4-21-04                                                                                           Vol. 7: No. 4 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: The Implications of a Strong Economy on Real Estate, & vice versa. A. Strong Job Growth B. Rates are Rising C. Is Real Estate Really Helping Us Out of a Recession? D. Equity REIT Performance E. Large Cap REIT Performance F. Mortgage REIT Performance G. Realty Corporations H. Real Estate Mutual Funds A. STRONG JOB GROWTH POISED TO FUEL THE ECONOMIC RECOVERY The missing ingredient in a full fledged U.S. economic recovery has been robust job growth. After months of disappointing job creation, with forecasts of slightly over 100,000 jobs for March, last month's job estimates leaping to 308,000 (with prior estimates revised upwards) blew away a great deal of pessimism. With the loss of 2.5 million jobs in nearly three years, there is still much to make up, but the White House forecast of over 2 million job creations this year has more believers. Another critical element in an economic recovery is the health of corporate earnings. For the first quarter of this year, earnings could double from the 13% growth forecasted for the S&P 500 companies. Such a strong performance has recently helped raise the major stock indices. In addition, the Conference Board confidence index of CEOs is the highest in 20-years and now half of all CEOs anticipate an increase in hiring, up from just 16% a year ago. The economy has been pulled up by its boot straps by consumers, and now needs the corporate sector to kick the economy into full swing, which by most indicators is beginning to occur. With a jump in durable factory orders up 3.4% last month, consumers are still showing strong signs of spending. Recent earnings reported by retailers all support that consumer spending is broad based, with the growth strongest among higher end companies. Tax incentives provided last year still appear to benefit consumers for much of this year. However, some economists are concerned that the average hourly wage and hours worked is still fairly flat. In order for consumers to have more money to spend, they believe these indicators need to be stronger. Besides the concerns that workers are increasing their incomes sufficiently, health care costs are taking a bigger bite out of salaries. Gasoline prices have risen fairly dramatically recently, which could hold down vacation travel this coming summer, and thus create higher costs of goods. Though commodity prices are generally flat, some goods, like meat products and other food groups, are showing signs of increase. The trade deficit is growing, while the dollar is becoming stronger. This could hurt our export trade, place greater pressure on the deficit and reign in strong corporate profits. Now that deflation is no longer an issue, the greatest concern over a strong economy are rising costs and inflation. Of course, to counter this and help control economic growth, the Federal Reserve has the power to raise interest rates.   Top B. RATES ARE RISING Most economists and investors believe that it was just a matter of time before rates pulled off of their 45-year low - and that time may have started just a couple weeks ago. The strong job growth last month, and expectations for possibly more of the same early next month, have caused rates to sky rocket. The 10-year treasuries have jumped about 75 basis points (three quarters of a point) to about 4.5% in only a couple of weeks. This is an increase of 20% and is only 50 bp from what the forecasts of economists by year end - a couple months ago. In particular, most investors do not want to be caught holding bonds, which will decline in price if rates rise sooner than expected. This may have caused an over reaction to the rise in rates. But if job growth is around 300,000 or more next month, and throughout the summer, the Federal Reserve may raise rates before the fall. Though higher rates are needed to keep the economy from over heating, if increased too quickly, they could actually throw the economy into another recession; something the Feds want to be sure they avoid, especially in an election year. With rising rates, some industries will be much more vulnerable than others. As any REIT investor is well aware, prices have slipped significantly since rates have jumped, since the beginning of the month. As we had warned earlier this year, REIT prices were getting ahead of themselves with market capitalizations that often exceeded a reasonable relationship with their asset prices. Though the fundamentals of most commercial real estate markets should eventually improve with a stronger economy, the first concern due to higher rates is that values will be falling. What's ironic, is that the money coming into real estate this year, as noted in our last newsletter, was expected to nearly double. Though there might be strong demand to replace short term floating debt with long term fixed rate money, funds slated for acquisitions could be in for more difficulty. In times of lower prices, real estate does not price to market quickly, which should therefore result in less transaction activity in the coming months. That is likely to have negative consequences upon real estate slaes and financing. Top C. IS REAL ESTATE HELPING US OUT OF ONE RECESSION, ONLY TO START ANOTHER? Just as the stock market enjoyed an unprecedented ride during the 1990's, so has real estate enjoyed a very strong decade of price appreciation. The tech bubble caused the last recession, could a real estate bubble cause the next recession? Over the last few decades, easy money, overbuilding and excess inventory are usually what has lead to recessions. The cyclical nature of recessions, that seemed to occur every 5 to 7 years, shifted to the strengths and weaknesses of different areas of the country a couple decades ago, some enjoying longer or shorter cycles. But in a more global economy, other factors may determine future recessions. Though it would be quite unusual for a real estate bubble to occur during an economic recovery, it is not impossible. Plentiful financing at half-century low rates, if followed by much higher rates, could well cause a period of falling real estate prices and could be a nemesis for Chairman Greenspan. Just like the excesses in the dot com boom that came to pass, so might the enormous profits created in this real estate boom erode through much higher interest rates. Whether this fall in real estate may occur fairly quickly, if at all, may simply depend upon how fast interest rates rise. Other unknowns, influenced by a more global society, are also becoming much more instrumental to our economy. The coming presidential election could be well determined with what happens in Iraq in the coming months. Other global issues influencing our economy could include a sickness originating from another country, disruptions in oil and gas supplies, changes in monetary policy from a new super power (China), or another concern that we have had since 9/11. Now that we are on a strong track for economic recovery, it could make the U.S. a more timely target for terrorists from abroad. Despite what appears to be false cries of "wolf" over the past couple of years, the federal government believes the possibility of a terror attack in the U.S. before the end of the year is nearly eminent. Several incidents could make this plausible. The recent terrorist actions in Spain and Saudi Arabia indicate terrorist cells could be more active,and there is increasing unrest in Iraq. Furthermore, the U.S. recently modified certain positions with Israel that make us even more unpopular in the Arab world, and illegal immigration is accelerating, making it easier for terrorists to enter this country. The recent hearings on 9/11 also indicate shortfalls in the FBI and CIA. Though life for most of us may be back to normal or better than ever, we continue to exert some caution in our outlook, and for those that are overly weighted in real estate, this could be a good opportunity for more focus on diversified asset allocation.   Top D. EQUITY REIT PERFORMANCE Please note, that the returns mentioned below are for the month of March, and are now about 3-weeks old. (Sorry, this year it took longer for the editor to complete his tax returns.) We realize that returns shortly after the month have declined, and will address this in our forthcoming newsletter within the next two weeks. Equity REITs posted a robust gain of 4.63% for March. The best monthly performers were Retail Regional Malls and Retail Factory Outlets, up 9.65% and 8%, respectively. Only one of the groups were negative for the month, HealthCare, losing -0.61%. YTD, the Equity REITs have gained 10.45%. The best performing groups Year-To-Date (YTD) were Retail Regional Malls and Retail Factory Outlets, gaining 25.17% and 14.67%. All the groups were in the positive for YTD. The worst performing YTD group was Mobile Home Parks, gaining only a slight 0.39%. The best performing Equity REITs for March were First Union Real Estate Investments (FUR) and Alexanders, Inc. (ALX), gaining 17.7% and 16.4%, respectively. The worst monthly performers for the month were HealthCare Property Investor, Inc. (HCP) and Weingarten Realty Investors (WRI), losing -48.6% and -28.8%, respectively. The best performing REIT YTD was First Union Real Estate Investments (FUR), gaining 44.9%. The worst YTD performer was Phillips Int'l Realty (PHIR.ob), losing -48.4%, respectively. (Please see Equity Gainers and Losers.).   Top E. LARGE CAP REIT PERFORMANCE Large Cap REITs had a gain of 5.9% for March, slightly ahead of the broad based REIT performance. The best large cap performer for March was Trizec Properties (TRZ) followed by Prologis Trust (PLD) gaining 7.6% and 4.7%, respectively. The worst performing large cap REIT for the month was HealthCare Property Inv (HCP), falling -48.6%. The best YTD performer is Simon Debartolo Group (SPG) gaining 27%. The worst YTD performer is HealthCare Property Inv (HCP) losing -43.7%. Please see Large Cap REITs.)   Top F. MORTGAGE REIT PERFORMANCE The mortgage sector posted a positive gain of 4.64% for March, barely squeaking ahead of the gains for Equity REITs. The best performing group for March was Residential and Commercial Mortgages, gaining 8.46%. The best performers for March were Novastar Financial, Inc (NFI) and Imperial Mortgage Holdings, Inc. (IMH), up 25% and 24.2%, respectively. The worst performer was PMC Commercial Trust (PCC) losing -5.8%, respectively. For YTD, the groups gained 11.55%. The best YTD performers were Novastar Financial, Inc. (NFI) and Imperial Mortgage Holdings, Inc. (IMH), gaining 53.7% and 44.6%, respectively. The worst YTD was BRT Realty Trust (BRT), losing -16.8%. (Please see Mortgage Gainers and Losers.)   Top G. REALTY CORPORATIONS Realty and Housing Corporations had a price gain of 2.81% for March. The best monthly industry performers were Mobile Home Manufacturing Co's gaining 6.7%, followed by Construction with a gain of 5.5%. The worst monthly performer group was Onsite Tech with a loss of -4.7%. The best stock performers for March were California Coastal Comm (CALC), up 64.8% and Cavalier Homes, Inc. (CAV), up 37%. The worst monthly performers were Lipid Sciences, Inc. (LIPD) and Tuts Systems (TUTS), down 32% and -20.1%, respectively. For YTD, the group gained 13%. The best YTD performers were Price Legacy Corporation (PLRE) and Bluegreen Corporation (BXG), gaining 346.2% and 105.4%. The worst YTD performer was Tuts Systems, Inc. (TUTS), losing -33.9%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top H. REAL ESTATE MUTUAL FUNDS (REMFs) The average total return for real estate funds for March was similar to the broader REIT performance of about 2.9%. The best performing monthly REMFs were Lend Lease and PIMCO with outstanding returns of 7.5% to 5.5%. The best performing YTD REMFs were Profunds and PIMCO with respective overall returns of 19.4% to 17.8% compared to the YTD average return for all funds of 10.45%. (Please see REMFs.)   Top Stock Changes. no changes. Note: In reporting group percentage changes, stocks that were under $1 are excluded from our calculations. If a stock is under $1 for more than two months, it is subject to removal from our coverage. All gains or losses regarding Realty Stocks are price changes only; dividends are excluded, and are calculated as of the end of each month. Disclaimer: The material provided herein should not be taken as endorsements or recommendations to invest in a stock, fund, a group of stocks or other securities. No guarantee can be made as to the expected performance of such investments. Investors should consult all available information, including data external to RealtyStocks and associated Web sites, and exercise own best judgment before making any investment decisions. The author may have equity positions in some of the companies covered in RealtyStocks, which may change from time to time, and will divulge such information upon request.   Top InRealty Sponsors Inquire about our special advertising banner promotions! E-MAIL: stocks@inrealty.com Copyright ©2004, WebVisers Inc. All rights reserved .