Holds the stocks of companies involved with malls, shopping centers, and free standing stores. Some of the top holdings in this fund include Simon Property Group, General Growth Properties, and Kimco RealtyCorporation.
Short Equities (Nasdaq / Russell 2000) ONLY if Death Cross Confirmations
Bond Rotation (Falling 10 UST Yield)
Short EURUSD Cross
MOST CRITICAL TIPPING POINT ARTICLES THIS WEEK - JUNE 29h - JULY 5th, 2014
JAPAN - DEBT DEFLATION
JAPAN - 3 Arrows of ABE-nomics Not Working
Despite claims to the contrary in the mass media, Japan’s economy is continuing to suffer mightily under the leadership of Prime Minister Abe Shinzo. Abe is from a famous family and he’s a convincing talker, so he was able to bamboozle people into believing that he could make Japan prosper with his three arrows. These metaphorical arrows stand for “monetary stimulus,” “fiscal stimulus,” and “structural reform.”
When Abe was elected using his “three arrows” symbolism to attract votes, I thought the Japanese people were beginning to believe in magic. Perhaps they were gullible or a little lazy in thinking or thought they would receive “free stuff” from Abe. No matter, Abe became Prime Minister in December 2012 and shot off his arrows.
With his “monetary stimulus” arrow, Abe arm-twisted the central bank into doubling the money supply in just a few months time. I could just imagine Abe rubbing his palms together and fiendishly muttering “We’re going to be rich, rich, RICH!” All that the central bank had to do was type a few numbers into their computers to make this happen. Naturally, the newly created money was distributed to politically powerful banks.
How did all of this money creation affect the common people? Despite claims that Japan has less than 2 percent inflation, I can assure you that the prices of many goods, especially imported goods like energy, have increased dramatically since the monetary stimulus arrow was fired. Wages, on the other hand, have remained depressed. With higher expenses to pay, Japanese people can’t afford other goods they would like to buy and businesses can’t afford to raise wages, hire, or expand. Only Abe’s bankster friends have profited from this scheme by speculating in the stock market with the counterfeited money that had been credited to their accounts with the central bank computer.
Japanese people are mostly smart enough to realize that typing numbers into a computer can’t make an economy strong, yet they just haven’t figured out that Abe’s monetary stimulus is nothing but a sneaky counterfeiting scheme.
At the same time as the monetary stimulus arrow doubled the money supply, Abe and his gang used their fiscal stimulus arrow to enormously increase spending on government works projects. Unlike capitalists who at least try to invest productive enterprises, the government allocates money based on pull and other political considerations. Wasting money on things like a new sewer system in Kiev, replacing the perfectly good Olympic stadium with an expensive new Olympic stadium, and handing out plum contracts for highways to nowhere will never generate a profit. Government investment is more like consumption, often creating a 100-percent loss.
These money-losing projects weigh heavily on the people. After all, they will have to pay for this waste in the form of higher taxes and higher debt service. Even if by some miracle the fiscal spending created a profit, the money wouldn’t be distributed to the taxpayer. Heads you lose, tails you lose.
Most Japanese people are smart enough to realize that investing in things that lose money can’t make an economy strong, yet they just haven’t figured out that Abe’s fiscal stimulus is nothing but a sneaky scheme to enrich his well-connected friends. After nearly twenty-five years and fifteen rounds of fiscal stimulus spending, you’d have to be totally bamboozled to still be a believer in this failed Keynesian claptrap.
To pay for his “fiscal stimulus” arrow Abe decided to raise taxes and take the money he needed by force. He raised car taxes and income taxes and he raised sales taxes by 60 percent, but he also announced plans to raise sales taxes by 100 percent. He is considering increasing taxes on married people and poor people. With each tax increase and threat of further tax increases, the economy has weakened further.
And what of Abe’s third arrow, “structural reform”? No one knows what this political slogan actually means. It sounds like some modern day form of Soviet era Glasnost, but there’s been no significant deregulation or loosening of government controls that have long stifled the Japanese economy. We do know that Abe has spent a great deal of effort making enemies with the neighbors. Effectively, Abe’s aggressiveness in foreign affairs is the real third arrow.
Abe has severely damaged relations between the peaceful and industrious Japanese people and their business trading partners in the neighboring countries of China, Russia, and South Korea.Business deals such as the effort to build a gas pipeline between Japan and Russia have been scrapped. Profitable trading in South Korea and especially China has been crushed by Abe’s undiplomatic actions. Via his confrontation with China and sanctioning of Russia, Abe has recklessly followed the dictates of the warmongering US government, all to the detriment of the Japanese people.
Abe’s arrows have been praised in the media by the economically ignorant, the politically motivated, and those who believe prosperity is parceled out by some all powerful shaman.However, the arrows, seen in the harsh light of reality, turn out to be counterfeiting schemes, “investing” in money losing ventures, taking money from the productive, and squabbling with the neighbors. These counterproductive political actions won’t ever result in a stronger economy and have instead left the Japanese people with a crushing debt and tax burden. Don’t get taken in by the hogwash you read in mainstream media propaganda pieces.
Abe’s policies are complete and utter failures.
2 - Japan Debt Deflation Spiral
MACRO News Items of Importance - This Week
GLOBAL MACRO REPORTS & ANALYSIS
Iraq About US Dollar, Hyperinflation Trouble in 2015-Gordon Long
Macroeconomist Gordon Long says, “We’re not really running a capitalist system. We are running a credit system. Instead of using savings, we are using credit. Credit, the way we are doing it now, is really a form of counterfeiting. If you look at the $72 trillion shadow banking system that we have operating right now, that is generating this credit . . . it collapsed in 2008 . . . and now it’s on a hairy edge. It’s not mortgages and housing this time. It’s student loans through Sallie Mae. These students don’t have any hope of paying this back. We are talking north of $1.1 to $1.2 trillion. It’s car loans this time because of subprime. That’s the way to look at car loans, they are sub-prime. . . . And you got these highly leveraged real estate investment trusts also operating through the shadow banking system. These problems are blatantly evident, and I don’t think the powers that be have any control over them.”
On the next financial crisis, Mr. Long contends, “I think 2008 was an early warning signal of the magnitude of the problem. We didn’t fix it. We did extend and pretend. Dodd-Frank did not solve the underlying issues. The global swaps market went from $600 trillion to $700 trillion last year, alone. We’ve watched the shadow banking system push through $72 trillion. So, we didn’t stop it. We just, in fact, inflamed it even worse, and we got into even riskier kinds of assets. Is it imminent? No, I think we are talking 2015. I think we have a little bit of a deflation scare before we get into the hyperinflation. Don’t underestimate the central bankers and the politicians’ ability to kick the can down the road. They still got some more bullets here.”
Will the crisis in Iraq get out of control? Gordon Long says, “I happen to think that it probably will because we are not resolving the basic problems. But the big core issue here is the petrodollar. It’s not about oil and it’s not about gas. It’s about what it is bought and paid for in, and that is U.S. dollars. There is no one that trades any one of those products in anything other than U.S. dollars . . . right now, as of today. . . . As long as the trading continues in U.S. dollars, all those dollars will stay out there and not come back to the United States. When it comes back to the United States, you will have hyperinflation. These conflicts need to be seen in the context of they are really going to force groups to trade in other than the U.S dollar. That’s the problem because they are going to come back. They are going to say I have a U.S. dollar, and I am going to make a claim on it. That’s what is going to drive the hyperinflation. That’s what is going to drive the currency crisis. This is about trading in the U.S. dollar. . . . We are looking at spring 2015 to Q three. There is trouble there.”
On government debt and suspicious bond buying in places like Belgium, Gordon Long says the government has to keep finding was to sell Treasury bonds to finance the huge U.S. debt. Long explains, “They not only have to sustain the buying, but they actually, right now, need a shock to the system, what I will call a bond scare, so money will move out of an over-inflated equity market. . . . And they need that to drive down the interest rates, push up the bond prices and get that financing charge much lower.” Long goes on to say, “The real game that is going on here is a complex game, but it’s pretty simple, what they are trying to do and that is they are trying to finance the government’s debt.”
CENTRAL BANKING MONETARY POLICIES, ACTIONS & ACTIVITIES
TECHNICALS & MARKET ANALYTICS
ANALYTICS - Long Term Return Trends
'Tangible Ideas' via Sean Corrigan of Diapason Commodities via ZH
So where does this leave us, in financial markets, at the mid-point of the year, other than with asset prices through the roof?
As can be gathered from the faux lamentations issuing forth from those central banking Uriah Heeps who sit wringing their hands at the dangers inherent in a ‘search for yield’ which they themselves have driven, sovereign bonds are currently at their lowest yields, longest durations, and hence most adverse risk:return settings of the past half-century.
In turn, this has led to a similar compression of credit spreads to the point that junk yields are trading sub-5% nominal, sub-3% deflated for the first time in history, levels at which they spread to US treasuries has also gone blow the 250bps area which marked the eve of the last three major credit events in 1994, 1997, and 2007. Needless to say, they are also historically cheap to stock earnings yields, actually trading below them.
Stock multiples are also among the most favourable vis-à-vis corporate yields in three decades, while dividend yields – though themselves in only the 5th percentile of the last six decades’ range – are atypically well in excess of both the Fed funds rate and the 3-month T-bill rate - again for the first time in over half a century. This, as we shall shortly see, is perhaps the single most compelling reason why stock markets seem to have an inexhaustible supply of bidders.
What is good for junk is also becoming true for emerging market bonds, even if the broader indices, such as the EMBI is still some 60bps above the post-2007 lows of 220bps. Similarly, though Bono and BTP spreads have seen some profit-taking since hitting four-year lows early in June, crashed to their lows, they still trade at or through UST equivalents at the lowest nominal yields in history. For all the rumblings about debt traps, after-CPI yields in Italy, at around 2.5%, are smack on the midmean of the whole EMU era and thus substantially reduced from the 6.5% average which was laid down in the last decade of the lira’s life.
When it comes to equities themselves, it might appear that, just looking at P/E ratings – added to a little eternal optimism regarding the prospect fro the growth in the denominator, whether as a result of buybacks or earnings growth – the market has not yet gone beyond the bounds of sanity.
What we can say, however, is that the fraction of profits rung from each dollar of sales has become greatly elevated – running at just under 10% for manufacturing companies, for example, which is twice the 5% typical of the last four decades of the 20th century. This has allowed earnings to grow enough to keep the buy-side happy, even though revenue growth has become very lacklustre of late, to the point that it is barely positive in deflated terms, often a harbinger of a more widespread economic malaise.
Fundamentally, if profits are growing as a share of sales, we must be deducting less from those receipts. As a share of EBIT, both the tax take and the interest pay-out have fallen substantially over the cycle. Whereas, in the mid-1990s, interest was eating up half of pre-tax operating income and taxes were taking a third of the remainder, currently the former reduction has fallen to around 30% and the latter to a highly depressed 20%. Note, however, that in 2013, the ROIC was a creditable 5.4% nominal, 3.3% real, while the realized cost of capital (using dividends and tax-adjusted interest paid) was 3.3% nominal, 1.2% real. This, you will note, nevertheless left the residual ‘economic’ profit rate at 2.1% nominal or precisely zero after taking account of the intervening general rise in prices.
The point here is that this is a finite, if long-lived, process: the tax rate cannot continue to fall without limit while interest costs are already at historic lows (so much so, in fact that corporates, as we have noted are hardly shy about increasing their susceptibility to any future adverse changes in them). Whenever the day arrives, there will necessarily come a point when earning cannot grow faster than revenues and if, when that occurs, revenue growth itself remains enfeebled, earnings, too, must begin to disappoint.
Something of the sort may perhaps be found a parsing of the latest Duke/CFO Magazine survey of US business executives. This 405-strong sample found that the outlook for both revenues and earnings had darkened appreciably in the pact six months. Last autumn, sales were seen to be about to quicken to a 6.8% rate of increase taking earnings up to a 14.3% rate of climb. Now, revenue growth is forecast to reach only 5.7% yoy, with the earnings outlook slashed to 4.1%. That latter is the worst such outcome of their prognostications since the third quarter of 2009 and stands in stark contrast to sellside expectations, as reported by S&P, for a 25% gain.
As if that were not enough, the price to book of equities is also rising alarmingly, especially price to tangible, replacement cost book, a measure which has only been higher in the run up to the Tech bubble peak. So, to sum up, little account has been taken of the fact that a couple of the main factors which have allowed margins to expand so greatly are presumably fast approaching their expiry date; the price to forward earnings being bandied about only seems reasonable on a Street guesstimate which is no less than six times that offered by corporate insiders; price to cash flow is in the topmost six percent of the distribution; the liquidation value of the average company would leave creditors well under water, while net debt as a proportion of either cash flow or net worth is approaching previous highs.
That all hardly makes for a compelling investment case, even without wondering about the herding effects currently at work in the market.
Which only leaves us with commodities – bastard children of the last few years’ bull market, still greatly despised, outside of the energy sector, at least. In truth, in the year so far theirreturns have been anything but lacklustre. As of writing in the last week of June, the basket has returned a healthy 7.7%, led by Ags on 12.5% and lagged by industrial metals on just 1.3%. With such a score, they have so far outpointed US bonds (3.4%), Junk (5.6%), US Small Cap (2.7%), EM equities (5.5%), World ex-US stocks (6.1%), and the US itself (7.2%). Only EM bonds – plus-8.5% - have done any better among the major asset classes.
* * *
What this long preamble is aimed at doing is alerting the reader to the possibility that while the trend line chugs on upward with the bond market at ~6% nominal, any divergence of other asset class returns too far from this line may well sow the seeds of their own dampening and subsequent phase reversal. Here we would ask you to squint at the accompanying, start date-normalized plot of returns to see if you, too, can make out what appears to be atantalizing, seven-year waxing and waning of equity returns away from and back to the trend, alternating Blue Sky bull markets like the one we have been in for much of the past five years with more short-lived, Icarus-like descents of the order of 50% where they converge not just with bonds, but commodities, too.
If past is indeed sometimes prologue, this simple chart might be hinting that a rally similar in arithmetical range and time-span – if not in percentage gain – to the Tech bubble itself is becoming dangerously overripe and that, if so, the most propitious time to effect an exit is not when the fat lady interrupts her warbling of the anthem to shriek, 'Fire!' at the audience instead.
VIX reflects the lack of fear and is correctly doing so. The chart below shows daily closing prices for VIX and the S&P 500 from the beginning of 2014 through the end of the first quarter in 2014 and is a good illustration of why I believe VIX is properly reflecting the lack of fear.
Note the four places on the chart above where I have highlighted spikes in VIX over the past 15 months. The S&P will have hit a small rough patch and VIX moves up based on concerns that the market drop may turn into a protracted correction or bear market move. Now note what happens after these spikes in VIX, the S&P 500 resumes a move to the upside and VIX returns to lower levels. This pattern continues to repeat itself investors and traders become less fearful of the next drop. The last real volatility event in the US occurred back in August 2011 which seems be quickly becoming a distant memory for many traders.
Part of the argument about VIX not reflecting fear is that there are more alternatives to hedge against a drop in the equity market. This is an argument that I have a tough time with when I consider exactly what VIX represents. VIX is the implied volatility of options based on the S&P 500 or SPX Index options. Average daily volume for SPX option trading in 2013 was about 823,000 contracts which was a 17% increase over 2012 average daily volume. So far in 2014 average daily volume for SPX options is running at about 870,000 contracts. Many listed markets in the US have been experiencing negative or flat volume growth. If there are new hedging alternatives that are impacting the level of VIX this would mean that SPX volume should be shrinking, not growing.
VIX is doing what it has done for over 20 years – it is properly reflecting the lack of concern in the market when the S&P has a day like yesterday. The market has become accustomed to small corrections followed by a new high in the S&P 500 and VIX is quantifying that complacency through being a relatively low levels. When we get the next real volatility event that should quiet the critics that say VIX has undergone some sort of change – fear will return and with it higher levels for VIX.
"The Japan Trade is in trouble," warns BofA's Macneil Curry (and rightly so after this week's utter collapse in Japanese data and Abe's soaring disapproval rating). Over the course of the past week both USDJPY and the Nikkei have broken key technical levels which point to furthersubstantial downside in the weeks ahead.
BofAML's Macneil Curry explains...
Specifically, $/¥ has closed below its 200d average (now 101.71) for the first time since Nov'12, while the Nikkei has closed below 5wk trendline support (now 15,276). In both cases these breaks of support point to new 2014 lows before greater signs of stabilization. However, we must make clear that, despite our negative medium term outlooks, both of these markets remain in long term bull trends. We will look for these long term bull trends to re-emerge around the beginning of Q4, but for now we are BEARISH.
Chart of the week: $/¥ is breaking down
Since early Feb, $/¥ has been caught in a well-defined contracting range. NOW, the closing break of the 200d (101.71) says that the range trade is giving way for a bear trend. The downside is seen to at least 99.21, potentially 97.40
The Nikkei is rolling over
Similar to $/¥, the Nikkei outlook is turning negative. The break of 5wk trendline support (now 15,276) says that further weakness is coming. Minimum downside targets are seen to the multi-month range lows at 13,995, but weakness is more likely to extend to the confluence of support between 13,194/13,107.
Jeremy Grantham — once a bedpan salesman from Doncaster, England, now co-founder of one of the world’s largest asset management funds GMO — is noted for his astute predictions of stock market bubbles and recoveries. His investment philosophy is heavy on statistics and a conviction that asset prices and profit margins mean revert to the long run.
In January 2007, he wrote: “The stock market is overpriced. Everything is overpriced” and in March 2009, he wrote his newsletter titled: “Reinvesting when Terrified.” The timing was perfect because on March 9, 2009, the S&P 500 closed at 676, the lowest since September 1996.
Grantham’s first quarter 2014 letter was titled “Looking for Bubbles Part one.” The chart of aggregate profit margins on U.S. corporations shows they have risen from 7 percent in the fourth quarter 2008 to 12.7 percent in the last quarter of 2013 and have abruptly declined to 11.6 percent recently.
Grantham’s newsletter admittedly exhibits some rare indecision on one hand stating “The bull market may come to an end any time,” pointing to China slowdown and a Russia miscalculation, while also stating it will end badly after it reaches a level in excess of 2,250 or more.
In his defense, the credit, rates and equity markets are also throwing up mixed signals. A chart of the Credit Suisse Fear Barometer compared with the VIX , five year swap spreads and the CDX IG index show stark disagreement.
Grantham pointed to geopolitical risk as an achilles heel of the market. Country risk will be brought into sharper relief Monday with Argentina facing the possibility of another default
RETAIL CRE -Markets Being "Duped" by Misinterpreting Misleading Data
Some Serve Smaller Burgers and Steaks; Others Feature Cheaper Cuts of Meat, New Recipes
Steaks are displayed at the entrance of the Texas Roadhouse in northwest San Antonio. Customers can choose their cut from the display. Julia Robinson for The Wall Street Journal
Faced with soaring beef prices, many restaurants and food retailers are shifting strategies to woo consumers and protect profit margins.
The record costs are forcing beef purveyors from Ruth's Chris Steak House to Carl's Jr. to choose between asking customers to pay more for steaks and burgers and eating the costs themselves. Many are passing along the higher prices while embellishing their menus with new items, smaller-portion cuts and more sauces, toppings and side dishes. Others are seeking to control costs by locking in beef purchases at current prices as they envision further inflation to come.
The scramble shows how a prolonged drought in the southern U.S. Great Plains that has shrunk the nation's cattle supply to six-decade lows is rippling from slaughterhouses to drive-ins and high-end steakhouses.
"There are people out there that are panicked," said Gregory Schulson, chief executive of Burrito Beach Mexican Grill, a Chicago-area burrito chain with six locations. "Restaurants have a philosophical choice to make. Are you going to maintain your current products and eat the margin, charge your customers more, or adjust your product to meet the consumer at their price point?"
Burrito Beach recently introduced specialty accouterments like pickled onions and homemade coleslaw, which servers add to burrito or taco orders at no charge. The move came after it raised prices on beef items by about 4%.
"If you can add something that's not particularly expensive but that people think is special, it helps justify the price increase," Mr. Schulson said.
Wholesale prices for choice-grade beef—the main variety consumed in the U.S.—surged 11% over the 12 months through May as cattle prices reached all-time highs, according to the U.S. Department of Agriculture. The gains come as supermarkets gear up for the week of Fourth of July—typically the year's busiest period for beef sales.
In many cases, companies are sticking consumers with that higher tab. Average retail fresh beef prices rose 12% to $5.45 a pound in May from a year earlier, according to the USDA, and were just shy of the all-time high reached in April. The government forecasts that consumer beef prices will increase as much as 6.5% for all of 2014, compared with gains of up to 4% for both pork and chicken.
Some consumers are balking at the higher beef prices in favor of lower-priced chicken, creating challenges for restaurants and retailers that emphasize red meat. Rich Brashear, a 23-year-old accountant in Chicago, said he has cut back on burgers and buys more chicken at the grocery store. "I eat a lot less beef," he said while munching on a hot dog at a sports bar one recent afternoon. "You don't have much choice. It's either spend more or eat less."
DIFFERENT CUTS: Like all restaurants, Texas Roadhouse, a steakhouse chain, is weighing higher beef prices against margins.
In the first four months of this year, U.S. beef sales volume fell 0.6% from a year earlier after rising in the last two quarters of 2013 at 18,000 grocery stores, supermarkets and other retail outlets tracked by market-research firm Nielsen Co. In contrast, sales volumes for chicken rose 1.9%.
"We're preparing ourselves that it's going to be a long journey on beef," Arne G. Haak, chief financial officer of Ruth's Hospitality Group Inc., RUTH -0.01% said of the tight U.S. cattle supplies at an investor conference earlier this month.
The company, which operates 120 Ruth's Chris Steak House restaurants and other steakhouse and seafood outlets, said its operating expenses rose by 3.3% in the first quarter, in part because of higher beef costs. The company responded by locking in nearly half its beef needs from May through the end of the year at a price about 5% above last year's, executives said at the conference. A spokeswoman declined to comment further on its purchasing strategies.
Ruth's Chris also has added a 12-ounce rib-eye steak to its menu, smaller than its traditional 16-ounce version, to give consumers more options, executives said.
Some burger chains are making similar moves. Hardee's and Carl's Jr., which are operated by closely held CKE Restaurants Inc., have in recent years introduced smaller-size burgers and more burger alternatives. Those include a $3.99 five-ounce chicken sandwich launched in May, comparable in size and price to the company's signature black angus burger.
"It turned out that this was a smart time to do chicken because beef prices are so much higher," said Chief Executive Andy Puzder.
Smaller package sizes and less pricey cuts of beef are showing up in grocers' meat cases as well.
"We're seeing customers purchase more cube steaks instead of T-bones…and burgers instead of steaks," said Keith Dailey, a spokesman for Kroger Co. KR 0.00% , the largest conventional U.S. grocery chain. The company this month launched a Mexican-themed event in stores nationwide featuring thinner, marinated slices of beef for fajitas.
Theo Weening, global meat buyer for Whole Foods Market Inc., WFM 0.00% said the upscale retailer is promoting cheaper cuts of beef like boneless short rib.
"We knew we wouldn't have many promotions that feature deep discounts on beef this summer" due to high prices, Mr. Weening said. "It used to be we'd have a sale on New York strip steak every week. That's not happening right now."
Others are asking consumers to shoulder the burden of higher costs. Some, like burrito chain Chipotle Mexican Grill Inc., CMG 0.00% are raising menu prices to more closely reflect actual costs. Chipotle in May raised prices for beef-based entrees by 8% compared to 4% to 6% increases for chicken, pork and vegetarian options, according to William Blair & Co.
"Steak prices are rising faster," said Chipotle spokesman Chris Arnold.
"Rather than bringing everything up proportionately, We decided to let steak prices carry more of the load and let customers decide if they wanted to pay the premium for steak."
Texas Roadhouse Inc., TXRH -0.01% a steakhouse chain with about 420 outlets, boosted its prices by 1.5% in December, President Scott Colosis said in an interview. The company also added a beef specialist to its purchasing team last year to help negotiate better deals with meatpackers.
"It's always a battle to protect your margins," Mr. Colosis said. "You have the option of raising prices to a level that offsets inflation or betting that you can drive store traffic, which is a hard thing to do."
Low Vacancy Rates at Malls, Strip Centers Give Landlords Leasing Leverage
Shopping-center owners continued to increase rents in the second quarter as a host of retailers in expansion mode jockeyed for dwindling available space in existing high-quality centers.
Vacancy rates at U.S. malls and strip centers remained minimal in the second quarter such that retailers seeking to move into the best centers often must wait for another tenant to leave. Landlords and analysts generally don't expect a significant pickup in retail construction for at least a year or two.
Vacancies at strip centers declined to 10.3% in the second quarter, down 0.10 percentage point from the first quarter and now nearly a percentage point lower than a postrecession high set in the third quarter of 2011, according to data from Reis Inc. At malls, vacancy remained at 7.9% for the third consecutive quarter, down from a high of 9.4% set in the third quarter of 2011.
Meanwhile, the shrinking vacancies allowed retail landlords to raise rents at malls for the 13th consecutive quarter and at strip centers for the 11th. Rents at malls rose 0.4% in the second quarter to $40.32 a square foot a year, while rents at strip centers rose 0.5% to $19.51. Strip centers are rows of small shops often sharing a common parking lot.
"This is the continuation of a slow, but decidedly upward trend in quarterly rent growth over the last few years," said Ryan Severino, a senior economist at Reis, which compiles its data from 77 U.S. metropolitan areas.
Vacancy rates are even tighter in the highest-quality shopping centers, which typically are owned by real-estate investment trusts rather than individual, private investors. Cedrik Lachance, a managing director at Green Street Advisors, which tracks REITs, estimates the vacancy rate in top-quality, REIT-owned strip centers to be roughly 5%.
"We're over 95%-leased in our total portfolio," said John Kite, chief executive of Kite RealtyKRG +2.40% Group, an Indianapolis-based firm that owns more than 130 centers across the U.S. "That's as good as it's been in the past 10-plus years. The retailers that are expanding have limited choices, which is why we're driving rents up."
The short supply of shopping-center space stems from several factors. While retailers such as specialty grocers and discount merchandisers are expanding, there isn't enough expansion overall for lenders to justify financing many new projects. Meanwhile, retail sales have been sluggish this year; sales growth, excluding auto sales, increased by 0.1% in May from April, according to the Commerce Department.
Retail landlords say that plenty of retailers are expanding, led by
specialty grocers such as Whole Foods Market Inc. and Trader Joe's,
sports and outdoors stores,
discount apparel sellers,
dollar stores and
The roster of shrinking retailers is the same that has been whittling store counts for the past two years:
"We don't see the new-supply dynamic changing anytime soon," said Shane Garrison, chief operating officer and chief investment officer of Retail Properties of America Inc., RPAI +0.06% which owns roughly 230 properties across more than 70 U.S. markets. "So it's definitely a landlord's market again."
As an example of the changing U.S. retail landscape, Kite Realty accommodated Staples Inc. SPLS +0.45% by reducing its square footage at Kite's International Speedway Square shopping center in Daytona Beach, Fla. Kite halved Staples' square footage there to 12,000 and moved a new tenant, Total Wine & More, into Staples' vacated space in the second quarter.
In the Henry Town Center near Atlanta, Retail Properties of America replaced a 115,000-square-foot wholesale-club retailer with three tenants this year: Gander Mountain Co., Gap Inc.'s Old Navy and a TJX Cos. Home Goods store soon to open.
CoStar Group, a real-estate research firm, predicts that builders will complete 45.2 million square feet of retail space this year and 71.5 million square feet in 2015 in 63 U.S. markets. That is well shy of the 210 million square feet delivered in 2007.
"We'll see a moderate increase in the coming quarters in construction," said Suzanne Mulvee, a director of retail research at CoStar. "But it's going to be a couple of years before we see construction getting back to even half the pace of what it was in 2007."
Back in his day, Christopher Columbus was known as a swashbuckling adventurer willing to risk his life and limb for a boat ride. His thirst for adventure discovered many things, including the fact that the earth is round, and not flat.
Then in 2005, American journalist Robert Friedman declared the opposite in that the world isn’t actually round, but flat as a pancake. His best selling book explored how technology was changing the way people, businesses and countries do business.
Yet today, a mere 9 years later, legions of financial analysts, economists, elected and unelected officials are declaring the world is neither flat nor round, but a bunch of individually, wrapped islands completely separate, independent and unaffected by anything outside of their respective borders.
Call us old-fashioned, but we lie squarely on the side of Christopher Columbus. Yes, the world is indeed round and what goes around, comes around so to speak. Financially speaking, it’s our view that it is impossible today for any major country to function independently from anyone else. Economically, if most countries are doing well then it is highly likely any laggards will be dragged along for the ride too.
Of course, the opposite is also true. If the majority of the big economic countries are not doing well, then it is highly likely the rest will follow them down the garden path
Today, most major countries are struggling. In Europe for example, recent GDP data shows the old world growing at +0.8%. Hardly the acceleration needed to declare victory over the debt crisis. Italy in particular, is really struggling with what now looks like another return to recession, while everyone’s favourite socialist country – France, also disappointed with no growth to speak of at all.
Meanwhile, emerging market countries – the darlings of the pre-2008 crisis continue to grow, but at half the rate of what they regularly achieved previously during their boom years.
There is some good news. The United Kingdom has now officially returned to the same level it was prior to the 2008 crisis. And then there is America – the self proclaimed economic engine of the world.
At first glance, America seems to be firing on all cylinders. Over the last 4 years, the country has averaged +2.4% growth. Measured another way, the American economy increased from $13.8 Trillion to $15.6 Trillion, for a total 4 year gain of $1.8 Trillion.
At second glance, during the exact same time frame the US Federal Reserve printed money totalling $3.3 trillion. While viewing the data in Chart 1 on the next page, we ask you to really think about what you are seeing. Essentially, using a money printing machine to produce $3.3 Trillion only helped to grow the US ecoAfter 4 Yearsnomy by $1.8 trillion.
Obviously, the Americans didn’t quite get the bang for their buck they were expecting, and this is the point we make – despite trillions in Dollars, Pounds, Yen and Euros of economic stimulus, world economic growth remains a rather big disappointment.
As there are always consequences, the major consequence of massive money printing followed by low economic growth is the one few investment analysts, economists, and big bank investment committees speak about. Now, whether the reason for this silence is a business decision, lack of product to express the view, or even plain ignorance, the fact remains the connection isn’t being made. And worse still, it isn't being communicated to the majority of investors around the world.
Maybe this lack of communication can be blamed on Christopher Columbus, or Robert Friedman. More likely however, the real target of blame is the current culture imbedded in the financial industry that central bankers do know what they are doing and eventually they will deliver the world from its current economic funk.
In fact, the current state of economic, monetary and fiscal policies has become so severely warped and twisted that for the first time ever, we have economics and business graduates that have spent their entire academic career in a period with 0% interest rates, money printing and subsidized lending.
Think about this for a moment, our future leaders have established their entire economic and monetary belief system during the most bizarre economic moment in the history of the world. To them – this is normal. In many ways, it’s very much the same as the film “The Truman Show” where unknown to him, Jim Carey lives his entire life within a manmade bubble, only to eventually discover his entire belief system was manufactured by the director and producers of the show.
In our opinion, it’s rather quite obvious that the world’s policy makers absolutely know that the economic and financial world isn’t quite up to par. In some ways they should be congratulated and maybe even admired for stoically making many very bold decisions. In other ways, they should read their report card and admit their failures.
Just because you sit in the corner office and make bold decisions, doesn’t mean you are right. The corporate world is famous for firing under performing workers. Those that make bad business decisions rarely find themselves with the opportunity to continue making even more bad business decisions. It’s mind boggling that the world’s central bankers are not treated the same way.
In our mind, it’s become rather obvious that current stimulus plans are not working. Rather than scrap the madness and start over, our world political and economic leaders insist on a rather bizarre analysis that what they are doing is actually correct. But the reason for its ineffectiveness is that they haven’t done enough of it. In other words, yes the central banks and governments of the world have certainly dug themselves into a pretty deep hole. Yet, instead of trying to climb out or shout for help, they ask for more shovels – dig deeper! Chart 2 on the next page shows the amount of money printing that has been initiated since 2008. Considering that the previous 100 years produced no money printing by the world’s major countries, the current amount is rather shocking to say the least.
And this brings us to the consequences of all of this digging by our central banks. Despite massive amounts of stimulus, global growth remains stagnant. The reason for the lacklustre rebound is due to businesses and individuals slowly withdrawing their money from the economy.
Many people have commented that all the world really needs is a little more confidence. Once people and companies become more comfortable they’ll start to spend again. This view is 100% correct – but what’s missing from this analysis is the reason confidence is declining. The reason for the decline is due to the very policy actions of our governments and central banks to help restore confidence. Their actions are actually causing people to have less confidence – talk about irony.
When it comes to money, no magic formula or pixie dust can be applied to make it behave differently than it should. Individuals and companies both live in a world where you can only spend what you make. If you spend more than what you make, you need to borrow to make up the difference. Eventually, you will have reached your borrowing limit and then you have to start repaying your debt, or if you cannot repay – you default on your loans, and whoever lent you the money takes a loss. Simple enough.
Governments also use money and rarely spend less than what it collects in taxes. The difference of course is referred to as a deficit, and the only way money math works is to borrow money to equal the difference.
Yet, this seemingly perpetual access to debt has proven to be an open ticket for most governments to evolve into spendthrift characters of the worst kind. Months, years and decades of deficits and borrowing have literally pushed the natural laws of money and mathematics to the limit. With many countries having reached this limit, the inclination is to keep the money party going – which of course is the reason for 0% interest rates, money printing, bank bailouts and robbing savings from the poor to pay the rich.
While most media outlets only focus on the growth story of our world, we find it interesting that very few ever discuss the debt story. There are many reasons for this. For starters, you can see growth but you cannot see debt. When you see a nice car parked in front of a nice house, full of a nice family who takes nice vacations, most people say “wow, it must be nice to be rich.” Since you cannot see the debt used to become so nice, perhaps you should be saying “wow, they must have a lot of debt.”
As most countries continue to spend more money than they collect in taxes, the amount of debt continues to grow. And, this brings us to the global hunt for taxes. Because our economies are growing slower than our debt levels, the only other way for governments to improve their financial lot is to either reduce spending or to increase taxes.
Tipping Points Life Cycle - Explained Click on image to enlarge
Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.
THE CONTENT OF ALL MATERIALS: SLIDE PRESENTATION AND THEIR ACCOMPANYING RECORDED AUDIO DISCUSSIONS, VIDEO PRESENTATIONS, NARRATED SLIDE PRESENTATIONS AND WEBZINES (hereinafter "The Media") ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY.
THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
Gordon emperically recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, he encourages you confirm the facts on your own before making important investment commitments.
Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.
Please note that Mr. Long may already have invested or may from time to time invest in securities that are discussed or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.
FAIR USE NOTICEThis site contains
copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in
our efforts to advance understanding of environmental, political, human
rights, economic, democracy, scientific, and social justice issues, etc. We
believe this constitutes a 'fair use' of any such copyrighted material as
provided for in section 107 of the US Copyright Law. In accordance with
Title 17 U.S.C. Section 107, the material on this site is distributed
without profit to those who have expressed a prior interest in receiving the
included information for research and educational purposes.
If you wish to use
copyrighted material from this site for purposes of your own that go beyond
'fair use', you must obtain permission from the copyright owner.