Smart Real Estate News & Commentary by Chris McLaughlin August 16, 2010
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Lowes shows profit
Lowe’s, the home improvement retailer, reported a profit of $832 million, or 58 cents per share, for the quarter ended July 30. That was below the 59 cents per share analysts were forecasting, but was up 9.6% from $759 million, or 51 cents a share, a year earlier, thanks to cost-cutting measures. Sales for the quarter rose 3.7% to $14.4 billion from $13.8 billion a year earlier. Analysts were expecting revenue to jump 5% to $14.5 billion. Lowe’s also gave a more cautious outlook for the year.
“Longer term, we believe improvements in labor and housing markets will be necessary to support more consistent improvement in demand for home improvement products,” said Robert A. Niblock, Lowe’s chairman and chief executive. Lowe’s is anticipating earnings per share of up to $1.45 for the fiscal year ending in January, down from $1.47 it previously projected. Total sales are expected to increase about 4%, a drop from the 5% to 7% increase the company said it was expecting at the end of the first quarter. Lowe’s stock was up 48 cents to $20.17 in premarket trading.
10 year yield down
Demand for safe-haven Treasurys dragged the yield on the benchmark 10-year note to 2.68% Friday from 2.75% late Thursday. Bond prices and yields move in opposite directions. “The belief that we’re in this stagnating growth phase, which is based on the idea that higher taxes and more uncertainty are going to limit growth, makes the Treasury market a lot more attractive,” said Larkin. The fact that the yield on the 10-year note is hovering under 3% is a very bad sign for the economic outlook, and if investors don’t become more confident, the yield could sink even lower, he said. “When yields get this low, it means trouble, and alarm bells should be going off in investors’ minds,” said Larkin. “A lot of people are betting that the economy’s not going to get enough steam, which is leading to frustration, confusion and impatience.”
Struggling stocks, lackluster economic data and fears of a slowing economic recovery all boosted the appeal of Treasuries on Friday. A report from the Commerce Department said July retail sales edged up 0.4%, missing economists’ forecasts of a 0.5% gain. The University of Michigan Consumer Sentiment Index for early August rose to 69.6 from 67.8 the previous month, also just missing expectations. The Labor Department said its July Consumer Price Index, a key measure of inflation, edged up 0.3% in July, slightly more than the 0.2% rise economists expected.
No wind down of Fannie and Freddie
It’s probably not a big surprise that this administration isn’t about to abolish an institution that it already has its fingers in. According to officials, any credible proposal to overhaul the government-sponsored enterprises, as Fannie and Freddie are called, would need to include a “thoughtful approach” to prevent house prices from dipping lower. In all fairness, without government backing, some large investors have said they would stop buying mortgage bonds, a development that would be catastrophic both for the housing market and the broader economy, but pressure is building on the Obama administration, which has promised to submit a proposal to Congress by January, to find a solution. Since being taken over by the government in 2008, Fannie and Freddie have absorbed nearly $150 billion in aid, making them by far the costliest part of a bail-out that rescued carmakers and financial institutions. Conservatives argue that the private markets, not the government, should provide financing for home loans.
But liberals say the government should have some role. They point out that the private markets seized up during the credit crisis. “It’s clear there is no good short-term solution,” said Rajiv Setia, of Barclays Capital. Last month Mr Geithner promised that an overhaul of Fannie and Freddie would bring “fundamental change” and that they would not survive “in anything like their current form”. But he added: “I think there’s going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee so, again, homeowners have the ability to borrow to finance a home, even in a very difficult recession.” That sounds like nothing much will happen if the administration is left to tackle this alone.
New York Manufacturing grows
The New York Fed’s “Empire State” general business conditions index increased to 7.10 in August from 5.08 in July. The August reading was below market expectations. Economists polled by Reuters had expected a figure of 8.00 for August. Employment gauges showed improvement. The index for the number of employees rose to 14.29 in August from 7.94 in July. The average employee workweek index jumped to 7.14 from -9.52. The new orders index, however, fell below zero for the first time since June 2009.
The index of business conditions six months ahead fell to 35.71 in August, the lowest since July 2009, from 41.27 in July. Despite a small rise this month, the index remains well below its recent high near 32 reached in April. It’s consistent with other recent data showing the U.S. economy has slowed considerably in the past few months, though most economists say a double-dip recession remains unlikely. The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions.
HAHB index higher?
The National Association of Home Builders’ housing market index for August is expected to tick up to 15, according to the consensus forecast of economists surveyed by Thomson Reuters. That would be a modest improvement from July, when the monthly reading sank to 14 — the lowest since March 2009. Readings below 50 indicate negative sentiment about the market. The index is set for release at 10 a.m. EDT on Monday. The lackluster economy has made potential buyers skittish about shopping for homes.
Sales of new homes jumped in June, but it was still the second-weakest month on record. May’s sales were the worst on records dating back to 1963. The industry received a boost in the first half of the year when the government offered tax credits to homebuyers. But since they expired in April, the number of people looking to buy has dropped. That has happened even though buyers are able to take advantage of the lowest mortgage rates in decades.
House prices slow in June
National home prices rose in June from the same time in 2009, marking the fifth consecutive month of year-over-year increases, according to the latest report from real estate services and data provider CoreLogic. National prices, including distressed sales, rose by 1.4% in June from a year earlier. The yearly appreciation slowed from the 3.7% increase in May from one year earlier. The May increase was revised up from the initial 2.9% estimate.
“Home price volatility and collateral risk remain very high,” said CoreLogic chief economist Mark Fleming. “The stabilization phase and policy intervention since the spring of 2009 has run its course. Prices are expected to further moderately decline as the economy remains weak through the fall.” CoreLogic called the 2.3 percentage point deceleration from May “very large by historical standards,” with deceleration most pronounced in more expensive and distressed housing markets. Excluding distressed sales, prices rose 0.2% in June from one year earlier.
Now for our real estate education section…
What’s Better – ADR’s or Real Estate?
What’s better…American Deposit Receipts (ADR’s for short) or real estate? In recent months there has been a great deal of interest in ADR’s as a convenient way for American investors to own shares of foreign corporations without the risk associated with overseas investing. Add in the prospect of dividend paying ADR’s and you have a recipe for success…or do you? Today we will investigate the pros and cons of investing in ADR’s to determine how it measures up against real estate.
ADR’s Defined
American Deposit Receipts are a special type of stock that allows investors the opportunity to mirror the value of foreign corporation shares while retaining the convenience of purchasing just like stocks while using US dollars and without the need to use a foreign trading desk.
The benefits of an ADR are impressive; the ability to easily purchase a stake in a foreign owned corporation, dividend paying yields and many of the same protections investors have come to rely upon when investing domestically.
ADR’s Profit Potential & Pitfalls
Not only do ADR’s benefit from the currency exchange, rapidly rising economy in emerging markets and general growth trends but some ADR’s also pay dividends which can create an even more enticing profit potential.
Unfortunately, all that glitters isn’t gold especially when it comes to ADR’s. ADR’s are handled very differently when it comes to the underlying deposits on hand at the bank so it is essential to fully understand who is holding what and the reporting requirements before investing. It’s also important to note that the exchange rate may work in reverse, effectively reducing profits and yield due to exchange imbalance.
Compare & Contrast
By now it should be obvious that ADR’s certainly represent an interesting investment prospect; rising dividends, potential for capital appreciation and exchange rate returns… but how do they compare to real estate? After all, the most important aspect isn’t what the media thinks but how much profit an investment can generate for your personal portfolio.
To find out the facts, we took the time to research some of the most attractive dividend paying ADR’s currently available and found the majority provide dividends of less than 5% (most in the 1% to 3% range) yet trade at premium levels when compared to the cost of purchasing a similar product in the original nation of origin. Use of leverage may be restricted, lack of familiarity with ADR’s often results in a less robust trading floor due to decreased volume and perhaps most important of all…the real rates of returns often fall short of those enjoyed by average real estate investors just like yourself.
See you at the top!
Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 2010.
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
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thousands of investors make money in the
biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
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