Sometimes, I miss being an academic

Working Paper From St. Louis Fed:

"Time and Risk Diversification in Real Estate Investments: Assessing the Ex Post Economic Value"

Welfare gains to long-horizon investors may derive from time diversification that exploits non-zero intertemporal return correlations associated with predictable returns. Real estate may thus become more desirable if its returns are negatively serially correlated. While it could be important for long horizon investors, time diversification has been mostly investigated in asset menus without real estate and focusing on in-sample experiments. This paper evaluates ex post, out-of-sample gains from diversification when E-REITs belong to the investment opportunity set. We find that diversification into REITs increases both the Sharpe ratio and the certainty equivalent of wealth for all investment horizons and for both Classical and Bayesian (who account for parameter uncertainty) investors. The increases in Sharpe ratios are often statistically significant. However, the out-of sample average Sharpe ratio and realized expected utility of long-horizon portfolios are frequently lower than that of a one-period portfolio, which casts doubts on the value of time diversification.

Quick Links: Transportation

Ocean Shipping:

Ocean cargo/global logistics: Some vessel operators may fade away, say analysts

Drewry’s revised estimate for 2008 global container traffic growth is 152.8 million TEU (twenty-equivalent-units), representing a 7.2 percent year-on-year growth, down from the 8.6 percent they published in their previous September report, with a meager growth of 2.8 percent forecast for 2009.

PierPASS rethinks its gate-closing decision

The OffPeak program was established in 2005 to reduce congestion and air pollution in and around the Los Angeles and Long Beach ports. Under the program, all international container terminals in the two ports established five new shifts per week (Monday through Thursday from 6 p.m. to 3 a.m. and Saturday from 8 a.m. to 6 p.m.). As an incentive to use the OffPeak shifts and to cover the added cost of the shifts, a Traffic Mitigation Fee (“TMF”) is required for most cargo movement during peak hours (Monday through Friday, 3 a.m. to 6 p.m.).

Volume throughput continues to decline at the nation’s two largest ocean cargo gateways.
Beyond cost-cutting measures that marine terminal operators are already taking individually, the terminal operators are analyzing potential methods of controlling the costs of the OffPeak program, which doubled the number of weekly shifts from five to 10.

Air Cargo

While the International Air Transport Association (IATA) is reporting a 13.5 percent drop in November’s airfreight volume, the figure might be somewhat higher in Southern California, analysts told LM.

“We feel that the decline has been more like 15 percent,” said Guy Fox, president of Guy Fox & Assoc., a Yorba Linda, Calif.-based consulting firm. “Given the slack holiday retail season, it may even be worse.”

Railroads

Railroad shipping: AAR says 2008 is fourth best year on record for railroad volumes

Even with a down economy in 2008, United States railroad volumes for the year were the fourth highest on record behind 2005, 2006, and 2007, according to data released by the Association of American Railroads (AAR).

Commodity breakdown: Motor vehicles and equipment loadings were down 219, 603—or 21.2 percent—at 817,744 for the year. And crushed stone, sand, and gravel loadings were down 95,270—or 8.8 percent. Only grain, metallic ores, coal, and “all other” carloads saw annual increases, according to the AAR.

Trucking

Proposed funding for infrastucture investment falls short, according to House Transportation and Infrastructure Committee

The House’s proposed tally for transportation infrastructure investments falls well short of the $85 billion suggested by James L. Oberstar, Chairman of the House Transportation and Infrastructure Committee earlier this month. Oberstar’s plan called for: $30 billion for highways and bridges; $12 billion for transit; $5 billion for rail; $5 billion for aviation; $14 billion for environmental infrastructure; $7 billion for the U.S. Army Corps of Engineers; and $10 billion for Federal buildings.

Inland Empire Industrial: Worse in 2009?

Yesterday I had a meeting with an analyst from PNC bank, which is based in Pittsburgh.

PNC recently acquired National City Bank, which is based in Ohio.

PNC has financing for several buildings in the Ridge Property Trust (I do not remember if they originally offered the financing or assumed it from National City Bank, I am looking into that now).

He was out here to check the status of several speculative industrial buildings and some completed projects in Perris and Moreno Valley.

PNC is trying to decide if they should require Ridge to pay them more money. This is part of the de-leveraging that we all have been hearing about.

Obviously, the assumptions in the pro formas that said all this speculative space was a good idea has been proved false. Rental and sales price depreciation has made fools of us all. Few people saw this fallout coming. And if they did, nobody wanted to listen.

Almost overnight, these loans have became a lot riskier (especially if these were not your loans in the first place but were part of the bank you just bought).

The analyst is trying to feel out the market, visiting the sites, meeting the people. Things are not as nice and pretty in real life as they are on paper and there is no substitute for boots on the ground. It is getting harder and harder to quantify anything, especially when everything is changing and is changing in ugly ways.

Here is the condensed version of my argument:

2009 will not be a better year than 2008 in absolute terms. But, in relative terms, the rate at which things fall apart will be less. We have not reached the bottom, this is not the recovery period. But we are closer to what could be called a "bottom".

At face value, this is complete and utter BS, simply because I seem to be stating the obvious. A picture of the business cycle will illustrate these facts. See below:

The peak already occurred, and it occurred in December of 2007, when the recession was officially realized. Looking at the chart, we are now nearer to the trough (the bottom) than in 2008, so I am just stating the obvious.

I really hate that though. I disagree when people say that this recession will be over by such and such a date. They do not know, and their guess is just as good as anybody. It is a moving target, and it is easy to adjust as new information arrives.

What I meant to say is that, people are adjusting to the current situation. Commercials on TV are constantly advertising lower prices and are news shows are spouting on and on about these "hard economic times", simply because everyone can now agree that things are bad.

This was not the case in 2008, when it may or may not have been true and the uncomfortable surprises we only starting to occur.

In 2009, we have adjusted to the "mental recession". Our minds are no longer economically out of shape. The choices people are making now are more risk adverse and are grounded in fear.

Yesterday, borrowing money made you richer than saving it. That was true then, and only painfully ludicrous now. But it made sense then, people did it, that was the old economic reality, and the winners and losers of that game are being sorted out.

People realize they are playing a new game and are adjusting to the new rules. That is why 2009 will be better than 2008, in my opinion.

Case and point, construction activity is down severely in the Inland Empire. Rental rates are declining and vacancy rates are going up. People will adapt at a faster pace, simply because it is harder to pretend that these things are not happening.

I am not sure if this ray of sunshine was inspiring to the PNC analyst. His portfolio was grounded in the old rules, and would probably need some kind of adjustment.

Had he still been under the 2008 mindset, he would never have had to leave Pittsburgh. He could see it all on paper and would never have to personally visit the flaming wreckage that is currently the East Inland Empire industrial market.

New 4th Quarter Market Reports!

The Inland Empire and San Gabriel Valley office and industrial reports for the fourth quarter are completed. You can access them by clicking the links above.

Changes this quarter include a new 6 page Inland Empire Office layout and a new layout for the Los Angeles Basin Industrial report (to be posted later this week).

Essentially, all markets had a horrible quarter, which finished off a horrible year. For the West Inland Empire and the San Gabriel Valley industrial reports, 2008 was 4 quarters of negative net absorption and falling rents.

The landlord paradise that we have collectively been selling for the past few years is now a lie. It is a tenants market, even though the Los Angeles Basin vacancy rate is the lowest in the nation, it cannot live up to past expectations.

It was good while it lasted *sigh*

Fresh and Easy In Pasadena!?!

Comming soon!

On Lake & California, right where the shuttered Wild Oats market was.

This means I finally have an alternative to the first (and worst) Trader Joes right down the street.

Who knew that my love of a store would sprout by touring their distribution center?

All I am saying is that you can learn a lot about a company by looking at the "back office", and I liked what I saw.

NAR's Baghdad Bob Admits He Was Wrong

From Newsweek:

Former housing industry economist who famously said there was no housing bubble now admits he was wrong

David Lereah, the National Association of Realtors’ former chief economist who famously denied that the housing bubble existed even as it started to pop, is finally admitting that he was wrong.

Lereah, whose book “Why the Real Estate Boom Will not Bust and How You Can Profit From it” was published in February 2006 just before the bubble went bust, suggests in a new Money Magazine interview that his rosy outlook might have had something to do with his position as top spokesman for the Realtors. Lereah, now a private real estate consultant, says he’s bearish about the housing market and has been for a year and a half.

“I worked for an association promoting housing, and it was my job to represent their interests,” Lereah said. “If you look at my actual forecasts, the numbers were right in line with most forecasts. The difference was that I put a positive spin on it.”

The damage Lereah caused, of course, was serious, especially for the many home buyers who bought the hype. Lereah said he now expects only a modest recovery in sales activity this year.
“I was wrong,” Lereah told Money. “I have to take responsibility for that.”

UPDATE:

I just spoke with the Realtors’ current chief economist Lawrence Yun, who has also been criticized on blogs such as the “Lawrence Yun Watch” for his overly optimistic predictions.

Yun, who worked as a number cruncher for the industry group during Lereah’s tenure, said he “disassociates” himself from the way his former boss did things and is careful not to let his role as lobbyist for the group influence his work as the group’s chief economist.

“I don’t see my job as somehow spin,” Yun said. “I share the housing data and say ‘What does it mean and what it may imply about the future.’”

If people want to discount his predictions, they can, Yun said. And he doesn’t think Lereah’s admission hurts the credibility of the National Association of Realtors, though “it might hurt his [Lereah’s] credibility,” Yun said.


My take:

One of my professors (who worked in litigation) always said it was best to always tell the truth, because then you won't have to keep all your lies straight.

There is a fine line between being an economist and being an industry advocate. Often I am "requested" to alter some of the language in the reports or to give it a spin. I am more fortunate than most researchers, since my guys give me a lot of leeway and trust my numbers. Thus I can print headlines like "Worst Year Ever" as long as I can back it up.

As I talked about in an earlier post, the numbers are not the key anymore. It is the interpretation. And if you are an industry advocate, people more or less look at your work with a sense of skepticism, which is what they should do because you are lying to them because you have an agenda.

It is in balancing out the lies you are told and putting together a picture of what is really going on. Which is what I try to do.

First Post Of A New Year!

Found this pretty interesting.

The ghost of John Maynard Keynes, the father of macroeconomics, has returned.... Like all prophets, Keynes offered ambiguous lessons to his followers. Few still believe in the fiscal fine-tuning that his disciples propounded in the decades after the second world war. But nobody believes in the monetary targeting proposed by his celebrated intellectual adversary, Milton Friedman.... Now... it is easier for us to understand what remains relevant in his teaching....

Minsky... we should not take the pretensions of financiers seriously. “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.” Not for him, then, was the notion of “efficient markets”....

The economy cannot be analysed in the same way as an individual business. For an individual company, it makes sense to cut costs. If the world tries to do so, it will merely shrink demand....

I am not sure where I stand on the economic ideological spectrum, but my guess would be center-left. I am not a libertarian (the far-right) nor do I sympathize much with would-be socialists (the far-left).

I do feel that the government is part of the solution, but I suppose my belief changes depending on who is running the government.