Thursday, December 15, 2005

“Predicting the Rain Isn't as Important as Building the Ark” – unknown

"The collapse of the housing bubble will throw the economy into a recession, and quite likely a severe recession," July report by the Center for Economic and Policy Research, November 2005.

"The demographic story behind the housing market boom, as we always thought, was a giant hoax," David Rosenberg, Merrill Lynch economist, November 2005

The Federal Reserve, as expected, hiked short term rates for the 13th Fed meeting in a row. The target for the Fed Funds rate now stands at 4.25%, up from 1% just 18 months ago. The language of the Fed’s policy statement has changed slightly; expect at least 2 more ¼ point increases in the months ahead. The Fed Funds future’s market is discounting 4.75% no later than the May ’06 meeting, and quite possibly by the March ’06 meeting. With the 10-year Treasury bond closing to yield nearly 4.5%, it appears unlikely that the 10-year could very well close the year yielding 5%. Still, that bond has lost 5% of its value in 4 months, over 1 years worth of interest. 30 year “conforming” mortgage rates will be in the 6.25% to 6.5% range (jumbo and commercial mortgages will be somewhat higher), and adjustable rate mortgages not much cheaper. What a difference a year makes.

So much capital is sloshing around the globe that asset prices in every industrialized country have been bid up to the point that Fed Chairman Alan Greenspan felt compelled to warn investors that past periods of low “risk premiums” (those of you reading my commentary will remember this term and definition) demanded by investors had not been “kind” to investors. Herewith his recent remarks:
“[the] vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”
“Greenspan speak” frequently requires translation. Please feel free to call me directly and I will be happy to expound.
Lets get back to “Building the Ark”. I love Real Estate. I hate losing money, poor returns, and high risk/low reward investments. My comments in this forum over the past 8 months have certainly had a negative slant when discussing this asset class, particularly in the South Florida market. I enjoyed a nice visit on the phone with a substantial Real Estate investor/attorney, and during the conversation he asked me when my predicted “crash” in Real Estate values would occur. I was somewhat disappointed in his interpretation of my diatribes and hope to be clearer in the future. Real Estate, for the most part, does not crash; it experiences “corrections” and “cyclical downturns”, or it may become difficult to sell at all. Unlike a bond or a stock or other financial asset, Real Estate has carrying costs. If the property does not generate self-liquidating cash flow, these carrying costs add up rather quickly. Here is one of my favorite quotes from Tim McGinn, a respected Wall Street investment banker I met during my days at Bear Stearns:

“The gross overbuilding of the 1980’s has taught real estate investors that tenants are what matter most. Without them, architecturally stunning, exquisitely located, and ingeniously financed buildings move rapidly to foreclosure.”

My concern is the direction of interest rates coupled with what appear to me to be super-stretched asset prices. I have been through a couple market disasters in my life. Not one was predicted the week prior to the crash in the Sun-Sentinel or even the Wall Street Journal, so you cannot look for signs in the newspapers. I have never in my life heard a real estate salesperson or stockbroker that wasn’t “constructive” (outrageously bullish) on their market place. After all, they get paid to be optimistic! Yet the 20th century was replete with corrections, bear markets, financial dislocations, currency crises’, credit crunches, war, etc… Real Estate is now considered by the average, individual investor to be the “can’t lose” asset class of choice, while stocks are thought to be incredibly risky, and because of easy credit individuals have, in my opinion, bid up the price of many Real Estate markets to the point where the risk/reward ratios are poor. Too much of American’s balance sheet assets, if you will, are in Real Estate. Remember, broad diversification is the key to surviving any “market correction” or “cyclical downturn”.

“All eyes on the Dollar”

The Dollar, somewhat predictably, has rallied from its lows against the major currencies by virtue of the Fed’s activities, but has stalled near current levels despite several rate hikes. This is important stuff. The current account and budget deficits are nothing short of frightening to people of my ilk, but do not seem, at this time, to be bothering many others. The Dollar might very well continue on its rally in spite of the twin deficits because of little competition from other market’s fixed income securities. Or it might not. If not, look out for significantly higher long-term rates, falling asset prices (attention real estate speculators!), and tough going in all U.S. markets. Here is a graph of the DX:


The last 3 Fed hikes failed to rally the dollar above 91. The market anticipates an additional 3 hikes before the end of Q2, 2006. If the dollar fails to rally with these subsequent hikes… well let’s just say it is worth watching.

“All eyes on Oil, too”

Oil continues to defy those who thought this was an asset bubble created by financial investors (dry barrels) rather than the physical (wet barrels) market. There are a significant number of smart people that believe that we have passed the peak in world oil production. Is it this year or the next or the year after? I don’t know. But the consequences of $100+ per barrel will be significant, and not just at the gas pump. This development will reward some and punish others. I highly recommend “Hubbard”s Peak” by Kenneth S. Deffeyes, and a short white paper easily found on the Web “The End of Cheap Oil” by Colin J. Campbell and Jean H. Laherrere. This issue is here to stay.


The Santa Klaus rally came early this year. Looking forward, this asset class will be driven by interest rates, energy prices, and geopolitical outcomes. I need a better sense of where the aforementioned are going before I

Let’s review this year’s prognostications: Our readers would have steered clear of speculative housing bets; check! They would have over weighted equities; check! Under weighted bonds; check! Remember, things change: The U.S equity market has rallied significantly, and is not as attractive as it was, in my opinion, and we are again rebalancing out asset allocations towards more international exposure and less domestic exposure. I do not speak in absolutes (I did not say no exposure) – only in probabilities. It is probable, in my opinion, that the U.S. will not be the leading equity market in terms of appreciation in 2006.

Friday, October 14, 2005

The Federal Reserve has certainly gained the stock, bond, and Real Estate market’s attention. The Real Estate market (as measured by the iShares REIT index) is off sharply, Bonds have had negative returns, and equities have had a rough start to the 4th quarter as well.

The target on the Fed Funds, now at 3.75%, is projected to stand at 4.5% in January by the futures market. My own opinion (at this moment) is that 4.25% is a lock, and 4.5% is 50/50, but, as always, my opinions are subject to change without notice. The Fed is in a tough spot: they helped create the current environment of commodity inflation (this includes land prices, metals, and oil), and now must reign in the U.S. housing and real estate market in what they must hope will be a soft landing. I am not so sanguine about their prospects.

I understand the “explosive” (I believe that Real Estate in Shanghai, Hong Kong… is a bigger bubble than South Florida, and when it goes, so will the certain commodity prices, but more on that in another commentary) growth in Asia, but I am of the belief that, irrespective of China’s demand for commodities, our own contribution in this equation has been substantial and misguided. We have become a nation of homebuilders, condo developers, and land speculators, brought about by extreme policy accommodation on the part of the Fed. Remember economics 101? Savings that can be used for investment for the purpose of production? Just how many widgets will be manufactured in those condos we are building? How much software will be written at that country club development? Our economy has spent far too much of its resources in Real Estate development, and far too little on productive capacities (oh, I can hear the “there is too much capacity as it is” nay sayers as they point to all the cash Corporate America is hoarding – to which I say - “buffalo chips”!).

If it is not the housing market that the Fed has in its bomb-sights, then what is? Core inflation for September was just .1%, hardly the boogey man that the Fed has been seeing under its bed. The moment that the housing market appears to have been humbled the Fed will cease hiking rates. The Bank of England, raised short term rates to 4.5% recently but had to change course and lower by .25% because of a dramatically slowing economy. Are you listening, Alan?

The Federal Budget Deficit is finally getting the press it deserves. Federal spending on the “War on Terror”, pork, Katrina, Rita, Tom (DeLay), Dick (Cheney) and Harry (W) has gotten out of hand. The negative impact of these deficits on long-term interest rates is not an “if” but “when”. I am almost embarrassed to call myself a Republican, considering the profligate spending by our Government and the Federal Reserve’s complicit encouragement of spending by consumers (remember our little 0% savings issue? We now have negative savings); they have created the current bubble to pay for the previous bubble. Did I mention the possibility of an out and out civil war in Iraq? What is it the Chinese say? “May you live in interesting times…” I am no politico - I am a businessman, and I want to make money. Unfortunately, free-market types are not running the show in Congress.

Real Estate:

Opportunity Cost:

“The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.”
“The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6%-2%).” - Investopedia

Investors considering Real Estate as an option would do well to reacquaint themselves with this concept. I always hear “you can’t lose money in Real Estate”. “Donkey Dust”! Investors who bought Real Estate in 1990 lost over 30% in inflation adjusted dollars by 1999, while investors that bought a S&P 500 fund and held it over the same period made over 400% in inflation adjusted dollars. OK, you say that Real Estate has doubled from 2000 to 2005 (I question this analysis but lets just make the assumption for this discussion) while the S&P 500 has declined 20%. For the 15-year period 1990-2005, it is not even close.

It is important to compare apples to apples. I am comparing Real Estate investors with equity investors, not Real Estate developers with private equity funds (these are the wholesalers that investors buy their various holdings from). If I were, the disparity would have been far greater in favor of the private equity guys.

The opportunity cost of Real Estate over the next decade when compared with other asset classes will not be as great as the 1990-1999 period, but it will be substantial, in my opinion. Real Estate enjoys the power of leverage more than other asset classes – you can mortgage it – but leverage is a double-edged sword, and it cuts, hard, both ways. Just look at the history of bankruptcy for the land speculators and developers in past recessions. That’s the problem with debt; lenders have this pesky requirement of being paid back irrespective of market conditions. With the new bankruptcy statuettes taking effect this week investors in this sector would be well advised to understand the effect of the leverage in their holdings on their personal fortune should the wind shift.

As measured by the iShares Dow Jones US Real Estate Trust (IYR – NYSE; it is not a perfect index, but it is certainly indicative of market conditions and valuations), the market has corrected significantly, 14.5%, but not nearly enough to interest me in putting money to work in this asset class. Another 20% down as measured from the top (35% peak to trough) and I might have some interest, 50% peak to trough and I would be a buyer. I doubt that that is how things will work out. Markets are not quite so neat in their corrections. The following is a quote from an analyst for whom I have great respect:

“…the average dividend yield for the stocks in this REIT index has dropped more than two percentage points--from 7.3% in September 2002 to 5% last month. As the Fed raises interest rates, their advantage over CDs or money market funds is rapidly disappearing… Few investors in REITs remember the 40% to 50% losses, which occurred leading up to the last two recessions in 1990 and 2001. We strongly urge subscribers to avoid the lure of these REIT investments and their attractive yields. Those yields won't appear so favorable when a significant portion of your original investment disappears.” (Amen!)
- Catherine Hetrick; InvesTech Research

Remember my ranting diatribes earlier in the year on the housing market? I took a lot of heat from clients and prospective clients because my views diverged from what they read in the local newspaper. Reminds of the Will Rogers line, “All I know is what I read in the papers”. Here is a quote from a recent Merrill Lynch report:

Deflation: "Folks, this is still a deflationary world," said David A. Rosenberg, a Merrill Lynch economist. "The airline industry, which is the closest to the oil price runup, is having problems raising fares." Instead, it's cutting jobs.

The Housing Market: ”The housing market is getting softer. Inventory of existing homes, condos and new homes on the market is up. Unsold new homes have jumped to a five-year high. “

It is interesting to note that Mr. Rosenberg is concerned with Deflation at a time that the Federal Reserve is concerned with Inflation. Could it be that we are in a period of commodity inflation and wage deflation? If so, where will the convergence/divergence take place to correct the imbalance, and give us an opportunity to profit? I don’t give specific strategies in this forum (but I do have an opinion), I merely point out macro trends that your local newspaper usually misses.

For my South Florida readers: The carrier of last resort, Citizens, is considering asking for 100% rate hikes for its wind damage insurance. It is safe to say that flood insurance will be considerably more expensive. Energy costs and interest rates have spiked considerably, yet there are no means to recoup any of this from tenants in many leases (even if you could, just ask the airlines how hard its been to pass these costs along). Demand for second homes is falling at a time when a great deal of supply is coming on line. Corporate relocation to our region has dried up. This is not the stuff positive returns are made of. When the “newbie” Real Estate investors “hit the bid” (hit the market) en masse, my sense is that market will be a place of extreme pain.


If you were long bonds over the past several weeks, you truly know what pain is. The 10-year Treasury closed today to yield 4.49%, up from roughly 4.05 in early September, and as we all know, when bond yields rise - bond prices fall (yes, if you hold them to maturity you will receive all of your interest payments and return of your principal, but remember the concept of “opportunity cost”). I am tempted to reign in my prior cowardice when I said it might not be till the end of Q1’06 that the yield on the 10-year would hit 5%, and move back to year-end ’05, but only tempted. This would imply 30-year mortgage money at 6.5%, and adjustable rates not much lower. I continue to be a bond bear. For those investors needing the security of principal bonds represent I would look to short term CMO’s and equity indexed annuities. These relatively new products from the insurance industry give investors most (but not all) of the upside of the equity markets with none of the downside. It is hard to beat that risk/return ratio, but I am sure Wall Street will give it a shot soon with some new product. In the mean time, “Buy-Write” mutual funds (they own high dividend paying stocks and then sell, or “write” in industry jargon, calls against their positions or some comparable index picking up income in addition to the dividends), usually issued as closed end exchange traded funds, pay dividends in the 9% range and have a fairly low beta (risk profile in relation to the overall market).

Oil & Gas:

Demand is going to grow 2 – 3 % per year worldwide for the foreseeable future. Are worldwide reserves going to keep up? I doubt it. On any pull back in energy equities (like the one we are having now), you know what you need to do.

Domestic supplies will increase, refineries will come back on line, hurricane damage will be repaired, and prices will adjust, but there is no stuffing the genie back in its bottle. China and India are going to be major economic powers – and soon – and major economic powers consume lots of energy and other commodities. But you know this, you just need to act on it.

Equity prices in the energy sector have fallen sharply in recent weeks. Is this the absolute best time to add to these positions? Who knows? I added to my positions last week, and will do so in the near future.


A rough start to what is usually the equity market’s best quarter. The Fed is much closer to the end of its tightening cycle than it is to the beginning, and the equity market traditionally rallies nicely in the months before the final crank of the policy wrench. The markets had been looking, and I might add anticipating a bit too soon, for the end of the current tightening cycle. Core inflation is not a problem, and if Q3 earnings come in during the next several weeks as I expect (another double-digit earnings gain, outpacing analyst expectations) the next 6 months will reward investors in consumer non-cyclicals, healthcare, pharmaceuticals, bio-tech, and energy, to name a few. Remember where we are in the Fed cycle and avoid industries that have historically performed poorly in flat yield curve and rising rate environments.
I keep pounding home the theory of “reversion to mean”. The equity markets, and growth stocks in particular, have been significant under performers for the past 5+ years. And in that time the total earnings of the S&P 500 has doubled. Certain international equities are also in a good position to perform well for dollar denominated investors.

mentatt (at) yahoo (d0t) com

Sunday, September 25, 2005

Crude Oil fell from a peak of $78+ to under $60 as of this morning’s trading. A sense of “well, we don’t have to worry about energy anymore” has descended upon mankind. As the famous game show host used to say: “EEGHGHGH!!! Wrong! Thanks for playing!”

“All I know is what I read in the newspapers” – Will Rogers

If all you know is what you read in the newspapers, you have been misinformed. For the past 20 years Crude Oil (and its derivative products) experienced a seasonal decline in price each Fall, averaging nearly 20%. This year’s decline was earlier and steeper than expected, but in hindsight, the steepness of the rise in price was warranted at that time considering the supply risks – and the steepness of the decline was warranted by the removal, even if temporary, of these risks. Further, several large hedge funds have experienced tremendous losses on heavily leveraged positions, and were forced to sell billions of dollars of commodities and securities positions in less than 2 weeks. The futures market has prices in the mid 70’s going out 5 years. In other words, the pros think controlling oil in the mid 70’s for the next 5 years is going to make them money – and that the price will be higher than the contract price (otherwise one would buy at the spot price).

After review of the supply numbers for the U.S. for January to August, 2005 vs the same period for 2006

(You can review U.S. domestic production and imports yourself, just go to: and

total supply actually went down. . The U.S. Energy Information Agency (“EIA”) reports that demand was 20.73 million barrels per day (“mbpd”) in 2004, 20.66 mbpd in 2005, and expects 20.66 mbpd in 2006. Let me be the first to point out that NOT ALL OF THE NUMEBRS ADD UP PERFECTLY (the data sources are disparate, but it’s the trend we are looking for)… but if imports are down, and domestic production is down, and demand is flat… why are inventories “high”? Maybe they are not. Total supply is not the correct method of measurement – the number of day’s supply is the correct unit of measure.

“OECD inventories began the second quarter at the upper end of their past 5-year range for this time of year. However, when measured on the basis of how many days of demand the current supply could meet, OECD inventories were only in the middle of their observed 5-year range. By the end of 2007, EIA projects days of supply of OECD inventories to finish at the bottom of the 5-year range for that time of year, which is expected to make the market even tighter.” U.S. Department of Energy, Energy Information Agency, 9/12/06

At times like this it is important to “keep your eye on the ball”, the supply/demand equation. For better or worse, circumstances have not improved on this front and the energy dilemma is still with us, and not to put too sharp a point on it…

China, India… China, India… Chindia… there is no doubt that these gigantic populations are going to drive the majority of the increased energy demand picture over the next decade. Here is something the market (and those screwy newspaper reporters) has not factored into the demand equation. The collapse of the Soviet Union and subsequent economic fallout depressed the consumption of the countries of the Former Soviet Union (“FSU”) by at least 4.3 mpbd during the 1991 – 2005 period.

“In retrospect, the best way to review key fundamentals is to look carefully at changes in global supply and demand, and where they’ve come from. Between 1991 and 2005, global demand for oil grew by 16.6 million b/d. More astonishing is that non-FSU demand grew from 58.9 million b/d in 1991 to 79.8 million barrels a day in 2005. In other words, outside the unanticipated collapse of the Former Soviet Union, the rest of the world's oil demand grew by 20.9 million barrels a day in just 14 years (35%; 2.5% per year) vs. the projection by many oil pundits that oil demand growth was certainly slowing down.

In the meantime, non-OPEC oil supply, outside the FSU, grew in that same 14 years, but only by a modest 6.7 million b/d, from 31 to million b/d to 37.7 million b/d. That’s less than 0.5 mbd per year. Too many important regions peaked and went into decline. Had the FSU not been able to grow from 10.4 million to 11.6 million b/d and OPEC grown from 25.6 million to 34.2 million b/d, the world economy would likely have been in very hot water.” - Matt Simmons, Author, “Twilight in the Desert: The coming Saudi Oil Crash and the World Economy”

And therein lies the rub. Supply is simply not going to be able to keep up with demand in this brave new world of Russian, Chinese, and Indian ascension. The U.S. has 2 % of the world’s oil and consumes nearly 25% of world’s annual production. One does not need a background in mathematics to visualize the intersection of the 2 sloping lines on that graph.

Last year we told our clients that the big story in business for 2006 would be energy - so far, so good. The oil depletion issue, “Peak Oil”, if you will, was considered the lunatic fringe in 2005. In 2006 it has been covered by Forbes, Fortune, Business Week, CNN, CNBC, and The Wall Street Journal, and nearly every daily on the globe. Also, it has been derided by the likes of OPEC, the Oil Minister of Saudi Arabia, Big Oil, and other special interest groups. I would like to point out that these are the same entities that spent BIZZILIONS OF $$$$$$ over the past 2 decades trying to convince the public that global warming was not caused by CO2 emissions emanating from their product…


Why, indeed? Denial. The implications of this issue are simply mind boggling. If these scientists and academics are correct, it is likely the new car you purchased in 2007 will outlive its fuel supply. If and when this dawns on John Q. Public… well, how do you figure that works out for GM, Ford, and those far flung suburban developments 50 miles from the nearest employment center? It is just too inconvenient to consider; denial is a lot easier. If, however, you are not into denial, there is a convention hosted by Boston University this October 26 and 27 on the subject of “Peak Oil”. Scientists, Physicists, and Mathematicians from Princeton, Cal-Tech, and Oxford University, among others, will be presenting. Guess how many members of the U.S. Congress will be there? One, the Honorable Roscoe Bartlett, R- Maryland. Guess what his background is? He’s a scientist. If you are interested in attending please call me.

OPEC? Watch what they do, and why – not what they say. OPEC is irrelevant at this point. What’s the point of a cartel if you are pumping as fast as you can? Only a fool thinks they intend to cut production with prices anywhere over $40 per barrel… not to mention the fact that Saudi Arabia has ordered so many drilling rigs that the daily rental price has more than doubled worldwide! Now why would you want to develop more production capacity if you are going to cut production? Somebody, please, give that CNBC reporter a V8!!!

Real Estate

The residential market in South Florida is at the beginning stages of a 5 – 10 year correction. It is not as bad as Japan, 1992, but its pretty bad. And its not just current “prices, supply, and demand”. Healthcare and construction have been the only legs on the stool, and construction is in contraction. Healthcare? It has been great, but I cannot see how things can improve in the coming years – this is as good as it gets. Government reimbursement drives the industry and growth from this quarter is coming to an end. Did I mention your potential employees cannot afford to live here on what you pay them? Commercial property investors might get some relief in the form of lower, long-term interest rates, but it’s a catch 22. To get the lower rates, the housing correction (crash?) would have to get worse. You might get some relief on debt service, but your vacancy rates are going higher still. And if rates were to go higher? I don’t even want to think about it. Let me remind you that the most beautifully designed building, at the finest location, brilliantly financed – without tenants is on the fast track to foreclosure. If you have any doubts about this, call me, and I will tell you the story of the Resolution Trust Corporation.

Guess what the best performing Real Estate asset class for past 12 months was: Agricultural property. Yep. Not those shimmering condos in Miami overlooking the bay, it was a cornfield overlooking a feedlot full of manure – go figure. Now, who told you about this last year? Who put his money where his moth is and bought a farm early this year? The same guy who wrote in early 2005 that speculators in South Florida single-family homes had lost their marbles… but I won’t mention any names…

The Real Estate industry has a boom and bust cycle to it. It is as good as it gets during the boom. The bust is tough on your nerves. Where are we at this time in the cycle? Residential is a no-brainer. Office? Industrial? Retail? There is no substitute for knowing your market, but under no circumstance are the prices properties are being offered in our market cheap, leaving no room for error, and worse should the economy enter a recession.

Speaking of recession. One of the reason I write this newsletter is to market my perspicacious acumen by letting it all hang out in this forum and then letting prospects see how my prognostications worked out. I think a recession is highly likely, if not unavoidable. There, I said it. Next year you can either call me an idiot, or a genius. But call me. I need the business.

The U.S. Dollar

The Dollar can’t make up its mind – but I can. If rates go lower the dollar gets killed. If rates go higher, the dollar has already gotten killed and the Fed is trying to save it and will kill everything else in doing so. A decline in the dollar’s value can be a good thing for real estate, Gold, Silver, and Oil. I say, “can be” in regard to real estate investors. The U.S. Dollar heading south is good for Oil and the precious metals in nearly all circumstances, but that is not necessarily so for Real Estate. For the rest of us, it is not so good. If you actually have assets, this is quite the conundrum.

The Financial Markets

The bond market tells me we are headed for a recession. The equity market tells me we are in the “Goldy Locks” zone – neither too hot nor too cold. They can’t both be right. If the economy is going to continue to expand at the clip expressed by the stock market’s gains, the bond market would be taking some serious heat and long rates would be headed much higher. After 20 years at this I firmly believe that the bond market participants do much better homework.

Tuesday, September 20, 2005


As we discussed in our September 6, 2005, comments, the Federal Reserve raised its target for the Fed Funds Rate to 3.75%. The Fed gave some lip service to Katrina, but kept the rest of the language from their recent announcements intact. With the 2 year T-note yielding, at this moment, 4%, and the 10 year T-bond yielding 4.29%, the yield curve is flat enough that: A. We are heading into a recession; or, B. The longer end of the curve is going to rise in yield and fall in price. We are squarely in the “B” camp.

Real Estate:

For you Real Estate speculators out there: We would prefer to jump out of a 3rd floor condo unit’s window rather than buy the unit (it would be a coin toss if faced with the 4th floor). Single-family investment properties in South Florida are dead money for the foreseeable future, just as they were from 1990 – 1999.

Commercial properties? The prime rate - now 6.75%, and we expect 7.25% no later than Q1, 2006 – is the benchmark for corporate borrowers and commercial mortgages. The average yield spread for a commercial mortgage in South Florida is 1.5 – 2.0 % over prime, giving us 8.25 – 8.75 % commercial mortgage rates, and asking cap rates of 7.5%. No wonder these properties are not moving! The Fed has clearly stated their intentions, in our opinion. They intend to move the long end of the yield curve higher – by any means necessary. There is no relief in sight for either commercial or residential property investors in South Florida - interest rates are going the wrong way, insurance costs are spiking, as are energy costs (read your FPL bill lately?), the supply issues are horrendous (of course, a nice category 5 landfall would adjust those nasty supply issues quite nicely), and that is before green Real Estate investors come to the conclusion that (unlike financial instruments) left unattended their investments will rust in the rain, and rent yields are barley above the cost of taxes and insurance in many cases. The rent yield issue is going to get worse, in my opinion. As I have stated before, South Florida has become Real Estate centric. As this market corrects, a lot of space now rented to people working in the industry is going to be on the market, further worsening bleak rental yields.