Short End Rates to Rise?

$2,600,000 for Unanchored Strip Center in Southern California: Our borrower built this 18,000 s.f. property in 1986. The 11 tenants include a 4,900 s.f. furniture store, a dry cleaner (with on-site processing), 2 flower stores, and other neighborhood tenants. All tenants are local businesses (no national or regional chains). Rollover: 10 tenants roll by 2008. In lieu of ongoing TI and LC reserves, lender required an up front holdback of $75,000 (which came out of loan proceeds). Terms: (1) Rate: 10 year T + 1.57%; (2) Term/Amort: 10/30; (3) LTV: 70%; (4) DCR: 2.00; (5) Lender Fee: Par; (6) Non-recourse. (Gary E. Mozer, Lee Norman, Mark Wintner, Karim Mashouf)

Short End Rates to Rise? The latest forecast from our friend, Don Straszheim, the highly respected global economist focused on the following: (1) Likes equities, but…be willing to take profits; be an active manager; be positioned for improving economics; favor some dividends; look for EPS gains to accelerate. (2) Doesn’t like bonds as he sees a stronger economy; big deficits starting to worry some investors; rates up 50 basis points on 2 yr-30 yr. Treasuries by year end; deflation story now out of fashion. (3) Rising Rates not enough to hurt the economy yet. Even the additional 50 bps. rise in rates that he predicts by early 2004 will be insufficient to hurt the economy significantly. (4) Housing will slow, but not much damage elsewhere. (5) The Interest Rate Bubble: Interest rate drop from mid-April 2003 to mid-June 2003 (92 bp on 5-year Treasury; 87 bp on 10-year; 85 bp on 30-year) was a quick bubble that never got built into business expectations. (6) The 20–year bull market in bonds? Peak yield for 10-year Treasury was 15.84% on 9-30-81,versus low yield of 3.13% on 6 -13-03. It WAS a great run; just like equities. It’s over. That was a different era. 1981: Double-digit inflation; second “oil shock;” stagnant growth and inflation (dubbed stagflation); Federal Reserve that had almost abdicated responsibility. (7) 2003 2nd half solid economic growth. He is impressed as the strength broadens out to encompass most sectors. Say goodbye to the “double-dip” crowd. 2004 is a 4% growth year; best in a while. (8) Equity advance clearly helping consumer durables, other big-ticket spending. Should start to give boost to some small-business spending as well – hiring, expansion, cap spending. (9) Housing will slow as up-tick in mortgage rates still hasn’t slowed housing but it will. Record sales pace for existing homes, up 14% from last year, with prices to match: up 12% from last year to $182,100. New home sales slipped just 2.9% in July; still strong. Mortgage rates up, but still low by last 10-15 year record. Nevertheless, we are betting against housing equities. Peak is past. (10) Slight (not major) up-tick in August consumer confidence. Consistent with consumer crosscurrents– good equities, weak jobs, low inflation, house price hikes, mortgage rate increases. (11) Ugly federal budget deficit news. Get used to it. Slow economy hurts tax receipts. Defense and homeland security costs soaring. It is the same for entitlements payments, especially on health. (12) Healthcare cost problem getting much worse and fast. No incentive for anyone to economize; big paperwork costs. This is evident in federal, state budgets; in employer costs, among elderly, uninsured. (13) European news is a little bit better, but in economics and investing, it’s all relative. Germany, France, Italy and Netherlands all had two consecutive negative GDP quarters. Gains there are likely to lag those in US over next 4 quarters. This weakness is not menu for a strengthening Euro. To Learn More About Subscribing to the Straszheim 2-Minute Drill, contact Donald H. Straszheim at info@straszheim.com,- www.straszheim.com.