INTERNATIONAL

The international market continues to be dominated by two things: war and emerging countries doing well. Muslim terrorists are a moving target. December was the first month since the war in Iraq started without a US service member being killed but Al-Qaeda is now active in Yemen along with a lot of activity in countries bordering both Afghanistan and Iraq.

China remains the country about to show its economic strength but other countries, especially in South America are also showing outstanding muscle. Brazil is one mentioned repeatedly. And then there is Greenland which will supposedly benefit from global warming and its potential for natural resources such as petroleum and natural gas plus minerals like gold, rubies, diamonds and more. The world is certainly changing. China is expected to overtake Japan as the second largest world economy this year.

NATIONAL

The US market is still having issues with its commercial lenders. Capmark Financial filed for bankruptcy in October listing $21 billion in debt, mostly commercial loans. Then CIT Group, another huge commercial lender, filed in November. The US government (taxpayers) will lose the $2.3 billion it sunk into CIT last year. CIT had debt of $64.9 billion compared to $71 billion in finance and leasing assets.

The US government has deemed Fannie Mae and Freddie Mac as both too big to shrink more less fail. The two government backed entities were given a blank check with the Obama administration stating that the federal government will cover unlimited losses through 2012, lifting the previous cap of $400 billion. Where is this money going to come from?

Treasury Secretary Timothy Geithner announced in early December that the administration will extend the government’s financial bailout program until next fall. He stated that the extension is “necessary to assist American families and stabilize financial markets.”

The House voted to extend $31 billion in tax breaks in December. It includes an income tax deduction for sales and property taxes in Texas and other no-income-tax-states plus breaks to taxpayers that do not itemize their deductions, those that are paying for college tuition, business finance research and development grants and accelerated depreciation for improvements made to leased restaurant and other retail property. The United States government will give money to anyone with a breath these days.

Citigroup and Wells Fargo are seeking to repay billions in federal bailout aid.

Because so much of our nation’s wealth has historically been in our primary residences, let’s look at the fact that the distribution of negative equity is heavily concentrated in five states. This is the percentage of homes that are under water (mortgage over value) according to national CoreLogic’s methodology factoring in amortization and utilization rates for home equity lines of credit:
Nevada – 65%
Arizona – 48%
Florida – 45%
Michigan – 37%
California – 35%

I really want to focus on the consumer report this quarter. Because about 70% of our economy depends upon consumer spending, this is very important to track. I regularly take the short graph from the Conference Board website because it is a quick snap shot. The graph shows some significant improvement from an index of approximately 42 in April to just over 50 in December.

Taken from Conference Board website

But let’s take a more in depth look at three other graphs from the same data set from the Conference Board but published in the Market Harmonics reports and going back to December 2000:

The graph above shows just how high the consumer was riding at the end of 2000 and how far we fell at mid-year in 2009. Note how far up we progressed in the last half of last year – from 24 to 52.

The Present Situation graph shows where the public thinks they are today.

And the Expectations graph tells where we think we are headed. This is all well and good. But much is predicated on one four letter word – JOBS. If the jobs do not show up soon, where will this third graph be at mid-year? I don’t know but I am certain that the old definition of recession and depression still holds true: A recession is when your neighbor loses his job; a depression is when you lose yours! If business does not regain its confidence in our nation, the jobs will not be coming. And right now our federal government is scaring business to death. Stay tuned for another mud-slinging election in the fourth quarter.

Speaking of jobs and the federal government, the President held a jobs summit at the White House in early December. The administration made a big deal out of this meeting, inviting a lot of “green partners” and proclaiming how they are going to create the jobs of the next decade. But those that were not invited may be even more important than those in attendance. The President did not include the US Chamber of Commerce, the National Federation of Independent Business and a lot more groups that represent small businesses across the nation. And it is no secret that small business creates the most jobs in the United States.

RETAIL REPORT

• Best Buy continues to have good news. The company feels the US consumer is coming back into their stores and they are planning expansions in Europe, even as sales in China and Canada lag.
• Neiman Marcus reported a 34% fall in profit in its fiscal first quarter. Its Chief Executive, Burt Tansky said that “improvements are slow in coming.” Well, duh. The wealthy in our country are worried that the federal government is going to put them out of business.
• Ford Motor, the only US automaker to dodge direct government aid and bankruptcy, turned a $997 million profit in the third quarter and is forecasting a profitable 2010 and 2011.
• The Sahara Casino has temporarily shut down two of its towers on the strip in Las Vegas until the gambler returns. After a major renovation of $300 – $400 million in late 2007, this has got to hurt.
• And China now owns Hummer. Good luck, guys. Maybe they can figure out a way to run those things off solar panels.

TEXAS

• Texas led the nation in population growth from July 1, 2008 to July 1, 2009 with an addition of 478,000 new residents. California was second at 381,000 and North Carolina came in third at 134,000. Florida and Nevada had negative net domestic migration.
• Texas reported its 2nd consecutive months of job gains in November and its unemployment rate was 8 percent, two percent lower than the national figure. The state added 17,000 people to payrolls.
• The Texas State Comptroller’s office reported that Texas brought in 2.7% less revenue during fiscal year 2009 than in 2008, partly because of reduced drilling and production activity. The office projects a 58% drop in natural gas tax revenue in fiscal year 2010 after 2009’s 48% drop. Lower natural gas prices are a double edged sword for the state.
• Texas added 436 megawatts of wind-power capacity in the third quarter, a significant increase in the US capacity of 31,000 megawatts. For the year, the nation has added 5,800 megawatts. For comparison, a megawatt produces enough power for several hundred average Texas homes. Texas is the overwhelming US leader in total wind capacity at 8,797 megawatts. Did you know that Iowa was second at 3,053? Interesting.
• In order to move the electricity to users, the power grid is undergoing transmission projects totaling $8.2 billion over the next five years. The Electric Reliability Council of Texas, which manages most of the state’s power grid, said that they are reviewing major expansion plans for an additional 5,729 circuit miles of transmission lines.

DFW REGION

• Commercial real estate is expected to show further pain in 2010 with an increasing foreclosure list, more tenants going dark and cutting back on spaces and with greater layoffs. We should start seeing some stabilization in 2011.
• Almost no speculative space will be built in the DFW area in 2010. This is a good thing. At some point vacancies will begin to decrease and rents will stabilize.
• The January foreclosure postings for both residential and commercial real estate were up 45% compared to last year. But a good number of those are not new but holdovers from last year.
• Housing should start to stabilize in 2010. The number of homes for sale in North Texas has fallen to its lowest in over two years. There is currently less than a six-month supply of homes priced under $250,000 on the market and just over a six month supply of homes priced between $250,000 and $500,000. A six month supply is considered normal and healthy.
• Builders started only 13,000 homes in North Texas in 2009, the lowest in two decades. The current rate of starts, about 13,200, should be close to the bottom according to Residential Strategies, Inc.
• Obviously the first-time home buyers’ tax credit has had an enormous influence on the market. It has been extended by the Obama administration and congress. What happens when interest rates go up and the credit expires?
• The DFW office market saw a huge drop in the last quarter of 2009. Net leasing was down 1.9 million square feet in 2009, the lowest since it dropped 2.9 million in 2002.
• Just over 1 million square feet of office space is under construction in North Texas according to a study done by Cushman and Wakefield. That is down from 4.2 million s/f in 2008 and almost 6 million s/f in 2007.

FORT WORTH CBD

• The downtown campus of the Tarrant County College opened its doors on the Trinity River.
• Dallas-based Hughes Development refinanced its So7 development on 7th Street just west of downtown. It will now lease residential units in addition to selling them.
• Texas Health and Centerre Rehabilitation Hospitals announced a joint venture to construct a 50-bed, 58,000 square foot rehab center in the Medical District. The $14 million facility is expected to keep locals in Fort Worth instead of sending them to Dallas.
• The $2 billion, 13-mile long North Tarrant Express will see dirt turning in late 2010 according to Cintra, the developer. It should be completed by 2015.

FORT WORTH & ALLIANCE AREA

• Alliance continues to be a huge income generator for the City of Fort Worth and the surrounding cities and towns. Hillwood says that the development has had $36.4 billion in economic impact on the area in its 20 year existence and it is only about 40% developed.
• Supermarket chain United Supermarkets has purchased 15 acres at Alliance where it is about to begin development of a 200,000 square foot distribution center to serve the North Texas area.
• National accounting and consulting firm, Deloitte, LLP has made the decision to build a $300 million training and conference facility in Westlake. The 750,000 square foot facility will have 800 guest rooms and state of the art conference center, classrooms, ballrooms and a fitness center on a 107 acre campus.

SUMMARY

Even though I am not as pessimistic as I was two years ago, I still think we have a long way to go before we get out of this economic mess we are in. Without major changes in our nation’s capital, we are likely to stay in a hunker-down mentality for most of 2010 and maybe even into 2011. We have to get out of the old “entitlement” mentality before we can get moving forward again. And I see no signs that our government is trending that way. Therefore, I believe we will have to do everything we can to get our vacant space leased and our unproductive ground put into some use that creates value or we should dispose of it. The issues with non-income producing assets are going to be huge over the next several quarters. I recommend that we attempt to raise cash with anything that is not working for us.