How to "WIN" during a recession?

The effects of a recession were seen and felt well before the Bureau of Economic Analysis formally declared one. In Q4 2007, few chose to liquidate equity positions in portfolios; yet, using the Intelligent Asset Management (IAM) Discipline Software our clients were able to recognize and act on the triggers to move 100% of their equities to cash in Q1 2008. As a result, my clients were spared most of the 35% drop in the S&P 500 index through December 2008.

The first half of 2008 experienced billions of dollars of write downs, dividend cuts, and management shakeups at some of this nation's largest financial services firms. As you recall, shares of commercial banks took a big hit, pushing the KBW Bank Index down 33%.

The dramatic near-collapse and subsequent purchase of Bear Stearns in March was followed by at-home arrests of two of their former hedge fund managers, Ralph Cioffi and Matthew Tannin. Later, in the same month, an uncharacteristic downgrade of Merrill Lynch (MER) and Citigroup (C) stocks to a “sell” recommendation by Goldman Sachs analysts stoked investor nervousness about the financial sector and contributed to the nation’s lowest consumer confidence level in over 17 years and for good reason, as autonomy of the Merrill Lynch brand became a division of Bank of America; and the demise of Lehman Brothers in September changed investment banking forever.

There are a number of analysts and portfolio managers, however, who expect to see more pain in the second half of 2009. Some fear it could be just as bad, if not worse than, the last two quarters of 2008.

Our economic picture is precarious. If Fed Chairman Benjamin Bernanke and the Federal Open Market Committee keep interest rates low, the U.S. could be subject to rapid inflation. However, if he were to raise rates, even slowly, over a million home owners would face higher monthly resets on their adjustable rate mortgages and potentially increase the number of already record level foreclosures. As the former Federal Reserve Chairman, Alan Greenspan, stated recently in Financial Times Magazine, he was puzzled that the economy hasn't fallen off a cliff, given the housing crisis, credit crunch, and oil price surge. He was quoted as saying "A recession is characterized by significant discontinuities in the data.... It started off that way—there was a period of sharp discontinuity from December [2007] to March [2008]. But then it stopped.... No one knows how this tug of war will end—specifically, whether the financial crisis will end before it drags down the real economy."

The operative phrase is “tug of war.” How does an Investor win in times of economic tension? Do you just “hold on” to your stock portfolio and ride it through? Intuitively you know this means ride the market down and back up only to find yourself at a near breakeven five years later. Or, is there some proactive solution that, five years from now, will have you admired by all for your intelligence, insight, timeliness, and courage? I believe there is a way to “win”!

The answer is having all six asset classes with which to invest, and know how to allocate them to optimize opportunity. It is said that in the land of the blind, the one-eyed man is king. This colloquialism parallels the challenge of having only stocks and bonds to buy, in which case you spend your energies trying to justify one sector over another with disregard to the fact that none of the sectors are winning in real returns. However, when another asset class is presented, a true comparison can take place. Enter Commercial Investment Real Estate, by which most of the wealth in America has been generated.

When you stop for a moment and consider the tragedy of the sub-prime lending debacle in this country, it requires a paradigm shift to realize that the real estate values directly impacted have not been impacted to the same degree at the same time for all types of real estate. There has been and will continue to be a laddering affect between the drop in reported real estate of single family residential homes that vs. that of retail shopping centers and triple net leased multi-tenant industrial properties.

In addition, the news headlines continually offer distressing news from the perspective of the seller. But the wealthiest investors remaining are buyers of property, not sellers, because they realize the value of investing into the fears and the presumptions of those paralyzed by the media. By the time the media begins to report good news about the real estate market, savvy investors will be on to another asset class with an opportunistic shrewdness that is non-emotional and studied.

In short, banks are not aggressively making commercial loans in this market. It can be expected that financial liquidity could loosen when they start reporting second-quarter results the second week of July and begin setting more money aside to protect against delinquencies or defaults in their commercial real estate portfolios. And, as more commercial debt comes due, banks will have to build those reserves even more later this year by selling off assets at deeply discounted prices.

This translates to fewer buyers in the commercial real estate market buying from the same level of inventory as there was two years ago. We are in a buyer’s market where cash and good credit is king. But it will only be this way for another twelve to thirty six months, after which the housing market will be through the worst of its problems and residential leads commercial. Home prices will begin to rise, the economy will be more stabilized, and many of the reasons for selling commercial properties will have subsided as retailers are able to sell to customers with a higher consumer confidence, thereby staying current with their lease payments and reducing vacancies in commercial buildings.

During the past 2 ½ years, clients of The Coggins Company have completed nine commercial real estate acquisitions ranging from a Class A Office Building in Baton Rouge, Louisiana, to an In N Out Burger retail development center in Wildomar, CA. In each deal, the projected annual returns exceed 19%, with most of the deals distributing a current income of over 7% per year.
If your investment objective includes “winning” during every economic cycle, then do what you intuitively already know to do. Invest in assets that will make you money during the next five years. If you think that means stocks and bonds, good luck. But as for me and my clients, we will lean into Commercial Income and Development Real Estate for a portion of our assets, and then reengage the stock market with an Intelligent Asset Management (IAM) Discipline. How do you know when that is? It’s when the media pundits tell their audiences to go to gold.

Watch for my next eNewsletter for updates on investment strategies and market expectations; and help a friend “win” by introducing them to a unique and superior investment platform of Stocks, Bonds, and Commercial Real Estate. Have them call The Coggins Company at (949) 240-6080 for a free, exploratory discussion.