UPDATE APRIL 24 – Nothing new re the markets. A quick note regarding VIs – Virus Incubators. A report says that 3% of the counties in the USA account for 50% of GDP and 61% of COVID-19 cases. Until we empty the large cities and distribute our populations throughout the country, we will have disastrous societal problems. Less density is naturally better than high density.
That is it for this week. Have a great weekend and stay safe.
UPDATE APRIL 22 – Well, the talk of the week was Oil futures hitting -$40 per barrel earlier this week. I wish they would pay me to take some oil:) I am confident we can say this week saw the conclusion of a 110-120 year cycle for Oil. The next phase will see Oil soar past its prior high just below $150. I believe this will be more due to the US Dollar’s devaluation and surging inflation than supply/demand factors. BTW, June 2021 Oil Futures have stayed around $35. This gives us an indication of where the market thinks we will be in a year. That is still cheap.
A few other experts I follow (not to insinuate I am an expert….they are though) have also mentioned standing aside to watch who wins this battle between the bulls and bears. The stock market should decline significantly from these levels. But, when the world is implementing QE Infinity it is tough to overcome trillions of Dollars and Euros in buying activity. It is comforting to know others are watching this unfold from the sidelines, too.
NOTE: Next week I will post how far I believe real estate prices have declined. These are being published in Mr. Wirgler’s next Broker Log Report so I want to let that get disseminated first. I have analyzed several key indicators in a variety of ways and the data is fairly consistent. So, I am confident enough in the indications to publicize them.
My side commentary this time is about the public and how they usually get things bass ackwards. When gas prices are low, like now, I ask why aren’t people complaining about C-Store operators gouging them now? Why do people think C-Store operators are ripping them off when gas prices hit $3 or $4 per gallon? The operators have virtually no control over gas prices! When gas prices are high, they still make the typical 20 cents or less per gallon. As a percentage, their profit declines as gas prices go up! I read that right now many operators are making up to 80 cents (!!!!!!!) per gallon. Even if they were only making the normal 20 cents, the percentage would be 10%-15% versus 5% when prices are high. The time for the public to scream about C-Store operators is when gas prices are low….not high. But, no one has ever listened to this argument….so nothing will change. But, I do feel better venting:)
Some Baby Boomer humor in this regard….today is like it was when I was 16 years old – gas prices are low, but I am grounded at home:)
Make a note to come back to my blog next week to see where I think real estate prices are today.
APRIL 19 – First, I hope everyone is well. Continue to stay safe.
Stocks have been in a trading range for a few weeks. This has helped many indicators get out of extreme oversold levels. As I forecast, many analysts are taking credit for going bullish at the March lows and claiming a V-shape recovery is underway. Admittedly, we are at that point where there is some support for us being in a new Bull Market versus the Wave Theory still calling for the next wave down to be worse than what we saw in March.
The bullish case has some solid support. Amazingly, during the initial crash from near 30,000 to about 18,000 in the DOW, over 100% of the decline occurred during the gap down openings! What occurred in this time frame was extreme buying by the professionals while the public was selling. I have to admit it is tough to bet on the downside when the pros have bought while the public was throwing in the towel. Also, very difficult to fight unlimited QE. I am going to stand aside and see which way this goes. There is no stress if you are on the sidelines.
I mentioned the ETF VNB in March. It has recovered from about a 7% discount to NAV to being above NAV now. This suggests bonds have been repriced to the market’s satisfaction.
Real estate markets are starting to gel regarding forecasts. Hotels appear to be the first to show a value decline around 30%. This applies to the mid-level to upper-end hotels, especially those that have closed down. Economy hotels along interstates have not been hurt as bad. Contractors and travellers (who are those people! lol) need a place to stay.
The forecast for office buildings has very divergent opinions. One side believes that people have learned to work at home and many will not go back to the office. The positive side sees the amount of space per employee increasing drastically due to a desire for some distancing.
I have always, and continue, to disagree with the at-home work movement being successful and significant. In 1995 when I was getting my MBA, the prediction was by 2000 most people would be working from home. 25 years later this has not come to fruition. And it won’t because of this virus. Why, you ask:)
For the same reason as in 1995, humans are a social animal and we prefer to be together. Also, people like to look you in the eye when decisions are being made. What I found with email (and the blackberry, remember those) is it was a way for companies to bring work in to your personal life. Of course, they don’t want you bringing your personal life into the work day. But, having you work at home in the evenings is ok.
Employers want to have control over their employees. They want you in the office. It is not the employees choice how this plays out (Millennials will of course disagree as they think they can dictate to employers what working conditions should be….that is for sure dead now.).
Zoom and such is not a reason to expect more people to work from home. Zoom is simply a conference call. We have been able to communicate in groups for 30+ years. I had my first Zoom meeting with about 20 people last week. My observations were I am looking at a Brady Bunch intro for an hour and I am distracted by watching the faces of 20 people looking at their computer screen looking at 20 people looking at their computer screen. Not a thing has been added to the phone conference call. ((Side note….the meeting was fruitful regarding the information we all shared. But, a phone conference call would have accomplished that, too.))
Where I see videoconferencing having an effect is on business travel. I see there being two types of company meetings – IntraOffice and InterOffice (both copyrighted, April 2020). Per above, IntraOffice is not going to change. Employers are going to make their employees come in to the office. What might change is a movement back to the Baby Boomer way of doing things – having private offices and less of this common area stuff for employees to gather around and chat and whatever. You can go back to doing that at the water cooler:) So, the trend towards less square footage per employee could reverse. Maybe we will go back to needing 250-300 square feet per employee.
Obviously, I believe executive suites (temporarily known recently as shared work areas…e.g. WeWorks) are dead for another 20 years. The concept has always been on the fringe and that won’t change. I think ‘hoteling’ (I recall that starting back around Y2K with accounting firms initiating such) will be adversely affected, too. I sure wouldn’t want to go into an office that someone else has been in for the last few hours. Or at least not until someone comes in and decontaminates it!
Where I do think a permanent change is occurring is what I term InterOffice – travelling to other corporate locations around the nation or world. The current crisis has made it very difficult in the future to justify to your manager that your staff needs to go to New Orleans to have a sales meeting and brainstorm and plan for the upcoming year et al. All of that travel cost and time away from the office is going to be hard to justify in comparison to a Brady Bunch, er Zoom, meeting. This doesn’t hurt the office market. But, it does hurt the airline, rental car, taxi, hospitality, and restaurant markets.
One last argument for the plus side and one for the negative side as I write this and listen to various experts speaking (I must spend 5-8 hours a day right now just listening to various experts that predicted this crisis….can’t wait for things to calm down so I don’t have to listen to all of this every day!).
Positive – I was very surprised to hear that a survey of Millennials showed that 77% prefer learning in a classroom to online. For a generation raised on technology, this certainly shows that the human species prefers in-person interaction. Also, with my wife being a former teacher, she points out that only in-person learning will account for all the different ways individuals learn. That cannot be accomplished online. This supports the argument for an increase in office demand as employees remain in the office, but require more private space.
Negative – A demographer I was listening to said that worldwide the number of professional workers is going to decline 8% to 10% over the next decade. This directly reduces the need for office space.
As of today, that is all I know about the office and hotel markets. I always encourage you to gather all of the information you can and make your own decisions and forecasts. Do not blindly listen to the Fake News Media and the pundits they bring on. Think for yourself.
I have absorbed information on other real estate property types. But, this is already a long post. I will address the other types over the next few weeks. Hopefully, I will obtain even more information by then.
Thanks again for all that send me information they come across. I truly appreciate it and I try to digest it and put it here on my blog.
I look forward to seeing which side wins the Bear/Bull stock battle.
Lastly, one of the experts I subscribed to did a lot of math and predicts a 16.5% unemployment rate when the May 8th report comes out. I like when someone shows the math and the reasoning for a projection. We shall see how that turns out.
Stay safe and well.