Where to now?

The Federal Reserve Board (FRB) moved into yet untested waters yesterday, decreasing the Federal Funds Rate to a record low “target range” of 0% to 0.25% from its previous 1.0% rate. This is the lowest Federal Funds Rate…ever! The Federal Funds Rate is the rate charged on overnight loans between banks. The FRB also reduced the Discount Rate—the rate charged on loans from the FRB to banks—to 0.5% from 1.25%. The Federal Open Market Committee’s (FOMC) statement said it would keep rates at these levels “for some time”. Commercial banks reduced their Prime Rate to 3.25% from 4.0%.

The FOMC statement also noted that the “outlook for economic activity had weakened further” since the last FOMC meeting in October.

While the FRB/FOMC has certainly played the “Rate Cut Card”, the statement pointed out other conventional and “unconventional” measures including “quantitative easing” available to the FRB including, but not limited to, purchasing government guaranteed debt of various maturities and issuers (such as Fannie Mae and Freddie Mac) in an attempt to bring down long-term interest rates and spreads on long-term rates over U.S. Treasury securities.

Federal Reserve Beige Book Economic Survey

As expected, the Federal Reserve’s Beige Book Economic Survey of the 12 Federal Reserve districts for December showed economic conditions having weakened since the prior report in October. The following summarizes a number of the takeaways from the report:

1. Nearly all districts reported consumer sales weaker to sharply weaker.
2. Auto sales down everywhere.
3. Business and leisure travel down in a number of districts.
4. Service sector (lawyers, accountants, architects, advertising, etc.) weaker in most districts.
5. Manufacturing sector reported to be contracting except defense and aerospace.
6. Residential sales weaker; commercial real estate rents declined and vacancies increased; lack of liquidity remains a major concern.
7. Reported deterioration in the credit quality of borrowers leading to less consumer and business lending.
8. Labor conditions characterized a weak, affected by hiring freezes and layoffs.
9. Pricing pressures abating as demand slackens.

Lloyd’s Wall of Worry-It’s the Counterintuitive Indicator: Many Worries, Buy; Few Worries, Sell

(Lloyd’s Wall of Worry is a trademark of Khaner Capital Management)

December 2008

October 2008 takes its sorry place along side other horrific Octobers—those in 1857, 1907, 1929, and 1987. Whether owing to risk aversion, forced liquidations, or just panic selling, investors lost heir appetite for equities in every market on the planet. The Wall loses a couple of worries, but there are still more than enough to go around. Looking ahead, there are concerns about the rebirth of unions, rising credit card delinquencies and the continued “missing-in-action” status of the “up-tick rule” for short-selling. Stay in survival mode and buy slowly and selectively.

The Bailout—Buddy, can you spare a billion? The breadlines of the ‘30s become the credit lines for failing industries today.

Consumer Spending—Son of Stimulus on the way. Whew! Just in time to cover Joe Six-Pack’s $20,000 personal-seat license and $10,000 per-season-ticket charge courtesy of the National Football League.

Oil Prices—Looks like double digit per-barrel oil prices are here to stay. Too bad, because I had a few Amish buggy whip stocks trading below book that looked appealing.

Interest Rates—If interest are cut around the world but no one lends money at the lower rate, did they actually get cut?

Housing Prices—I’ll show you mine if you’ll show me yours.

Unemployment—I’ll take anything in the single digits. But if it starts to approach my golf handicap, we are all in serious trouble.

U.S. Dollar—Pumped up for a stroll along monetary muscle beach. Take a picture—it won’t last.

Deflation—This is when everything goes down in value. Sounds good until you realize that includes your net worth too.

U.S. Mortgages—Likely there are more mortgages underwater than here are sunken boats in the Bermuda Triangle.

U.S. Economy—As the man says in Starsky & Hutch, “I gotta be honest with you—this is going to get a little weird."

European Economies—Sure, we brought the spiked punch to the global economic huse party, but no one told Europe to chug it.

Credit Crises—Now that we all know what LIBOR stands for, can anyone put it out of its misery before it gets us first?

Banking Industry—For those with balance sheets loaded with derivatives, it’s good old-fashioned shotgun-marriage time here is the wild American North, South, East and West.

Commodities—The price of coffee beans is dropping fast, which should make my overnight vigils watching foreign markets collapse a lot less expensive.

De-Leveraging—Saw a few trillion 10cents-on-the-dollar credit default swaps on an online auction site; they didn’t come in their original, sealed packaging, so I passed.

Global Recession—Hey, China, it’s time to inflate and overheat your economy to save the rest of the world from a global depression. Oh, you already did that?

Who’s Next?—After the problems at investment banks, mortgage lenders, savings banks, insurance companies, and countless hedge funds, “Who’s left?” may be more like it.

U.S. Congress—“Give me a lever long enough, a fulcrum strong enough, and I’ll move the world.” Congress has its scapegoat: Archimedes!

Country Defaults—Yo, Iceland, what’s up with that!

Currencies—We’ll have to wait a little longer for the massive unwinding of carry trades to be done. Then we’ll know which currencies to put in our wallets and which to use as wallpaper.

Headline from the December 22, 2008, Wall Street Journal:

Developers Ask U.S. for Bailout as Massive Debt Looms
"With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance."
Read the article >> (WSJ subscription required to access the full text of the article)

Special Comments: Notes from the December 10, 2008 issue of “The Punch Line…”, published by Abraham Gulkowitz

Headlines and data appearing in The Punch Line came from widely available publications including national and international newspapers, trade journals, economic and industrial bulletins and news websites.

On Life Support…

Despite aggressive efforts by policymakers, the credit markets remain locked, sure to extend the crunch in financing and business activity into 2009. Clogged financing channels continue to block policy stimulus, and by seriously restraining aggregate demand, are instigating severe labor market declines and reinforcing new deflationary pressures. Loan and bond markets have experienced the worst deterioration in history. With the worlds of finance and business thrown into disarray, policymakers have taken on ever extreme interventions to restrain the breakdown. There is nothing normal about the current situation; money markets are on life-support systems, which by definition are only made to be temporary solutions and cannot go on forever. Both credit markets and many business sectors around the globe are now in uncharted territory. A raft of lousy signals about the economy, housing and the consumer state of mind suggest the U.S. is headed toward the worst recession in decades. Even worse, a globally coincident predicament may be the first of its kind in the post-war era. That the corporate sector is now showing serious trauma is a reminder of the underlying economic forces at play. The downturn is now in the broader economy and no longer confined to some sliver of the financial markets. The most obvious culprits for this impending slump in corporate profitability are the risk of several years of below trend GDP growth, the higher cost of capital, the exorbitant cost of hedging business risk, a significantly lower tolerance for leverage, possibly higher corporate taxes, and likely increased government regulation. Now that household wealth has collapsed, due to trauma in both the stock and housing markets, there is a serious lack of new growth engines. Indeed, the least efficient element of the economy – government - is being heralded as the sole growth impetus. The result – take any forecasts with a skeptical frown…

From the section entitled: “You Can’t Handle the Truth”

Believe it or not…

Gaming The TARP: "Pay $10m, get $3.4bn of funding?"

Hartford Financial Services Group Inc. said it’s buying a Florida bank [Federal Trust Bank] for $10 million so the insurer can be eligible for the Treasury rescue program. Hartford, based in the Connecticut city of the same name, expects to qualify for $1.1 billion to $3.4 billion under Treasury guidelines, the company said in a statement distributed today by Business Wire.

From the section entitled: “Households – Brave New World”

The number of borrowers delinquent on their mortgage payments rose to a record for the third quarter, and the Mortgage Bankers Association said the picture could darken as

job losses mounted. By yearend, 2.2 million homes will have entered foreclosure, according to MBA's estimate; 7% of all mortgage loans were in arrears in the third quarter.

Delinquencies, foreclosures rise to 10 percent of US home loans in third quarter

WASHINGTON-- A record one in 10 American homeowners with a mortgage were either at least a month behind on their payments or in foreclosure at the end of September as the source of housing market pressure shifted to the crumbling U.S. economy. The Mortgage Bankers Association said the percentage of loans at least a month overdue or in

foreclosure was up from 9.2 percent in the April-June quarter, and up from 7.3 percent a year earlier. Distress in the home loan market started about two years ago as increasing numbers of adjustable-rate loans reset to higher interest rates. But the latest wave of delinquencies is coming from the surge in unemployment.

High Re-Defaults… Comptroller of the Currency John C. Dugan said today that new data shows that more than half of loans modified in the first quarter of 2008 fell delinquent within six months. “After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,” the Comptroller said in

remarks at the Office of Thrift Supervision’s National Housing Forum today.

From the section entitled: “Engines of Growth”

Beware… A synchronized global downturn

Developed economies are leading the global downturn, the majority of them already experiencing a recession in the second half of 2008. Meanwhile, through international trade and finance channels, the weakness has spread rapidly to developing countries and the economies in transition, causing a synchronized global downturn in the outlook for

2009. Such a globally synchronized slowdown may be the first of its kind in the post-war era.

From the section entitled: “Global Fault Lines – Too Many Wildcards!”

Governments may be coming to the end of their easy abilities to raise debt.

Bankers "are warning of potential problems in meeting funding needs." The estimate for the total debt issuance expected next year has reached $2.535 trillion. The hardest-hit countries could be the U.K. and Italy. The U.S. and Germany, "which have the most liquid bond markets in the world," could also suffer — the signs are there. Last month a bond auction in Germany failed.

Some point out that stocks “look cheap” using P/Es or measures of replacement cost values; but they are actually far less cheap than they appear when one considers the continuing paradigm shift away from the use of cheap and too easily available leverage.

From the section entitled: “Bailout After Bailout After Bailout”

So far, the government has spent almost $1.4 trillion, although it has guaranteed almost $8 trillion in investments, deposits and loans. That figure does not include $775 billion in currency swaps with central banks of other countries, nor does it include some lending programs for financial institutions whose cost is not quantified.

The Federal Reserve announced over the last week of November two new programs that will add significant assets to their balance sheet – a $600bn program purchase of agency debt and agency mortgage-backed securities and the Term-Asset Backed Securities Loan Facility (TALF) that will be used in early 2009 to lend up to $200bn against asset back securities. The program will significantly add to bank reserves at a time when the US monetary base has already surged about 75% over the last ten weeks.

From the section entitled: “Real Estate and Construction Outlook”

…the OCC has stepped up its scrutiny of exposures to commercial real-estate loans, and that the OTS "is trying to find buyers for multiple troubled thrifts," and the FDIC "has opened a large satellite office in California to deal with failed institutions in that region."

As Watson said to Holmes, "Sherlock, the game is afoot."

The "game" being the auctioning of performing and non-performing real estate loans. For example, DebtX is auctioning a wide array of assets including commercial real estate loans on behalf of an equally wide array of sellers including the FDIC (as conservator for multiple failed financial institutions), commercial banks, and savings and loan associations, and a national loan servicer. To see an auction calendar, visit www.debtx.com.

Mission Capital Advisors is auctioning an equally wide array of commercial real asset loans for an equally wide array of sellers including a CMBS conduit originator and a CMBS Special Servicer.

The Carlton Group is auctioning performing loans as well bank loans securing a diverse group of properties ranging from office to residential land.

Special Comments: Notes from the November 20 issue of “The Punch Line…”, published by Abraham Gulkowitz

Headlines and data appearing in The Punch Line came from widely available publications including national and international newspapers, trade journals, economic and industrial bulletins and news websites.

The Great Transition... Many growth engines are winding down both here and overseas, and it's very uncertain what will replace them. Hopefully, a great deal will be learned from this unprecedented nightmare. The extent to which the financial and economic crisis has damaged household attitudes and pushed companies out of any sense of equilibrium is becoming more evident every day. It has been revealed in the string of official economic data announcements on a day-by-day basis and also in the financial marketplace. Some money market indicators are showing tentative improvement, owing to heroic Fed and Treasury actions, but the breakdown in sector after sector is accelerating. The U.S. economy contracted slightly last quarter, led by falling private consumption but cushioned by surging federal defense purchases. It really would be naïve to assume anything except that the real weakness will become even more obvious with coming data releases. Accordingly, the outlines of a second fiscal stimulus package are likely to emerge soon after the new year. The tragedy is that the debt explosion over recent years is now being heaved up, but without any growth lever to replace the free-spending households and business. The financial sinkhole that has been created seems larger than anything in recent experience. Let's not forget that the boom in the NASDAQ in the late 1990s could never be retraced… Only government spending will have any chance of holding the line. But that will require huge borrowing by governments – a burden that will need to be reckoned with in years to come. The free-fall in commodity prices has struck much deeper than many expected and while it offers the hope of relief to many businesses and households, there is the painful counterpoint – the crash in natural resources is wiping out a primary wealth engine and will therefore add a second-round effect to this downturn. There will be ongoing repercussions from this ugly bust in money and finance, and we worry about the likely contours of the resulting awkward fix.

From the section titled: You Can’t Handle the Truth…

The Fed funds market will be massively distorted as bank reserves climb well over $1T ($7bn is a normal level), so banks will never get caught short of reserves and need to borrow in the funds market. In addition, excess reserves are likely to climb to roughly 10% of total bank assets.

From the section titled: Turnaround Monitor!

Pointing to a serious business downturn… The ECRI's leading growth index hit a record low in the week to October 24th–a record low of -21.9%, taking out the December 1974 low of -19.8 by a sizeable margin, not to mention the -13.2 reading at the worst point of the recession of the early 1980s. ECRI is the Economic Cycle Research Institute

From the section titled: Too Many Wildcards!

The October 2008 Federal Reserve Board Senor Loan Officer Opinion Survey on Bank Lending Practices

Net percentage of domestic respondents tightening standards for commercial and industrial loans

From the section titled: Credit Concerns – Debt Rattle

Credit-rating company Moody's Investors Service predicts that the default rate among sub-investment grade borrowers will surge to 7.9 percent in a year, from 2.8 percent at the end of the second quarter of 2008 and from just 1.3 percent 12 months ago. "With the global credit crisis intensifying and credit spreads widening, it is increasingly likely that corporate default rates will spike sharply in the next 12 months," Kenneth Emery, the director of default research at Moody's, said in a research report published in Oct.

Can the center hold? There are three possible outcomes for the leveraged loan market: bad, worse, and catastrophic.

Breakdown in Loan Books… The unwinding of the investment vehicles that drove the credit boom is roiling the once staid corporate leveraged loan market, and the pain may not be over yet. Look at the damage being caused by the unwinding of investments in the loan market. "For years, the U.S. loan market was a clubby world dominated by banks, insurance companies, and a few mutual funds." But more investors poured in during the credit boom, and loans began to be packaged in vehicles such as collateralized loan obligations and total return swaps. Some estimate that $50 billion worth of these securities remain in the market and may be unwound.

Leveraged Loan Defaults – Default Volume

From the Section titled: Real Estate and Construction Outlook

National Construction Loan Delinquency Hits 10%

The increase from 8.1% at mid-year is being driven by a sharp rise in non-accruals–past due loans on which the lender has stopped accruing interest because full repayment is doubtful. The delinquency rate was 8.1% at mid-year, 7.2% in the first quarter and 5.5% in the fourth quarter of 2007, according to final figures for those periods.

US Architecture Billings Index Drops to All Time Low

The American Institute of Architects (AIA) reported the October ABI rating was 36.2, down significantly from the 41.4 mark in September (any score above 50 indicates an increase in billings). The inquiries for new projects score was 39.9, also a historic low point.

Mirror, mirror on the wall, which stock group index is doing worst of all?

You’re right; it’s real estate investment trusts. Down 46.5% year-to-date, we’d better pray that REITs are not that good a leading indicator because if they are, all bets are off. While we have always agreed with the leading indicator concept, we sense this time that REITs have been lumped in with financial stocks (banks, insurance, investment banks, etc.), all of whom are being pummeled.

	November 2008	Year-to-Date	Dividend Yield
Industrial	-41.62%	-8.92%	22.06%
Office	-25.15%	-49.88%	9.59%
Office/Industrial	-23.10%	-44.22%	14.40%
Shopping Centers	-23.32%	-49.56%	10.63%
Regional Malls	-35.3%	-65.90%	10.63%
Freestanding Retail	-19.45%	-29.57%	8.49%
Multifamily	-14.84%	-26.84%	7.53%
Manufactured Homes	-19.52%	-31.78%	6.94%
Diversified	-22.40%	-35.92%	8.47%
Hospitality	-25.31%	-63.57%	17.64%
Healthcare	-25.48%	-31.09%	8.67
Self-Storage	-15.21%	-9.19%	4.36%
Specialty	-10.26%	-28.77%	5.95%
Equity REIT Index	-23.06%	-46.50%	9.39%
Source: FTSE Group and National Association of Real Estate Investment Trusts

National Council of Real Estate Investment Fiduciaries (NCREIF) reported the results of its National Property Index (NPI) for the third quarter 2008 as well as on a trailing 12 month basis. The NPI is comprised of 6,255 properties valued in excess of $331 billion owned by institutional investors.

The following chart compares historical performance since December 2007. The "stress," i.e. decline in performance, is due literally exclusively due to a decline in property values as the income component remained relatively unchanged.

Trailing 12 Months Ending	All Property	Office	Retail	Industrial	Multifamily
12/31/07	15.80%	20.50%	13.50%	14.90%	11.40%
03/31/08	13.60%	17.50%	11.60%	13.00%	9.60%
06/30/08	9.20%	11.50%	8.70%	8.50%	6.50%
09/30/08	5.30%	6.10%	6.30%	5.10%	3.10%
Source: www.ncreif.org

If our records are correct, the last time we saw the "All Property" Index in the 5.0% range was in mid-2002; the same is true for the property sub-indices. Unfortunately we can expect more of the same—no, probably worse—when the yearend results are reported in late January/early February.

Mortgage Delinquencies—So Far, So Good

According to a recently released report from the Mortgage Banks Association, delinquency rates for commercial and multifamily mortgages continue to remain at the lower end of their historic ranges. The reported noted that as of the end of the third quarter 2008:

• 30-plus day delinquency rates on securitized mortgage loans stood at 0.63% of outstanding balances, up 10 basis points from the prior quarter.
• 60-day plus delinquency rates on loans held by life insurance companies equaled 0.06% or 36 loans out of a pool of 35,135 loans having a combined unpaid principal balance of $253 billion.
• The 60-plus day delinquency rate on multifamily loans held or insured by Fannie Mae equaled 0.16% while the rate for loans held or insured by Freddie Mac equaled 0.01%.
• The 90-plus day delinquency rate for loans held by FDIC-insured banks equaled 1.38% (or $18 billion of loans of a total of $1.2 trillion outstanding).

Commercial Mortgage-Backed Securities

According to an analysis in Commercial Mortgage Alert, global commercial mortgage-backed securities (CMBS) issuance for the first nine months of 2008 declined 90% as compared to the same period in 2007 and no, repeat no, CMBS were issued during the third quarter.

The CMBS market is moribund with spreads widening and then narrowing without purpose or course. As one trader in the article noted: “At this point people are afraid to buy anything. People are afraid of buying something and then seeing its spread widen immediately widen 50 basis points…so everyone has thrown in the towel”.

Who Holds Commercial and Multifamily Mortgage Loans?

The following chart summarizes the holders of commercial and multifamily mortgage loans as of March 31, 2008:

(in $ Billions )

Commercial Banks, $1,426.6
CMBS Issuers, $919.9
Life Insurance Companies, $308.8
Savings and Loan Associations, $225.7
Government Sponsored Entities, $157.7
Others, $349.7

Total $3,388.4

The public debt capital markets remain on “life support” with year-to-date volume of $12.1 billion versus $188.7 billion in 2007. If the market improves, i.e., if spreads narrow, one or two more deals in the $1 billion range can be expected to come to market this year. Otherwise, the pipeline is bare. Conduit lenders are “quoting” mortgages at spreads of 425 to 475 basis points over 10 year Treasury bonds and obviously, writing no tickets when conventional financing is being priced at 250 to 300 basis points over Treasuries. Breakeven spreads for conduit lenders need to improve dramatically before they will be able to compete with conventional lenders. And with B-rated tranches trading—by appointment it seems—at 2900 over Treasuries, this is going to take a while to resolve itself.

Federal Reserve Board Senior Loan Officer Opinion Survey

The most recent Federal reserve Board Senior Loan Officer Opinion Survey indicated that domestic financial institutions have tightened lending standards and terms for all major loan categories; importantly, few if any financial institutions indicated that they expected to ease lending standards for the balance of 2008 and for the first half of 2009. In effect, it will be more difficult to obtain credit of any sort—consumer, housing, business investment—during the next 12 months.

Net % of Domestic Banks Reporting
Period	Tightening for Large/Medium Commercial/Industrial Borrowers	Tightening for Small Commercial/Industrial Borrowers
Q3 – 2008	57.6%	65.3%
Q2 – 2008	55.4%	51.8%
Q1 – 2008	32.2%	30.4%
Q4 – 2007	19.2%	9.6%
Q3 – 2007	7.5%	7.7%
Q2 – 2007	-3.7%	1.9%
Q1 – 2007	0.0%	5.3%
Q4 – 2006	0.0%	-1.8%
Source: Federal Reserve Board; Moody’s Economy.com.

The latest issue of the Journal of Property Investment and Finance is a special issue on Sustainable Commercial Real Estate:

http://www.emeraldinsight.com/Insight/viewContainer.do;jsessionid=FFBEBE75580226
7B11684F74AD08AD53?containerType=Journal&containerId=12267

The following information appeared on the Responsible Property Investment Information distribution list:

In its 3rd sustainability report Chamartin / Dolce Vita Shopping Centres details how the Company puts corporate sustainability into practice, and illustrates how Charmartin / Dolce Vita Shopping Centres is facing future challenges of sustainability.

Other significant highlights include:
• Case studies about bioclimatic architecture, sustainability project innovation and biodiversity;
• 2007 Economic, Social and Environmental performance on main retail, residential and corporate projects;
• How the Company applies its 10 principles of sustainable real estate project; and
• Examples of how the Company is creating profitable, environmentally-efficient projects of excellent wellbeing and safety;

In developing the report, the Company surveyed some of its strategic stakeholders to find out their concerns and assessment of the company commitment to sustainability. The structure and contents are the result of analysis of this stakeholder feedback, together with feedback and comments on the previous year's report.

The Company's 3rd Sustainability Report was prepared on the basis of the Global Reporting Initiative (GRI) G3 Guidelines and refers to the activity of the Company's three business units - Retail, Corporate Solutions and Residential - within the Portuguese market. The report attained GRI level "B+" and was verified by PwC.

The report is available in Portuguese and English at http://www.reportalert.info/ra/profiles/Chamartin/2008/?ID=23090

More information on Company's sustainable strategy can be found at:
http://www.reportalert.info/ra/profiles/Chamartin/2008/info/?ID=23090

About Chamartin / Dolce Vita Shopping Centres:

With its 60 years of experience in real-estate, the Portugal-based company operates its business in developing and operating real estate assets in three business areas: Retail (Dolce Vita shopping malls), Corporate Solutions (offices and warehouses) and Residential. 2007 was marked by the opening of two new shopping malls - Dolce Vita Ovar and Dolce Vita Funchal, and by the reopening of Dolce Vita Funchalin central Lisbon. The Company's growth strategy is focused on internationalization, which will make it an international player of renown. Poland, Italy, Romania and Germany are included in this expansion plan.


It's official: the Responsible Property Investment Council has been approved and will hold its first meeting at the ULI Fall meeting in Miami.

In regard to the work of the Green Building Finance Consortium, members and contributors are in the process of reviewing a series of reports dealing with underwriting sustainable property investment which will be published on the Consortium's web site (www.greenbuildingfc.com) as well as by ULI when completed.