NAR forecasts continued declines in rent for commercial real estate

The National Association of Realtors released its latest projections for commercial real estate. In this report, the NAR forecasts continued declines in rents across all segments of commercial real estate.

Here is the NAR’s breakdown for 2010 rent changes (followed by last year’s change in rent):

Office Market: -7.2% (2009: -12.7%)
Industrial Market: -9.6% (2009: -10.9%)
Retail Market: -2.4% (2009: -4.0%)
Multifamily Market: -3.4% (2009: -3.6%)


Atlanta considers tax increases to fill growing funding gap for pensions

Unfunded pensions are a growing problem around the country for local and state governments. The Atlanta-Journal Constitution reports that the city of Atlanta in Georgia has set up a Pension Reform Panel to figure out how to solve its own funding gap. This panel is considering increasing property and/or sales taxes as part of the solution.

Atlanta faces a very large problem:

“More than 20 percent of city spending is devoted to pensions. The city is spending nearly as much money on pensions as it does for its police department. At its current pace, the mayor told reporters Monday, it will be tougher for the city to provide services such as fixing sidewalks and adding more parks and greenspace…

…The amount of money Atlanta spends on pensions has more than doubled since 2001. That year, the city spent $55 million; it is expected to spend about $125 million on pensions in the 12-month period that ends June 30. By 2015, the annual cost to the city is estimated at $160 million.”

Like so many local and state governments, Atlanta increased pensions during times of relative prosperity with no real plan for funding in the future and optimistic assumptions about returns for investments.

“Atlanta’s three pension plans covering police, firefighters and general employees have long been underfunded. In 2001 and 2005, the City Council approved several changes to increase retirement benefits. Those changes, however, were made without determining a way to pay for them.

Meanwhile, the three pension funds have not earned as much as anticipated. As a result, the plans are about 53 percent funded…The city has an unfunded liability of about $1.5 billion…In 2001, the unfunded liability was $321 million.”

Federal Reserve Surprises By Raising the Discount Rate

(A version of this post also appears on ONE-TWENTY TWO)

The Federal Reserve essentially warned us in its most recent written testimony to the House of Representatives that part of its exit strategy from emergency monetary measures is to increase the spread between the funds rate and the discount rate. This evening, the Fed did just that. In a surprise announcement, the Fed increased the discount rate from 1/2 percent to 3/4 percent and accordingly widened the spread with the funds rate.

Once again, the Federal Reserve reassured us this action does not change monetary policy:

“The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC).”

This caveat probably means we should still not expect an increase in the funds rate until November/December at the earliest. However, I think the Fed’s surprise delivery of this message puts us all on notice and forces an attitude adjustment. The Fed is serious about normalizing monetary policy and moving away from emergency measures.

The Fed’s timing is particularly odd given options expire tomorrow. Typically, such timing is executed to squeeze shorts and force a market rally. There could be a lot of churn as market participants rush to adjust in the middle of dealing with expiring options. Already, the dollar has rallied sharply in the past several hours.

401K matching is back

Employees who took a hit on their savings last year might finally be in for some welcome news: Companies are stepping up efforts to help them save more for retirement.

Of companies that suspended or reduced 401(k) match programs, 80% planned to restore them this year, according to a survey conducted by Hewitt Associates, a global human resources consulting firm.

This could be a precursor to wage increases.

Dollar Thrifty expects auto rental industry to maintain pricing discipline

Don’t expect rental car rates to come back down anytime soon. After reporting its fourth consecutive quarter of year-over-year growth in revenue per day (double-digit growth in the last three quarters), Dollar Thrifty Auto Group (DTG) cited “industry pricing discipline” as part of its expectation for 2-4% year-over-year revenue growth for 2010. Pricing will remain firm even though DTG does not expect a significant recovery in the rental business this year. DTG is focused on profitability:

“We continue to focus on profitability of rental transactions. If it is consistent with our strategy at times, we will lower our transaction days and utilization to maintain proper balance in price and volume.”

(For more details, click here for a transcript of the earnings conference call).

Automotive rental companies have staged an amazing comeback from the March, 2009 lows. For example, DTG traded as low as 60 cents at that time. After reporting earnings Wednesday morning, DTG soared over 8% to $30.25 – a new two-year high.

Dollar Thrifty Automotive Group Soars to Two-Year Highs

Dollar Thrifty Automotive Group Soars to Two-Year Highs

Hewlett Packard reports higher server prices

So says Reuters: “HP’s server business benefited from higher average prices. Revenue from industry standard servers surged 27 percent.”

Note also the bottleneck in components for laser printers: “Sales of laser printers, however, were hurt by supply constraints.” This presumably means higher prices down the road.

Credit Suisse raises fertilizer price forecasts

Credit Suisse says demand for fertilizer is strong. As a result, it says, prices are going to go up.

Chipotle Mexican Grill Promises to Maintain Steady Menu Prices

Chipotle Mexican Grill (CMG) reported impressive earnings last night (quotes from Seeking Alpha transcripts):

“For the year, revenue increased 14% to $1.518 billion, with comparable restaurant sales up 2.2%. Our restaurant level operating margins for the year were just about 25%, up 340 basis points from the previous year, the highest we have experienced as a company. Net income for 2009 increased 62% to $126.8 million, leading to diluted earnings per share of $3.95, an increase of 67% over 2008.”

This performance occurred even as CMG held menu prices constant in 2009. The restaurant spin-off from McDonald’s (MCD) believes it has pricing power but still plans to maintain steady prices in the coming year:

“It’s now been over a year since we took any price increase in any market, and in some markets its approaching two years. And though we believe we have pricing power relative to our competitors, with the current chain food inflation outlook, we don’t have any current plans to increase prices.

Now of course our stance may change depending on food inflation or to fund future food of integrity investments. But based on our current industry leading margins and the uncertainty with the economy and consumer confidence, we’re in a good position to be patient about menu prices.”

This is great news for folks who enjoy CMG’s Mexican food. Investors were treated to a brief dip in the stock price before it rapidly recovered to make fresh 52-week highs. CMG is already up 19% year-to-date.

CMG grills fresh 52-week highs after reporting earnings

CMG grills fresh 52-week highs after reporting earnings

China Gets More Aggressive In Inflation Fight

China surprised financial markets by again raising requirements for bank reserves sooner than expected. More tightening is expected as Chinese banks continue to lend at a torrid pace. Read more at “China Lifts Banks’ Reserve Requirements Again.”

Inflation Watch gets mail!

Reader Jay writes:

Do you think TIPS are a good inflation hedge? Some say the Fed will  raise interest rates well before significant inflation is captured in the official CPI. Theoretically does the market go up during inflation? What are some other good hedges other than gold and gold stocks?

Hm, Inflation Watch isn’t an investment blog. I’d like to take a stab at Jay’s questions, but please keep in mind that nothing on this blog should be construed of as investment advice. (Do your own research!)

1. Treasury inflation-protected securities (TIPS) were a steal in late 2008, when everyone was worried about deflation. Less so now, because the market has priced in higher inflation expectations. Nonetheless, in my opinion, TIPS are an excellent inflation hedge if held over a long period of time. I don’t personally own TIPS but I would seriously consider buying the iShares Barclays TIPS Bond Fund as a long-term holding if prices pull back significantly from current levels.

2. The short answer is that the stock market can go either up or down in times of inflation. Certainly there are many companies (for example, those that have pricing power) that can prosper in times of inflation. But for the market as a whole, generally stable prices are best.  So a complete answer to Jay’s question is that it depends on a number of factors, including how much inflation there is, how the Fed responds to it, and how predictable the inflation rate is. For example, low, predictable inflation that is carefully kept in check by the Fed is a lot better for the stock market than high, unpredictable inflation that is ignored by the Fed.

3. Other good inflation hedges, aside from gold and TIPS,  include real estate (or real estate investment trusts), land, commodities, and any asset denominated in a foreign currency.

At times during the past 18 months, I have owned the ProShares UltraShort 20+ Year Treasury Bond Fund (TBT). I have also owned long-term puts on the iShares Lehman 20+ Year Treasury Bond Fund (TLT). Although both of these holdings performed extremely well, I do not recommend them now and I certainly do not recommend them for long-term investors.

Do you have a question for Inflation Watch? Send us an e-mail at inflationwatchblog -at- gmail -dot- com.

Bank of England sets stage for maintaining easy monetary policy

The Bank of England set the stage for maintaining an easy monetary policy for some time to come in its latest quarterly Inflation Report.

The Bank of England continues to expect a “…a slow recovery in the level of economic activity” partially because “…it is likely that credit conditions will remain restrictive for some time and that the need to strengthen public and private sector finances will weigh on spending.”

Moreover, the BoE maintained its forecast for low inflation for the next three years claiming that “…it is more likely than not that inflation will be below the target [2%] for much of the forecast period, but the risks are broadly balanced by the end.” (The forecast ranges from -1% to 5%).

Bank of England Infation Forecast

Bank of England Infation Forecast

Given these conditions, the Bank of England will be in no rush to tighten (significantly) monetary policy anytime soon.

Canadian Average Housing Price Sets New Record

In “Housing Rebound in Canada Spurs Talk of a New Bubble” the WSJ paints a familiar picture of what can happen to an asset market when interest rates drop to extremely low levels. Although Canada never experienced a housing crash like that of the U.S., the Bank of Canada still dropped rates to near-zero to help support the domestic economy. Its efforts to support exports (primarily to the U.S.) have been thwarted for much of the past year given the sharp rise in the Canadian dollar.

Here are some highlights from the article that describe the frenetic pace of the current Canadian housing market:

  • The average home price rose 23% from the trough in January, 2009, hitting a record according to one broad measure.
  • Home-sales volumes are up 70% since January, 2009.
  • Housing starts in December reached levels last seen October 2008 (no indication whether these stats were seasonally adjusted).
  • “Household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high.”

The response of the Bank of Canada speaks to the trap facing policymakers as they contemplate transitioning monetary away from extremely accomodative levels. The WSJ reports:

“…Canada’s central bankers appear reluctant to take any steps that would hurt the economy. In a Jan. 11 speech, a representative of the Bank of Canada said: ‘If the Bank were to raise interest rates to cool the housing market now…we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession.'”

The Canadians avoided the worst of the recent global meltdown. Let’s hope they did not avoid the fire only to land in the frying pan.

Anthem Blue Cross raises premiums by as much as 39 percent

We’re accustomed to seeing stories about rising health insurance rates, but this is really something else:

Anthem Blue Cross customers got a shock this week when the health insurer informed thousands of individual policyholders that their premium rates will jump as much as 39 percent on March 1.

The company, based in Woodland Hills (Los Angles County), declined to say how many customers received the increase or what the average premium hike was, but the insurer has the largest number of individual customers in the state. Last year, when Anthem Blue Cross raised rates by as much as 68 percent for some customers, the company said it had about 800,000 members.

“There aren’t any other parts of our society where people have no regard for inflation rate and increase their prices this much. I can’t imagine anything in the world that’s going up 39 percent,” said Josh Libresco, 54, of San Rafael, as he grappled with the news that his family premium will go from $858 per month to $1,192 – and that’s with a $5,000 deductible.

This comes on top of a 68 percent increase in premiums last year for some customers. (Hey, good news! Premiums are decelerating!)

Nearly three million Californians buy health insurance through the individual market.

Hoenig explains his objection to latest Federal Reserve policy statement

Nightly Business Report’s Susie Gharib interviewed Thomas Hoenig, President of the Federal Reserve Bank of Kansas City. Amongst many questions, Gharib asked Hoenig to explain his objection to the latest Federal Reserve policy statement. Hoenig basically wants the Federal Reserve to move back to a flexible policy stance. The current policy statement locks the Federal Reserve into maintaining a zero interest rate policy regardless of changing circumstances in the near-term. Here is some of what Hoenig had to say (click here to watch or download the full interview):

“I think what the Fed should be doing is, as I said, broadening it’s options. That is taking off restriction that it’s placed on itself because… Let’s say the economy grows more quickly that I even anticipate. We should be prepared to have the ability to make changes. Or if it does grow slower, then we can always extend this very low interest rate environment. The main thing is to be able to make choices in a timely manner and that’s what it’s all about…

…what I’m saying is that the language should be changed so that we’re not tying ourselves to language that says we won’t do anything for an extended period, when in fact events are changing. The economy is strengthening. I think those are really… what I’m trying to say is maximize your options as a policy maker. I don’t think necessarily, until we get the data coming in more in terms of our future signaling of what we do, but what we ought to be doing is very clearly saying that our policies have to have the ability to change as the economy changes.”

Phoenix Will Tax Food Again

The Phoenix City Council has voted to tax food again after ending a similar tax in the mid-80s. The City Council is looking for ways to fix a large budget shortfall. The association which represents police in Phoenix claims that the 2% tax is not sufficient to pay for police and fire services and has requested an increase to 4%.

Mesa and Surprise are the last two cities in the Phoenix, Arizona area that have no tax on food.

See for more details.

Copper Prices Plunge in 2010

Copper prices have plunged so far in 2010. The 19% price drop from the peak set in early January is the largest price decline during the entire rally off March’s lows. Copper is now trading at prices last seen from August to October of last year.

Copper prices plunge in 2010

Copper prices plunge in 2010

(chart from

The dollar’s rise and monetary tightening in China have no doubt played a role in pressuring copper prices this year. This trend bears watching given inflation should remain tame if commodities like copper continue to fall.

City of Atlanta adds fee for paying water bills online

Online billing is supposed to be a convenience and a cheaper alternative to paper billing. However, certain online bills are apparently MORE expensive to process online.

In January, the city of Atlanta instituted a $4.50 fee to pay water bills online. Other Georgia government entities like the Department of Revenue have charged an online “convenience fee” for several years for paying bills online.

The AJC reports that Atlanta’s Watershed Management Department was charged $700,000 by banks and credit card companies to process these payments. Banks do NOT charge this fee when using online/electronic bill pay systems directly from a bank account.

Potash prices up for Brazil and Asia and set to rise for Europe

Global growth patterns are widening between emerging markets and developed economies. Potash pricing appears to reflect the overall strength in Brazil and Asia and the relative weakness in Europe.

Belarussian Potash Co. (BPC), seller of 30% of the world’s potash, announced 6% price hikes in potash sold to its Brazilian and Asian markets:

“Oleg Petrov, director of sales for Belarussian Potash Co., said Wednesday the company had increased its spot price for standard material to $410 (U.S.) per tonne from $385. The new price for granular material is $425 per tonne, up from $400.

“We can probably strike new deals at the end of March or in April, as we’re completely sold out,” Mr. Petrov told Reuters. “We have no products for February and most of March as a result of strong demand.””

Just last December, German salt miner K+S, the world’s fourth largest potash producer, CUT potash prices for its European wholesalers. The company now states that these price cuts are driving stronger demand. K+S now expects that prices have bottomed, and the company is set to increase prices again 3.5% (from 285 to 295 euros per tonne) in the spring.

Iron Ore Prices May Spike Higher Than Expected

Reuters reported that Australian miners are seeking a 40% increase in contracted iron ore prices for 2010. This is in stark contrast to the 20-30% increase that the China Iron and Steel Association expected for 2010. The differential could lead to more contentious price negotiations – similar to what occurred at the beginning of 2009 – especially given some nervousness about whether steel demand will continue to increase robustly this year.

Click here for full details.