Are We Near The Bottom

Timing markets is always a challenge, but determining the approximate timing can make a huge difference to large profits or falling into crisis. In late 2006, early 2007, several people I know had concluded that the end was very near and began to make changes in their strategy. They were already sellers and had stopped buying. The more experienced people saw what was happening in the capital markets, and the prices being paid for assets, and understood that the insanity was not sustainable. They were then in a good position through the collapse to take advantage of the opportunities that were created. We may be at one of those turning points.

While many believed we had already passed that point in 2010, and the CMBS and other capital markets, and the REITs geared up in late 2010 and early 2011, they did not bother to look at the whole world and to understand what was really going on in Europe and in Washington. In August it all became very apparent when the debt talks in Washington turned into a fiasco and national disgrace, and it became apparent that Obama has no idea how to work with Congress and to fashion a workable economic program. He is not Regan or Lyndon Johnson or even Clinton. At the same time the right wing of the Republican party is equally unable to understand economics and how to do a deal. Throw in Pelosi and Harry Reid and we get the totally dysfunctional government in America today. On top of that we have a completely dysfunctional Euro Zone structure.

Having now witnessed this disaster, it is clear that at least Europe has finally figured out that their dysfunction cannot go on any longer or these Euro Zone will collapse and several countries will become insolvent. This would lead to serious social unrest and there are people in those governments who recall their history and understand that is exactly how Hitler came to power. It seems clear now that the Europeans will find workable answers along with the IMF, and will shortly release a program that at least gets them past this crisis, recognizes that Greece has been bankrupt for takes the hit on Greek debt. Ireland seems to be getting its act together and Portugal may get through. Spain has real issues but at least is working to consolidate its banks and to try to solve some of its major problems. Italy is still hopeless until there is a real prime minister in office.

It seems that, after the August fiasco, that Congress might realize that if there is another disgusting battle over the November debt committee, that they will all be out of office. They will find an answer, even if it is not the right one, so they don’t lose their elections. That is far more important to them than doing what is right for the economy since few of them really understand what that would be.

It also appears that China is doing what it can to try to stop the rampant real estate bubble and to control inflation and irresponsible lending. Brazil at least recognizes its problems and is taking some steps to try to get control of their inflation and currency problems. They have a long way to go, but at least they know what is happening and they know they need to do something to fix it. In short, it seems that the world leaders, other than Obama, do finally recognize that they can’t just keep kicking the can, and it is past time for genuine action, or the result could be very bad for everyone.

While I do not minimize the serious problems facing the US and the world, my belief is we are in the period of bottoming right now, and while there will absolutely be many more serious crises, and the US will not get on the road to cleaning up the mess until after the election, at least we may be in a place where we do not revisit October, 2008. Growth will remain slow, unemployment will remain far too high, and the structural changes occurring due to the proliferation of the digital world will cause some companies to fail, but there is a solid base now. The major banks are well capitalized, large corporations have extraordinary cash on the balance sheet, they also have global diversity, rates are so low that consumers and corporations can reset their debts to much more manageable levels, and homeowners are refinancing to relieve some of the pressures on them. The stock market has possibly found a bottom. Investor fear is at its absolute peak right now resulting in enormous amounts of cash sitting idle, but available.

My conclusion is that these all make for a bottoming. When fear is rampant and everyone is running for cover, that is when opportunity is best. It just takes brass and a long term view. This is not a trading market. It is an true investing market. If you have a five to seven year horizon, and if you choose good assets now, then you should do very well. Things will eventually get better. Obama will lose the election. It will be Romney or Cain or both. There will be major changes for the better in the US after 2012. Europe will get through this. The Middle East will remain in chaos, but in the end it will get resolved and Iran will get dealt with. It will be very messy and ugly, lots of people will die, but in the end the good guys will prevail. Good real estate in the US, bought right today, will prove to be a solid and reasonably safe investment provided you stick to good fundamental underwriting, and use downside scenarios to determine pricing. My mother, who lived through the depression and WWII, and lots of tough times in her 100 years, always told me, “just stick with it, eventually it will all be OK”.

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Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.