NATIONAL AND INTERNATIONAL

I just thought the world was ending last quarter. Now, according to the newspapers, it really is going to implode. The DOW closed down 777 points yesterday, the largest point drop ever! The fact that 777 points did not even put the correction in the top five market corrections in percentage of points lost was buried deep in the article. Who will pay for this bailout - the citizens of the United States, of course? It is called “socializing the loss.”

The Republicans seem to be making their views known on Capitol Hill. And joined by about 30 percent of the Democrats, they defeated the emergency bail-out bill, a $700 billion piece of legislation that originally came to the Congress in three pages from the US Treasury and the President.

So many banks and stock brokerage houses have failed or been taken over in the last month that I can’t even name them all. One worth of note was WaMu, Washington Mutual, a savings and loan out of Seattle. It is interesting to note that some pretty savvy guys from Fort Worth, TPG (former Bass family advisors) put $1.7 billion in WaMu earlier this year. They were wiped out completely when the thrift was taken over by the Feds and then sold to JPMorgan Chase.

What a difference 90 days makes. In the Second Quarter Report, I mentioned that our nation was focused on jobs being lost, $140.00 a barrel oil and $4.00 per gallon gasoline, home foreclosures and gloom and doom in general. Although the economy is still the main focus, oil has dropped below $100.00 a barrel and gasoline has fallen but not as much as oil did. But our nation does not seem to be as blue as last quarter. Look at the Consumer Sentiment chart below. The data shows that consumer sentiment actually went up significantly. It will be interesting to see if this is a trend or just a one-time anomaly.

Chart taken from Market Harmonics Website

Among all the bad news one can always find something good if you just look hard enough.

• Pakistan President Zardari and Afgan President Karzai recently were photographed together in a major thaw in their relations. They jointly declared that terrorists were not going to be allowed in their countries.
• Washington, DC recently reported that 1.3 million illegal immigrants have left our country because of the slow economy. Once our economy rebounds, they will want to come back. With the increased border security, many more will be coming into the country using legal methods.
• The higher price of gasoline has caused mass transit ridership to boom. The American Public Transportation Association reported that ridership increased 5.2 percent nationwide in the second quarter of 2008 over the same period of last year. In North Texas the increase was even more dramatic, hitting double digits in many cases.
• With fewer cars on the roads, highway deaths are falling, 22 percent in March and almost 17 percent in April over a year ago numbers according to Professor Michael Sivak at the University of Michigan.
• Another unintended consequence of higher gasoline prices is that the Federal Highway Trust Fund is running short of dollars because of the decrease in federal gas tax receipts. President Bush urged Congress to approve an $8 billion rescue plan to shore up the Fund. The fact that Congress loaded up the highway spending bill with more than $24 billion in “earmarks”, and this is being made public, may in the future help the next President stop at least some of the earmarks. It is certainly something that one of the Presidential candidates is talking about.
• Ron Muhlenkamp of Muhlenkamp Mutual Funds recently brought up an interesting fact. Ron stated that the tripling of crude oil in 1973-1974 brought about a huge effort in energy efficiency. His research shows that the US and other developed countries currently use half the energy per dollar of GDP that was used in 1970. He believes that this will happen again.
• Geoffrey Carr, writing in the June 21 edition of The Economist, states that he believes the next technology boom may be based on alternate energy, which would reinforce Muhlenkamp’s theory.

Everything starts with energy. Nothing starts without it. Look at the price of crude oil over the last year.

Chart taken from WTRG Economics Website

One of the most visited websites in our area lately is Boone Pickens’ website http://www.pickensplan.com/theplan/

It is worth visiting. Pickens states compelling reasons that we can greatly reduce our addition to foreign all. His basic theory is that we get there from wind power and that the United States is the Saudi Arabia of wind power.

RETAIL REPORT

I am not going to go into a comprehensive retail report this quarter. But I found a few statistics that I thought were worthy of note:

• Fifty years ago, Bank of America mass-mailed a small piece of plastic to nearly every home in Fresno, CA. It was called the “Fresno Drop” by B of A. By the second year, cardholders racked up $60 million in purchasers. Now, according to Smart Money, the average household in America is keeping track of 14 credit cards and the nation incurs almost $1.4 billion a month in late fees.
• Needless to say, major retailers like Lowe’s, Home Depot and many others tied to the homebuilding business are cutting back on new starts.
• Penny’s reduced its new locations by about 1/3rd as did other soft goods retailers.
• Holiday hiring is expected to be very slow this year as retailers brace for fewer customers during the Christmas season.
• Inflation has hit 99 Cents stores and they expect to have to raise prices.
• Neiman Marcus, Inc. is even worried that the financial turmoil on Wall Street will affect its bottom line.
• S&A Restaurant Corp. filed for bankruptcy in July shutting down all the Bennigan’s, Steak & Ale and the local Taverns. They are not expected to reopen.

RESIDENTIAL REAL ESTATE

• According to the Mortgage Bankers Association, a record 9 percent of American homeowners are either behind on their payments or in foreclosure. The highest rate is Florida at 13.68%; the lowest is North Dakota at 3.58%. According to the report this month, new foreclosures rose dramatically in eight states: Nevada, Florida, California, Arizona, Michigan, Rhode Island, Indiana and Ohio but declined in Texas, Massachusetts and Maryland.
• Housing starts are at a 17-year low, dropping 6.2% in August. And new building permits fell 8.9% to an annual rate of 854,000 units. This is a good sign. The market is correcting itself and must do so before it can heal.
• US home sales declined 2.2% in August to a seasonally adjusted annual rate of 4.91 million. The inventory of unsold homes on the market fell to 4.26 million, a decline of 7%, and the biggest drop since December 2006. This represents a supply of 10.4 months based on the August sales pace, the lowest level since March. Again, this is a good sign.
• And in a sign that prices are correcting also, prices declined nationwide by 5.3% from a year ago. This means that more homes are going to be taken off the market.

COMMERCIAL REAL ESTATE

It is going to be interesting to see what happens with the massive bail out being debated in Congress and its relation to commercial real estate. I have already seen some “calls” by lenders to their customers where they are demanding principal reductions for their construction and development loans. Almost every one of these was the large lenders that are in trouble with their residential mortgage loans. But one thing is for certain, commercial projects will be returning to the days before 10-year interest only loans with little to no equity and no recourse. If I had to bet, I would say that we are going to forced to have at least 25% equity in every deal for the next several years. The one wild card in the commercial side of the business is sovereign wealth funds. We are undergoing the largest transfer of wealth in the world history right now with trillions of dollars from developed countries being sent to oil producers and manufacturers. These countries have to have a place to invest their (our) dollars. Much of it is coming to US real estate.

TEXAS & DFW REGION

• Texas continues to add jobs, gaining 47,700 in June. I believe that will slow as we see many workers in the financial industry, mainly banks and mortgage lenders, being laid off with the mergers that are being made.
• DFW was number one in job growth in the US last month. Between July 2007 and July 2008, DFW gained 68,000 non-farm jobs, a 2.3% growth rate. Charlotte came in first in growth rates at 3% but not nearly as many jobs. After DFW, the next best growth rates were Houston, San Antonio and Seattle, Washington, all which posted a 2.2% growth rate.
• The growth rate in final agreed upon property values throughout the DFW area has slowed, mostly from double digit rates last year to 5%-8% this year, depending upon the city.

FORT WORTH/TARRANT COUNTY

In a sign of the lower energy prices, Chesapeake Energy announced that it is cutting drilling and development because of lower natural gas prices. While the company, one of the most active drillers in the Barnett Shale stated that it would not cut the Barnett activity, this shows how quickly these big energy independents can tweak their companies’ activities. Chesapeake also said that the distribution system (pipelines, etc) needs to catch up with the very active drilling programs over the last several years.

FORT WORTH CBD

XTO Energy has announced that it plans to build a $38 million office tower on one of the full blocks of land it owns in the CBD. The 360,000 square foot, nine story building located at Seventh and Calhoun are currently being used for parking for XTO employees.

ALLIANCE AREA

• The Alliance area continues to lead the growth in Fort Worth. A petition to allow alcohol sales in the dry portion of far north Fort Worth is underway and seems to be running strong. If successful, the area should see increased restaurants and stores selling beer and wine.
• The Northwest Independent School District is expecting an increase of over 13% in its tax rolls this year.

NORTHWEST FORT WORTH/LAKE WORTH

• Our Landmark Quebec project enjoyed a lot of new press this quarter due to the announcement of the Starplex Theater deal which we expect to close next month. One of the Texas Health Resources officials also announced that the non-profit hospital is expecting to close on 45 acres of our project.
• The F-35B Lightning II passed its initial tests with flying colors. The Marine and Navy version is the most technically complex version of the three F-35 models.

MANSFIELD/ARLINGTON

• While Arlington posted a 2% increase in population for 1007, Mansfield weighed in at 3.7%.
• Glorypark, the huge mixed use development of Hicks Holdings, the owner of the Texas Rangers and Dallas Stars, has put his development around Rangers Stadium and the new Cowboys football stadium on hold until better financing terms can be found.

SUMMARY

Is the US going into a recession? I don’t know and I do not think we will know until we are almost at the bottom or maybe even on our way out. When will the housing market return to “normal”? What is normal? Are any of the retailers and restaurants expanding? Yes but deals are harder to make than in the recent past. But with fewer new projects coming on line, the available sites are fewer also. What are we to do? I think we need to be careful, pay off as much bank debt as possible through sales to entities that make good tenants in our deals and make as many leases as we can while being careful that the tenants we choose have a good chance of making it through a prolonged weak period. Other than that, nothing has changed. Be very careful in our deals and try to capitalize on the current economy and be ready for it to grow rapidly again.