution or a negative one is up to you.
Regulating for Tomorrow
Posted by Dennis Daugs in Uncategorized on May 14, 2009
New rules are being created to oversee our financial system. These regulations are designed to protect us from financial harm. Unfortunately, what just harmed us is rarely what we should be worrying about.
Let me give you an example.
Today, banking regulators are working furiously to demand that the nation’s bankers rid themselves of those problematic development loans. That makes sense on the surface. In the minds of most, not a single new home will ever be built in this country. Neither will a new city be incorporated, a new school be built or a new job created.
But dig a little deeper and you will find that all land development is being regulated, even those where the borrower is steadily making proper loan payments.
From the banker’s perspective, he is not going to argue with the bank regulator. Running afoul of their demands carries the possibility that the bank is focused on too closely or even shut down.
For those with a short memory, or of a younger generation, I share with you the example of the banks that regulators chose to chain shut during the savings and loan crisis of the early 1990s.
Within just a few years, courts across this nation heard cases against the government for unfair decision making on the part of regulators. In at least one case, the fallen bank won a settlement for the subjective nature of its closure. In an odd aside to that crisis, the publicly traded stock of several banks continued to trade for the future value of potential settlement, long after the bank ceased to exist.
On another level, does anyone else find it odd that after more than 100 years as an investment firm, Goldman Sachs woke up one day and decided to announce it was converting to a bank? It was one of the first to do so and just in time for its former chairman, Hank Paulson, to announce that as Treasury Secretary banks would be offered a new program called TARP.
I suspect that when the story is finally written on today’s banking environment we will all conclude that some good banks were shut down, some bad banks were allowed to stay open and the system was overly focused on yesterday’s problems rather than tomorrow’s solutions.
What to do with Your Stocks
Posted by Dennis Daugs in Stocks on May 4, 2009
In late 2008, Lakeside observed investors nationwide displaying unprecedented panic over the stock market. Both large corporations and small investors alike sold stocks in a massive attempt to get cash in hand and quickly.
Where we once turned to our parents to gauge the severity of the market’s cycle, we now turned to our grandparents to see if they’d experienced anything this devastating in their lifetime. First, reports indicated the economy was the worst it had been in 10 years, then it became the worst market in a generation, and now, some people say it’s the worst market most have ever seen or heard about.
Much like our peers in the investment business, our clients rightfully demonstrated concern about their investments. Some wanted to sell their stocks and a few did.
To understand the situation from Lakeside’s perspective, it’s important to note that our average client is debt free and had no more than 20 percent of their investments in the stock market. We can only imagine what an investor under the auspices of a Wall Street firm must have felt – 50 percent account declines, zero accountability and to top it all off, many investment firms were either bought, sold, merged or closed the doors.
Even more important, is knowing that today the market is less volatile than last fall and there are many opportunities for investors with the right guidance.
The media propaganda machine is once again in full force. The talking heads tell you excitedly that the market rallied 20 percent in the past few weeks and they are absolutely correct. As a word of caution, there is always opportunity to manipulate and segregate performance to tell a good story and Wall Street is a master at that. This is something investors have seen since railroad stocks were pushed into their hands right before the panic of ‘07, 1907 that is.
Here is the scenario we see and the rules to follow:
Rule #1 –We believe that the stock market is indeed a forward-looking indicator, historically, moving six to nine months ahead of the actual economy. If we are correct, and you are an investor planning to “get back in when the economy looks better,” you will be too late. The economy will look better in the rear-view mirror and that may be 18 months too late.
Rule #2 -The media sets the tone as a contrarian indicator. In our work, we are regularly asked to give an opinion on business issues. Often we are given a list of “hot topics.” A hot topic is one that will sell well and is determined by where the public places its worry that month. I can assure you that what worries us is rarely what harms us.
Here are a few examples:
- Forbes Magazine Cover 1990: Japan, The New Global Superpower. In print right after Japan’s stock market reached 40,000 and right as it began a long decline toward 16,000 – a 60 percent drop.
- Fortune Magazine Cover 2000: Ten Stocks to Buy and Hold for the next Ten years. Both Enron and Qwest were on that list. Need I say more?
- The Seattle Times Cover Story 2007: Why Seattle’s real estate market will hold up better than San Diego.
- The Seattle Times Cover Story 2009: Local Foreclosures up 300 Percent – Oops.
Rule #3 – Know the source and motivation behind the research you follow. An extremely bright young analyst I follow has been calling buy signals on local bank stocks for two years. She recently gave up and started sending sell signals after stocks fell 80 to 90 percent. We often provide her our insights about what we see in the market, however, her MBA usurped her instincts in this instance.
Since 1999, we’ve obtained our research from independent research firms. We follow research from Wall Street as well, but have not put much faith in it for years.
I will end today with a few statistics for you to digest:
- Last fall, less than 30 percent of all stocks had more buyers than sellers.
- Today, more than 60 percent of all stocks have more buyers than sellers.
Looking back, October 2007 was the perfect time to reduce your exposure in the stock market. During this time, most stocks had more buyers than sellers. Late 2008, was the time to increase your exposure.
We feel that the easy money has already been made with 60 percent of all stocks on a buy signal. Careful selection is necessary going forward.
The information presented is the opinion of Lakeside Capital and is not meant to serve as investment advice.
Angry, Party of One?
Posted by Dennis Daugs in Diversification, Real Estate on April 29, 2009
Remember growing up, there was always one kid that had to have his way? If the ball game wasn’t going his way, he would threaten to storm off, and take the ball with him. It put the other kids in a tough spot; work with the kid, or cancel the game and go home.
It is sad to say but those behaviors are playing out today and not on the playground but in our local banking industry, and what’s at stake is not a ball game, but the region’s prospects of recovery.
Let me share with you what we are seeing.
Starting a few years ago, local banks went on a loan-approval spree, doing deals with real-estate developers at record levels and approving real estate loans at record numbers. Developers courted bankers and bankers excitedly approved loans, buying into the developers’ visions of great profits.
For a period, it seemed as if every developer in town had unfettered access to capital from community banks, and these banks started feeling good about the loans and the anticipation of big profit.
What the banks found, of course, was that Shakespeare was right: All that glitters is not gold.
The mood of those bankers is a great deal more somber today, and many of those golden fields of investment opportunity are now fallow. The builders, hamstrung by the current economic conditions, are handing the keys back to the banks. The banks, in turn, wholly ill equipped to own property, are posting these properties and projects as losses on the books.
Yesterday, we met with a local banker who is holding a portfolio of troubled real-estate projects. We wanted to discuss the possibility of buying some of these properties and moving the projects forward. We thought the bank would be very receptive to moving these real estate loses off the books.
As I found out, this banker – and many like him – is filled with anger.
On one hand, we understand the anger. This CEO, like thousands across the country, was enamored with the prospects of an upswing in the economy, but paid little heed to the possibility of a downturn. Now the bank’s balance sheet looks as red as a slaughterhouse floor, and many of the bankers – our guy included – don’t know how to fix it.
Compounding the problem are the regulators peering over banks’ shoulders, telling the banks to get the house in order, or face federal action.
I don’t know if our banker experienced the tough-love of the FDIC, but I can project that his world is certainly different than it was a few years ago. He most likely has employees expressing concern about their jobs, and investors and customers pinging him about the long-term stability of the bank.
Regardless, you, the CEO of a small north end bank, must now defend yourself from all quarters – customers, the board, federal regulators and employees.
To make matters worse, company stock is so low it seems like your life’s work is in shambles and perfectly timed with horrible synchronicity with the sunset of your career. At the end of the day, you are simply angry. Angry with your borrowers, angry with your customers and angry that you let this all happen.
Who knew that lending $150,000 to a builder to buy lots would end with a 50 percent write down?
This anger is what we witnessed in our meeting. It is that anger that we hope does not cloud a turn-around for the Puget Sound’s real-estate market.
If you are the banker in this scenario, it’s time to get past the anger and view this as an opportunity. There are buyers who want to take property off your hands and treating these buyers as potential problems solvers can make a world of difference.
Our advice – don’t put yourself in a situation where the phone stops ringing. You don’t have to take the first offer and if you don’t like a potential buyers price say no, but leave room for negotiation. Don’t take the ball and leave the game.