the BRIEFING: April 2013

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The Briefing is a monthly piece by Transwestern that discusses the national economy, capital markets and real estate outlook at a glance. It is an aggregation by Tom McNearney, Transwestern's chief …

The Briefing is a monthly piece by Transwestern that discusses the national economy, capital markets and real estate outlook at a glance. It is an aggregation by Tom McNearney, Transwestern's chief investment officer, of other articles and reports.

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  • 1. THE NATIONAL ECONOMY AT A GLANCEAPRIL 2013the BRIEFINGwww.transwestern.net
  • 2. www.transwestern.netƒƒ 1Q13 GDP of 2.5% as federal cutbacks and restraint from businesses keep recoveryfrom gaining momentumƒƒ March employment slowed to 88,000 – this following four months in which job growthaveraged 220,000ƒƒ Unemployment benefits fell sharply to a seasonally adjusted 346,000. Down 42,000after rising to 388,000 two weeks ago, highest level in four monthsƒƒ Unemployment fell to 7.6%, as 500,000 dropped out of the labor forceDespite signs of very solid first quarter growth, theeconomy appears to have lost momentum over thepast few weeks as higher taxes and sequestrationbegan to create a drag.THE ECONOMY
  • 3. www.transwestern.netƒƒ U.S. companies hit by slowdown in sales growthƒƒ Earnings growth decelerated in Chinaƒƒ From end of 2007 to beginning of 2009, U.S. economy lost $17 trn or ¼ of total U.S.wealthƒƒ Due to improvements in the stock market and home values, the U.S. economy hasrecovered $13.5 trnHowever, both the housing and auto industries continue to providereal growth and momentum, which should keep the economy ona positive track, barring unforeseen global events or self-inflictedwounds from Washington, D.C.THE ECONOMY, cont.$38.1BNFlowed into long-termequity mutual funds in lastmonth7.9%Delivered by REITs in 1Q13 vs. S&P500 and Dow Jones Index gains of10.6% and 11.93%, respetively$350BNRecord breaking year forjunk bond issues. 2013 off toanother record-=breaking start
  • 4. www.transwestern.netƒƒ For the past four years, the Fed had been buying Treasuries and Agencies, a total of$2.5 trillionƒƒ Primary risk is that this may cause an over-valuation cycleƒƒ Reasonable equity market valuations and modest recoveries in the U.S., China andother parts of the developing world will keep the party going for a whileƒƒ What will happen when the Fed stops purchasing tens of billions in Treasuries andAgencies every month?The Fed has been providing an unbounded and almost limitlessliquidity. The question ultimately is, what happens when that is gone?THE ECONOMY, cont.
  • 5. www.transwestern.netƒƒ S&P 500 companies expected to pay $300 bn in 2013 dividends, over $282 bn in 2012ƒƒ Announced plans to buy back $117.8 bn in stockƒƒ Institute for Supply Management index for factory activity slowed to 50.2 in April.Indicates continued growth, but at a slower paceƒƒ GM, Ford and Chrysler report highest March sales in five years – up 8% to 15.3 millionƒƒ U.S. banks continue to show signs of improvement:ƒƒ JPMorgan and Wells Fargo see record profits but falling revenue in Q1 2013ƒƒ CitiCorp records $3.18 bn profit with 3% revenue growthCompanies have a lot of cash and cash flow.U.S. Companies
  • 6. www.transwestern.netƒƒ Housing starts climbed to an annual seasonally adjusted rate of 1.04 million units inMarch, an increase of 0.7% over Februaryƒƒ Both institutional and private equity funds are buying single family inventoryƒƒ Blackstone is buying $100 million in homes per week and has purchased 20,000homes worth $3.5 bnƒƒ Colony Capital has spent $1 bn buying 8,000 homesƒƒ Inventory of unsold homes continues to drop with shortages beginning to emerge inmany marketsThe housing market continues to show signs of realrecovery.Housing
  • 7. www.transwestern.netƒƒ Moody’s stripped UK of AAA credit rating predicting economic weakness will weighon its public finances for years to comeƒƒ Spending cuts were justified by Prime Minister David Cameron to maintainsovereign credit ratingƒƒ Many expect triple dip recessionƒƒ Debt not expected to stabilize until 2016“The simple truth is that Europe is being heldtogether by one thing and one thing only; MarioBraghi’s promise to do whatever it takes to save theEuro.”— Grant Williams, analyst & commentatorNewsletter: Things That Make You Go Hmmm...THE HEADWINDS
  • 8. www.transwestern.netƒƒ EU economists predict 0.3% contraction for 2013, a shortfall for the 2nd year in a rowand 3rd year in last 5 yearsƒƒ Ave regional unemployment expected to reach 12.2%ƒƒ Greece expected to hit 27% unemploymentƒƒ Spain expected to hit 26.9%ƒƒ Portugal expected to hit 17.3%ƒƒ Average budget deficit expected to drop below 3.0% to 2.8%, for the first timesince 2008European economies also face high debt and unemployment.THE HEADWINDS, cont.
  • 9. www.transwestern.netƒƒ Prices overall are still near record highs with yields hitting record lowsƒƒ Many are providing negative returns after inflation and taxesƒƒ Treasuries are providing negative returns after inflation aloneƒƒ REITs are at their highest prices in five yearsƒƒ Gold fallen from a high in November of $1,889 per ounce to roughly $1,350,reflecting slowing of economies in China and the U.S.ƒƒ Average U.S. money-market fund yielded 0.04% on annualized basis as of February 3ƒƒ To avoid leaving investors with losses, 98% of funds reported waiving someportion of their management feesCorporate bond prices softened during the firstthree months only to strengthen somewhat duringthe spring economic slowdown.CAPITAL MARKETS
  • 10. www.transwestern.netƒƒ High-grade corporate bonds at approximately 138 bps over Treasuries – after inflationand taxes – NO REAL RETURNƒƒ 10-year Treasuries are back to 1.71% — no yield after inflation – NO REAL RETURNƒƒ Average CRE yields for core properties are attractive vis-à-vis historical spreads andvis-à-vis alternative investments, such as corporate bonds, etc.ƒƒ NCREIF shows average institutional CRE cap rates 400 bps over the 10-year Treasuryƒƒ Average CRE spread historically approximately 200 to 250 bpsƒƒ In this low yield environment CRE still appears very attractive vs. other asset classesCRE continues to provide an attractive return toboth institutional and non-institutional investors.2013 REAL ESTATE FORECAST
  • 11. www.transwestern.netthe BRIEFING is an aggregation by Tom McNearney, Transwesternchief investment officer, of other articles and reports. Tom leadsTranswestern’s capital market efforts for development andinvestment nationwide. Tom also serves on the firm’s investmentcommittee and board of directors, and he directs the executionand expansion of the firm’s principal investment activities acrossthe country.DISCLAIMERCopyright © 2013 Transwestern. All rights reserved. No part of this work may be reproduced or distributedto third parties without written permission of the copyright owner. The information contained in this reportwas gathered by Transwestern from various sources believed to be reliable. Transwestern, however, makesno representation concerning the accuracy or completeness of such information and expressly disclaims anyresponsibility for any inaccuracy contained herein.the BRIEFINGTHE NATIONAL ECONOMY AT A GLANCE