Capital Ideas Newsletters


The Heavy

July/August 2014

The U.S. was named the most obese country in the world. That cannot be surprising to any of us….look at our culture. Although, it is believed that Mexico has taken the lead in last few weeks, burgers, fries, chicken nuggets, ice cream…

We are currently in an economy characterized by labor versus capital. As long as U.S. growth is around 2%, interest rates should remain low, which usually causes investors to move into risk assets. This is where those with significant balance sheets win, yes, capital wins. Labor is taxed at increasingly higher rates, which make it more difficult for the middle and lower classes to accumulate wealth.

If the U.S. economy moves toward higher growth rates, job numbers should improve, and interest rates are likely to move higher. Interest rate moves often happen in a hurry. When this occurs, being in liquid asset classes is preferable because it enables one to reallocate quickly. Sometimes, the markets will react with great speed to a new environment. Investors need the ability to act just as fast.

According to Larry Fink, Chairman of Blackrock, a big fund manager, there are 40 million student loans with an average balance of $27,000. Young Americans do not have enough savings to buy homes and pay off their student debt. This is putting a crimp in young, first time home buyers and boosting the demand for multi-family housing. According to a speech given by Sam Zell, an industry expert, multi-family housing will likely continue to grow as a larger share of all housing.

It’s not just the younger generation who cannot afford to buy homes, its older folks as well. Interest rates are at historically low levels providing very little cash flow for current retirees. In the past, amidst more normal (higher) rates, fixed income generated enough interest (and safety) for a retiree to live on, and additionally, enable the purchase of a new home in a presumably warmer location. That is not always the case today. As an example, a couple might sell their home in New Jersey and rent a condo in North Carolina using the excess capital from their sale to provide extra retirement income. This example further emboldens the argument for multifamily investments.

Although stock prices are “melting up”, some troubling signs are apparent. Stock trading volume has decreased significantly. Another statistic noted by Howard Silverblatt, Senior Index Analyst at S&P Capital IQ is that, “corporations are squeezing more out of workers, outsourcing jobs, whatever they can do – everything except generating additional sales”. Per Silverblatt, aggregate sales per share in the S&P are in their own bear territory: $2.49 billion in the first quarter of 2014, versus $2.65 billion per share in the first quarter of 2008, even as the Great Recession approached.

A survey of leading economists in the U.S. just came out with their forecast for growth. They predicted gross domestic product growth of 1.6%, well below the previous forecast of 2.5%. This would be the lowest growth rate in any non-recessionary period in 65 years.

As for low interest rates, Rick Rieder, Chief Investment Officer of Blackrock’s Fixed Income Department was quoted in The Financial Times, “There is an imbalance in supply and demand. The net supply of all fixed income is tiny, while pension funds and insurers need fixed income products. Rates are more likely to drop because of the lack of supply”.

For fiscal 2009, the U.S. budget deficit came in at $1.5 trillion – for fiscal 2014, it is $475 billion. While the treasury borrowed $800 billion last fiscal year, it is expected to borrow $550 billion in fiscal 2015 – a good trend here which we hope will continue.

The Junk market is showing signs of weakness which may be an ominous sign for “risk on” assets. Liquidity has also become a concern for this marketplace (that is, liquidity of market makers).

Geopolitical concerns weigh heavily on our hearts and potentially on the stock market. This makes it critical to keep nimble. No matter what your politics are, certainly in my lifetime, I have never seen crises on so many fronts. Climate change, health hazards (look at the Ebola outbreaks) and geopolitics have created great challenges. Hopefully, we have leaders capable of dealing with these issues.

We are monitoring earnings and world events very closely. Our hunger for excellence in our portfolios is ever present. Thanks again for being part of our family!

As always,

Seymour W. Zises

P.S. For those of you who are not clients at this time, it would be my pleasure to sit down with you and discuss your current portfolio to see if we can bring some new ideas to light. I am reachable at 212-872-9610 and

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