Fundamentals falter … But fears fade

Bob Leggett, CFA, Senior Investment Strategist, FirstMerit Wealth Management Services

Every quarter, FirstMerit sends a newsletter to all its wealth management clients. In the Fall 2012 edition, Bob Leggett, CFA, Senior Investment Strategist, FirstMerit Wealth Management Services, discusses the year-long battle between fears and fundamentals.

Here’s an excerpt from the newsletter:

For the past year, we have been harping on the need to downplay fears and focus on fundamentals. Our point was that fundamentals were at least okay and might actually surprise the consensus to the upside. The fears were not unreasonable, but appeared to us to have low probabilities of occurring within our tactical time horizon. Thus, a total focus on the downside risks of fearsome outcomes (such as a U.S. recession, the Fiscal Cliff, the European crisis, or a China hard landing) could — and did — cause many investors to miss the opportunity to participate in a bull market.

Market returns were very good through Q3 and the S&P 500 led the way with a 16.4 percent total return. Midsized and smaller stocks were up about 14 percent and despite U.S. Dollar strength and European leadership’s determination to shoot themselves in the foot, EAFE was +10 percent and Emerging Markets +12 percent. Fixed Income returns weren’t bad either (although Treasury returns were only low single-digits), as “spread product” such as Corporates (+7.1 percent) and High Yield (+12.1 percent) continued to do well. Somewhat ominously, TIPS did much better than non-inflation protected Treasuries.

Read the entire newsletter here: 10629_Fall2012_MM_r4

Bob Leggett, CFA, is the Senior Investment Strategist at FirstMerit Wealth Management Services. Reach him at [email protected] or follow him on Twitter @firstmerit_mkt.

U.S. firms less optimistic, but will still invest in China: survey

WASHINGTON, Wed Oct 10, 2012 – Many U.S. companies are less optimistic about doing business in China even though sales there are still rising, and most of those firms are planning to increase investment, according to an annual survey of business executives released on Wednesday.

“The China market continues to deliver sales growth and profitability for U.S. companies, but rising costs, increasing competition, and persistent market access and regulatory barriers are tempering the optimism of U.S. companies doing business with China,” the U.S.-China Business Council said.

Forty-five percent of the 111 companies surveyed said they were less optimistic than three years ago about the business environment in China, compared to 26 percent that were more optimistic and 29 percent that were unchanged in their view.

At the same time, 89 percent, the highest ever in the seven-year history of the business group’s member survey, said they made a profit in China in 2011 and two-thirds said their revenues grew by at least 10 percent.

The survey comes amid growing U.S. frustration that many parts of China’s economy remain off-limit to foreign investment 11 years after it joined the World Trade Organization. China also is preparing for a once-in-a-decade leadership change that could keep any new economic openings on hold for a while.

It was taken before the House of Representatives Intelligence Committee urged American companies on Monday to avoid doing business with China’s leading telecoms equipment manufacturers, Huawei Technologies Co. and ZTE Corp. because of security concerns.

The panel’s recommendation has raised fears of possible Chinese retaliation against U.S. firms.

While two-thirds of survey respondents said they planned to increase investment in China in the next 12 months, 17 percent said they had halted or delayed investment plans.

Driving global sales for manufacturers

Andrew Dorn, Industry Leader, Information Intensive Business, Acxiom Corporation

When Andrew Dorn, Industry Leader, Information Intensive Business, Acxiom Corporation, was recently researching the top manufacturers in the United States, one topic kept coming up — the strong growth expectations focused on the world’s emerging markets. With the economies of the U.S. and Europe in flux, Dorn felt that, now more than ever, manufacturers need to be attentive to those emerging markets.

“The world is now flat,” says Dorn. “Competition comes from everywhere, so manufacturers need to be everywhere.”

Because of that, Acxiom has partnered with Smart Business to present a special one-hour webinar: “Driving Global Sales for Manufacturers: Why global growth for manufacturers is more important than ever.”

During the webinar — on Wednesday, September 19 at 1:00pm EST — we will discuss why global sales for manufacturers is critical, what factors should be considered in developing or refining the  international strategy, and, finally, present a roadmap that can be employed to optimize chances for success.

Featured panelists will be Zia Daniell Wigder, Vice President and Research Director, Forrester Research; Jennifer Barrett Glasgow, Global Privacy and Public Policy Executive, Acxiom; and Michael Biwer, Managing Director, Acxiom.

“As you enter the global market, it is imperative you understand the privacy laws in each country as they are quite complex and some are very stringent, for example, having criminal penalties for some violations,” says Barrett Glasgow.

Other topics to be discussed include:

  • How to determine which countries to enter and what data to gather to understand regional customer requirements
  • Recommended approaches to building country-specific strategies that can help facilitate smooth transitions, lowest possible cost-of-entry, and consistent performance
  • Considerations for navigating the complex web of country-specific data protection and privacy laws companies must adhere to in their efforts to connect with customers and prospects
  • Best practices used by leading companies that have successfully entered new markets

“The U.S. and European economies are still recovering and the balance of growth is constantly shifting,” says Dorn. “For example, China and Brazil have been experiencing strong growth. They are encountering a maturity curve, but that doesn’t lessen the importance of the issue — manufacturers need to be diversified and have a presence in all major world markets.”

The webinar, “Driving Global Sales for Manufacturers: Why global growth for manufacturers is more important than ever” will be held at 1:00 pm EST on Wednesday, September 19.

Click here to register for this free event!

How the commercial real estate market is impacting lending tendencies

Andrea Bucey-Tikkanen, Vice President, Commercial Real Estate Lending, Lorain National Bank

The commercial real estate market has been hard hit the last several years. While the residential market has suffered equally, commercial real estate typically falls the hardest and climbs the fastest. It has seen higher highs and lower lows than many other components of the market, but lenders are beginning to loosen their belts as things begin to slowly improve, says Andrea Bucey-Tikkanen, vice president of commercial real estate lending for Lorain National Bank.

“That many commercial lenders feel cautiously encouraged could be an indicator of improvements to the economy as a whole,” says Bucey.

Smart Business spoke with Bucey about the commercial real estate market and how banks’ lending practices have begun to thaw.

How has the overall commercial real estate industry been performing?

This year has brought the beginning of a recovery within the commercial real estate industry. There is more activity than there has been in some time, and more banks, insurance companies and other financing conduits are back at the table and proactively looking to lend. Since mid-2008, the industry has been fraught with frightened lenders and floundering borrowers. This year, there is more confidence and optimism on both sides of the table.

What has been the effect on commercial real estate developers?

Commercial real estate developers are a strong and resilient breed. The recession caused many within the industry to fail —some previously solid, good developers are out of business. However, the survivors are exceptionally creative and nimble and have less competition. That said, the role of government in the banking world is serving as a buffer; banks continue to be closely monitored, which prevents the pendulum from swinging too rapidly. The pace of recovery is measured and slow.

How have current market conditions impacted interest rates?

Many banks have been absent from the lending arena for a protracted period of time, either because they chose to sit on the sidelines or because their own poor performance forced them to do so. Banks with money to lend have had less competition and a borrowing base that needed capital. Simple supply and demand drove cost, and while the overall interest rate indexes have been exceptionally low for years, banks could — and did — pay little heed to the indexes themselves. Base rates may have been low, but spreads were thick. In recent months, that has changed dramatically. Spreads are greatly reduced from where they were as recently as late 2011.

Banks lending on commercial real estate consistently during the recession were doing so in a challenging and cautious market. The spreads applied during the worst of times reflected the level of risk inherent in the transaction. Interest rates are the way in which a bank is compensated for the risks it is taking. A riskier, more challenging market equals a higher price for the end user which, in this case, is the commercial real estate developer.

Has lenders’ behavior helped or hindered the market?

There have been bad cops and good cops in the lending arena. A number of lenders were so panicked by the economic downturn that they looked for ways to decrease any and all real estate assets within their portfolios, whether they were performing or not. To encourage their borrowers to refinance elsewhere, bad cops used any and all efforts, including applying punitive interest rates and failing to extend maturity dates on otherwise performing loans. The good cops were the lenders that provided capital consistently, in many cases helping to resurrect a challenged asset by providing the dollars needed to refinance. A good cop in this recent environment had numerous lending opportunities on good assets that were simply the victim of circumstance.

Have economic times influenced the types of real estate deals being done?

Absolutely. There are developers that have not only succeeded in recent years but thrived.  They responded to challenges by adapting and using the market to their advantage. This can be seen in the number of ‘value add’ projects being financed, which is the purchase — oftentimes for a markedly reduced price — of a floundering project, be it with high vacancy, a failed owner, or a lender desperate to dump an asset. These low prices have provided the developer that has had capital with a unique opportunity to cheaply buy an asset, provide it with a heightened level of attention, affect its turnaround and vastly increase its end value. These types of projects continue to be popular.

Is the recovery sustainable?

There is a ripple effect brought about by the ‘value add’ concept. A landlord who has paid less for his or her asset can charge his or her tenants less rent, which forces neighboring properties to adjust their rental rates downward to maintain tenancy, regardless of the price they paid and the level of debt upon their particular asset. This downward pressure on rents will serve as an ongoing challenge — some would call it a correction — for the foreseeable future.

What actions can a developer take to help improve their odds of success?

There is nothing a banker likes better than an honest borrower. Surviving these past few years has taken talent, perseverance and luck, but it has also forced a level of brutal disclosure. Successful developers have proactively worked with their lenders, disclosing early and regularly fears they have or problems they’re facing. A good lender will listen and help work creatively toward a solution. The end result is mutual success and a healthier market.

Andrea Bucey-Tikkanen is vice president of commercial real estate lending for Lorain National Bank. Reach her at (216) 520-7310 or [email protected]

Insights Banking & Finance is brought to you by Lorain National Bank

How to effectively market your commercial property

Terry Coyne, SIOR, CCIM, Executive Vice President, Grubb & Ellis

There are basic elements of marketing a commercial property that may make it seem simple, such as putting sign in front of the property. However, there are many dimensions to a marketing program that inexperienced sellers might not realize.

“You can’t sell real estate like somebody might sell shoes at Nordstrom,” says Terry Coyne, SIOR, CCIM, an executive vice president with Grubb & Ellis. “You can’t create demand. Either people have a need or they don’t, and if they don’t, then there’s nothing you can do about it.”

An owner can be as involved as he or she wants to be in the marketing of a property, and clearly, the more attention paid to detail the better. But by utilizing a broker, an owner will likely get more money on the sale, sell a property faster and be relieved of a lot of stress.

Smart Business spoke with Coyne about what to consider when putting a commercial property on the market.

What are the basic components of marketing a commercial property?

The aspects of marketing a commercial property include a sign in front of the property and postcard mailings that utilize a mailing list that’s well thought out. Sellers should ask their brokers how they arrive at their mailing list. Do they clean them out, use a mailing list service or are they buying a list and throwing postcards out there? Also, make sure that, as an owner, you’re on the mailing list, so every time something goes out, you’re getting a copy.

Other marketing components are print advertising, whether in newspaper or magazines, and online marketing. With a website, you’re getting immediate coverage that extends to the region and across the country. These websites might have virtual tours, one-click scheduling of site tours and an online offer option.

It’s also easy to measure traffic because you can ask a broker how many visitors his or her website gets, how long visitors are staying, where are they coming from and what are they looking at. Also ask your broker about his or her experience in getting people to follow through on their Web visits.

While it is common for people not to have building plans and site plans, it’s a critical component of marketing. When you’re looking to pay million of dollars on a property, you’d like to know the actual size of the building. A broker can get a fire exit drawing of the building, along with other measurements, and send them to a company that will then turn that into a CAD drawing in about a day and at a low cost. Typically these costs are covered by the broker.

What should sellers keep in mind when choosing a broker?

Oftentimes, people will choose a broker based on the broker’s knowledge of a specific market, but they don’t usually look at the person’s process. So before you hire someone who is the king of a small market, see if that person has a proven process. Ask a broker what steps he or she takes when selling a property. You’ll also want references and examples of similar types of properties that person has sold.

It’s critical that the broker marketing the property is there when the property is being shown because he or she might hear someone say, ‘I don’t like this building because it doesn’t have X’ when, in fact, it does. The seller has got to make sure the broker is at every showing.

What elements of a commercial property should be listed?

List as much as you can because you never know what someone is looking for. A good example is a stamping plant that was sold because it’s on bedrock. Who knew that sitting on bedrock would be a selling point? The more you know about a building and the more you can list, the better.

Another thing to consider is that a commercial building always sells better empty. Owners should do as much as they can to clean it, from getting a compressor and cleaning the ceiling to getting a floor scrubber and making the floors shine to painting the walls.

If you want to move the property up in the line of interest, the cleaner the building is, the better. However, that’s something the seller will have to pay for.

Could building owners market and sell a commercial property on their own?

They could, but it’s hard without a broker to buffer emotions. You can say things to a broker that can be then filtered in a way that is unemotional, but if you say it directly to the seller, it could blow a deal up. Brokers understand how to work their way through the emotional part of a transaction.

What are some common mistakes owners make when selling?

One is that they misprice the property. It’s hard to get good, comparable sale information on commercial property. The assets are very different, so it’s hard for someone who’s not in the industry. Go to a commercial appraiser with an MAI designation from the Appraisal Institute and pay for a formal appraisal.

Another mistake is not making it clear whether they’re willing to work with a broker. If they market it themselves and say ‘brokers protected’ or ‘brokers welcome,’ they could get brokers showing up and saying, ‘Hey, I’ve got a buyer.’ But if you’ve mispriced it and you have no clarification on brokers, then you’re wiping out a big part of your market. In the event that a broker approaches the seller with a buyer, the seller signs a commission agreement specific to that buyer.

Terry Coyne, SIOR, CCIM, is an executive vice president with Grubb & Ellis. Reach him at (216) 453-3001 or [email protected]

Insights Real Estate is brought to you by Grubb & Ellis

May consumer sentiment highest in more than four years

NEW YORK, Fri May 25, 2012 – Consumer sentiment rose to its highest level in more than four years in May as Americans stayed optimistic about the job market, while higher income households expected to see bigger wage increases, a survey released on Friday showed.

The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment rose to 79.3 from 76.4 in April, topping forecasts for 77.8 and an initial May reading of the same.

It was the highest level since October 2007.

“Unfortunately, consumer confidence is still extremely vulnerable to a reversal, as occurred in the past two years,” survey director Richard Curtin said in a statement.

“While their most optimistic expectation for job growth could go unfulfilled without much harm, if the recent slowdown in job growth persists in the months ahead, it could form the basis for a third retreat in confidence.”

Half of all consumers said the economy had improved during the past year, while buying plans for vehicles and household durables also improved. The gauge of buying plans rose to 132 from 126.

Higher income households anticipated a 2 percent income increase in the year ahead, while lower income households expected just a 0.3 percent gain.

The survey’s barometer of current economic conditions jumped to 87.2 from 82.9, while its gauge of consumer expectations improved to 74.3 from 72.3.

Jobless claims drop to 3.5 year low; labor market strength seen

WASHINGTON ― New U.S. claims for unemployment benefits dropped to a 3½  year low last week, a government report showed on Thursday, suggesting the labor market recovery was gaining speed.

Initial claims for state unemployment benefits dropped 19,000 to a seasonally adjusted 366,000, the Labor Department said. That was the lowest level since May 2008.

The prior week’s claims data was revised up to 385,000 from the previously reported 381,000.

Economists polled by Reuters had forecast claims rising to 390,000 last week.

The unexpected drop in claims last week pushed them closer to the 350,000 mark that analysts say signals labor market strength.

It offered further evidence of increased momentum in the pace of economic activity, even though retail sales rose modestly in November. This is in sharp contrast to Europe, where t he festering debt crisis has already pushed some economies into recession.

The Federal Reserve on Tuesday acknowledged the improvement in the jobs market, but said unemployment remained high. The jobless rate dropped to a 2-1/2 year low of 8.6 percent in November.

The U.S. central bank said the debt crisis gripping Europe was a big risk to the U.S. economy, which it described as “expanding moderately”.

A Labor Department official said there was nothing unusual in the state level data and noted that only one state had been estimated.

The four-week moving average of claims, considered a better measure of labor market trends, fell 6,500 to 387,750 — the lowest since mid-July 2008.

The number of people still receiving benefits under regular state programs after an initial week of aid edged up 4,000 to 3.6 million in the week ended Dec. 3.

Economists had forecast so-called continuing claims rising to 3.63 million from a previously reported 3.58 million.

The number of Americans on emergency unemployment benefits increased 254,642 to 3.05 million in the week ended Nov. 26, the latest week for which data is available.

A total of 7.45 million people were claiming unemployment benefits during that period under all programs, up 874,670 from the prior week.