Where All That Money Went (Part 1 of 3)

APRIL 30, 2010, 6:00 AM
Where All That Money Went

By UWE E. REINHARDT

Uwe E. Reinhardt is an economics professor at Princeton.

2:50 a.m. | Updated


“We’ve lost almost $11 trillion of household wealth in the last 17 or 18 months,” lamented Senator Christopher J. Dodd, the Connecticut Democrat, on last Sunday’s “Meet the Press,” as he urged Congress to proceed with speedy deliberations on a finance reform bill.

Eleven trillion dollars! That’s over three-quarters of our current gross domestic product.

Where did all this wealth go? Did other folks get it? Or did it just go up in smoke?

For that matter, what precisely is “wealth”? Is it something tangible we can see, or is it something intangible – something merely imagined?

In an illuminating paper on asset values and wealth, the economist Michael Reiter defined wealth in a way that makes sense to economists:

“Wealth” is the present value of the expected stream of future utility [human happiness] that an “infinitely lived individual or a dynasty” [or a nation] could hope to extract from the real resources available now and in the indefinite future, assuming these real resources are allocated and managed now, and over time, so as to maximize that present value of future utils (at the “proper” discount rate).

Two practical points can be extracted from this abstract definition.

First, economists think of wealth not just in monetary terms — as cash, stocks, bonds and real estate — but in terms of human well-being.

Second, and most importantly, the wealth a nation believes itself to possess is based strictly on the citizenry’s expectations about the future. It is in good part a figment of the citizens’ imagination.

To be sure, these imaginations are anchored in the tangible and intangible resources a nation has at any moment and hopes to have in the future. Among these resources are patents and blueprints that represent the current technological state of the art.

But the same set of current resources can trigger vastly different levels of imagined “wealth,” depending on the citizens’ mood.

To illustrate that these are not just the abstract musings of an econ-geek, let us look at the value of something concrete: a building. Here I draw on a tongue-in-cheek paper I once penned for Princeton alumni entitled “How Much is a Building Worth?”

What could be more real and concrete than a building?

Imagine, then, a new building that, fully leased at current rental rates, currently yields the owner $20 million in cash per year, after all of the owner’s expenses of operating and maintaining the building.

Assume the building will be in operation for 40 years, after which it will be torn down at costs that are just covered by selling the land underneath it. That assumption allows us to view the current value of the building to its owner, or to a prospective buyer, as the time-value adjusted sum of the annual net cash flows accruing to the owner(s) over the next 40 years.

The term “time-value adjusted” refers to the idea that, say, $1,000 receivable one year hence is worth less to the recipient than it is now, because something less than $1,000 could be invested today at some interest rate to grow to $1,000 a year hence.

If the relevant interest rate were 5 percent, then $952.31 would do the trick. It would grow to $1,000 in one year. The “present value of $1,000 receivable one year hence at a discount rate of 5 percent” therefore is $952.31. By similar logic, and assuming one could earn a compound-interest rate of 5 percent on money invested for 20 years now, $1,000 receivable, say, 10 years from now has a present value of only $376.89, and so on.

The graph below shows the present value of our building at different discount rates and for three assumed annual growth rates in the annual cash flow from the building. The exercise clearly shows just how sensitive the value of long-lived assets, such as an office tower, is to assumptions about the future. It can explain why Hong Kong real estate values literally fell by half as part of the Asian financial meltdown of 1997.


Uwe E. Reinhardt

The discount rate used in this exercise should be thought of as the rate of return that a prospective buyer of the building would expect minimally to earn on that investment to find the deal attractive. That rate is driven by three key factors:

• (1) what one could earn on a risk-free investment, e.g., a United States Treasury Inflation Protected Security (also known as TIPs), 
• (2) the investor’s expectations about future annual inflation rates, and 
• (3) a risk premium to compensate the investor for the perceived uncertainty inherent in investing in long-lived assets such as real estate.

It is here that mood enters the picture.

If investors are exuberantly optimistic about the future growth of the economy and future rental rates, and if they believe there is little risk in such long-term investments, the risk premiums they demand tend to be low and real estate values correspondingly high. Completely irrational exuberance of the sort we have seen in recent years can easily lead to serious “underpricing of risk” and, thus, to real estate bubbles.

On the other hand, if investors are very pessimistic and worried about the risk inherent in such investments, their risk premiums rise and asset values fall. Irrational despondency can lead to overpricing risk and underpricing real estate.

Now, what is true for real estate also applies to other assets — home values, stock prices, bond prices and so on.

So let’s go back to the lost $11 trillion in wealth lamented by Senator Dodd. Where did it go? For the most part, I suspect, it just went up in smoke. It represents a loss of wealth that once exuberant folks imagined to have had and now imagine they no longer have.

True, with its clever but untoward shenanigans, Wall Street has sucked billions of dollars out of the pockets of hard-working folks on Main Street and transferred them into the financiers’ own pockets. In this connection, merely read these articles to see how it was done.

But they didn’t amass $11 trillion. The bankers did not get that rich.

In next week’s post I will explore who creates a nation’s wealth — businesses or households or government, or all of them?


http://economix.blogs.nytimes.com/2010/04/30/where-all-that-money-went/

****Eight lessons of investing

Eight lessons of investing

I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.

By Kevin Murphy
Published: 7:31AM BST 26 May 2010

During the past 18 months we have seen unprecedented economic events, but I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.

LESSON ONE: PATIENCE IS A VIRTUE
Market sentiment can create exceptional opportunities for investors with patience. At times of market ''panic'', share prices fluctuate far more than underlying fundamentals of many businesses warrant. This creates great opportunities.

There have been many bargains over the past 18 months, Next is a particularly good example. The retailer saw share prices fall from £24 at the peak, to £8 at the trough.

This reflected investors' fears about global recession, but Next seemed a robust company with low net debt and unlikely to go bust. With shares seemingly trading at a low of four times normalised earnings this was a chance to acquire a quality business at a low price. Shares have shot back to more than £20.

LESSON TWO: IGNORE ECONOMISTS

While fund managers are frequently asked their economic views, macro-forecasting is notoriously difficult. The process relies on predicting a range of interrelated variables.

The number of economists proven wrong during this crisis highlights the scale of the challenge. There is little point forecasting economic outlook or using macro-forecasts to determine company values.

Economic growth often has an inverse relationship with subsequent stock market performance.

Research from the London Business School shows stock market returns are no higher in countries with high GDP growth and countries with low GDP growth can exhibit the best stock market performance.

This is an intuitive trend. Stock markets are discounting mechanisms that always look forward and equity markets can rally even while economic growth remains low.

LESSON THREE: CHEAP IS BEST

If macro trends are not the best indicator of stock market returns, valuation remains the surest guide to future investment performance and data illustrates that buying securities on low valuations gives the best opportunity for future returns.

Buying shares at around 5-10 times earnings, would usually see annualised returns for the next 10 years of more than 10pc. In contrast, buying shares on 25-30 times would see extremely disappointing future returns.

LESSON FOUR: GOOD COMPANIES ARE NOT ALWAYS A ''BUY''

Buying a ''good'' company at the wrong price can seriously affect overall returns.

GlaxoSmithKline, a very good company, generated earnings per share of about 50p in 1999-2000 and was trading at around £20 – equivalent to 40 times earnings.

Despite good earnings growth, it did not offer good value at that price. Ten years on, earnings have doubled while the share price has halved. The stock is more attractive now.

LESSON FIVE: IT IS THE AVERAGE THAT COUNTS

Peaks and troughs are part of operating and share price performance, but there is a tendency to revert to averages.

Companies with high profits are unlikely to generate that growth forever and companies with low profits are unlikely to be stuck in long-term ruts.

When valuing companies, strip out peaks and troughs and look at average long-term earnings potential – the intrinsic value or ''normalised'' profit potential.

Barclays' share price was about 700p in 2007, with earnings per share (EPS) of 70p. However, EPS looked unsustainably high given a ''normalised'' earnings estimate of 45p per share.

Mean reversion worked its magic and by April 2009 earnings forecasts dropped to 12p per share and shares to 50p.

Barclays faced obvious pressures, but this seemed a good company whose long-run earnings potential did not appear to have changed. The shares seemed to be trading at just one times normalised earnings – a low valuation that has corrected significantly in the past year.

LESSON SIX: DIVIDEND HISTORY IS KEY

As investors search hard for yield, it is important to note companies' long-term ability to pay dividends, rather than being swayed by short-term distributions.

Some utility companies need to increase their debt every year in order to maintain their dividend at its current level.

Conversely, a company such as AstraZeneca looks to be generating £8-9bn net cash each year, and is paying around £4bn in dividends. This is clearly sustainable and also gives the company flexibility.

LESSON SEVEN: SIZE DOESN'T MATTER

Tracking error (how different a fund looks from its benchmark index) is a widely used ''risk'' measure, but it is inappropriate to assess portfolios on this alone. Not owning a large FTSE All-Share constituent like British American Tobacco results in a higher tracking error and, theoretically, a higher 'risk'.

However, is it more or less 'risky' for investors to buy a company simply because it accounts for a large proportion of the index, and potentially overpay?

It is preferable to assess investments in terms of absolute risk, looking at

valuation risk (the risk of overpaying),
earnings risk (the risk earnings decline over time) and
financial risk (the risk of insolvency).

If an investment's potential returns significantly outweigh the balance of risks, it should be viewed as an attractive long-term opportunity, regardless of index size.

LESSON EIGHT: DON'T FOLLOW THE HERD

Willingness to go against the crowd (and for your fund to look different to the index) is fundamental for generating superior long-term returns.

Given ongoing search for yield and the disappearance of the banks as major dividend payers, many income funds have been forced into a smaller set of high yielding stocks. In many cases, these are among the biggest stocks in the market – names like BP, Royal Dutch Shell, BHP Billiton and Tesco.

This trend has left many funds in the income sector clustered in just a handful of stocks. This is not the way to produce superior performance.

Kevin Murphy is the manager of the Schroder Income Fund

http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7765851/Eight-lessons-of-investing.html

Eight lessons of investing

I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.

By Kevin Murphy
Published: 7:31AM BST 26 May 2010

During the past 18 months we have seen unprecedented economic events, but I believe the fundamentals of equity investing remain unscathed and investors should learn eight key lessons.

LESSON ONE: PATIENCE IS A VIRTUE
Market sentiment can create exceptional opportunities for investors with patience. At times of market ''panic'', share prices fluctuate far more than underlying fundamentals of many businesses warrant. This creates great opportunities.

There have been many bargains over the past 18 months, Next is a particularly good example. The retailer saw share prices fall from £24 at the peak, to £8 at the trough.

This reflected investors' fears about global recession, but Next seemed a robust company with low net debt and unlikely to go bust. With shares seemingly trading at a low of four times normalised earnings this was a chance to acquire a quality business at a low price. Shares have shot back to more than £20.

LESSON TWO: IGNORE ECONOMISTS

While fund managers are frequently asked their economic views, macro-forecasting is notoriously difficult. The process relies on predicting a range of interrelated variables.

The number of economists proven wrong during this crisis highlights the scale of the challenge. There is little point forecasting economic outlook or using macro-forecasts to determine company values.

Economic growth often has an inverse relationship with subsequent stock market performance.

Research from the London Business School shows stock market returns are no higher in countries with high GDP growth and countries with low GDP growth can exhibit the best stock market performance.

This is an intuitive trend. Stock markets are discounting mechanisms that always look forward and equity markets can rally even while economic growth remains low.

LESSON THREE: CHEAP IS BEST

If macro trends are not the best indicator of stock market returns, valuation remains the surest guide to future investment performance and data illustrates that buying securities on low valuations gives the best opportunity for future returns.

Buying shares at around 5-10 times earnings, would usually see annualised returns for the next 10 years of more than 10pc. In contrast, buying shares on 25-30 times would see extremely disappointing future returns.

LESSON FOUR: GOOD COMPANIES ARE NOT ALWAYS A ''BUY''

Buying a ''good'' company at the wrong price can seriously affect overall returns.

GlaxoSmithKline, a very good company, generated earnings per share of about 50p in 1999-2000 and was trading at around £20 – equivalent to 40 times earnings.

Despite good earnings growth, it did not offer good value at that price. Ten years on, earnings have doubled while the share price has halved. The stock is more attractive now.

LESSON FIVE: IT IS THE AVERAGE THAT COUNTS

Peaks and troughs are part of operating and share price performance, but there is a tendency to revert to averages.

Companies with high profits are unlikely to generate that growth forever and companies with low profits are unlikely to be stuck in long-term ruts.

When valuing companies, strip out peaks and troughs and look at average long-term earnings potential – the intrinsic value or ''normalised'' profit potential.

Barclays' share price was about 700p in 2007, with earnings per share (EPS) of 70p. However, EPS looked unsustainably high given a ''normalised'' earnings estimate of 45p per share.

Mean reversion worked its magic and by April 2009 earnings forecasts dropped to 12p per share and shares to 50p.

Barclays faced obvious pressures, but this seemed a good company whose long-run earnings potential did not appear to have changed. The shares seemed to be trading at just one times normalised earnings – a low valuation that has corrected significantly in the past year.

LESSON SIX: DIVIDEND HISTORY IS KEY

As investors search hard for yield, it is important to note companies' long-term ability to pay dividends, rather than being swayed by short-term distributions.

Some utility companies need to increase their debt every year in order to maintain their dividend at its current level.

Conversely, a company such as AstraZeneca looks to be generating £8-9bn net cash each year, and is paying around £4bn in dividends. This is clearly sustainable and also gives the company flexibility.

LESSON SEVEN: SIZE DOESN'T MATTER

Tracking error (how different a fund looks from its benchmark index) is a widely used ''risk'' measure, but it is inappropriate to assess portfolios on this alone. Not owning a large FTSE All-Share constituent like British American Tobacco results in a higher tracking error and, theoretically, a higher 'risk'.

However, is it more or less 'risky' for investors to buy a company simply because it accounts for a large proportion of the index, and potentially overpay?

It is preferable to assess investments in terms of absolute risk, looking at 

• valuation risk (the risk of overpaying), 
• earnings risk (the risk earnings decline over time) and 
• financial risk (the risk of insolvency).

If an investment's potential returns significantly outweigh the balance of risks, it should be viewed as an attractive long-term opportunity, regardless of index size.

LESSON EIGHT: DON'T FOLLOW THE HERD

Willingness to go against the crowd (and for your fund to look different to the index) is fundamental for generating superior long-term returns.

Given ongoing search for yield and the disappearance of the banks as major dividend payers, many income funds have been forced into a smaller set of high yielding stocks. In many cases, these are among the biggest stocks in the market – names like BP, Royal Dutch Shell, BHP Billiton and Tesco.

This trend has left many funds in the income sector clustered in just a handful of stocks. This is not the way to produce superior performance.

Kevin Murphy is the manager of the Schroder Income Fund

http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7765851/Eight-lessons-of-investing.html

Double-dip fears over worldwide credit stress

Double-dip fears over worldwide credit stress

The global credit system is flashing the most serious warning signals in almost a year on triple fears of a Spanish banking crisis, escalating political risk in Asia, and a second leg to the US housing slump.

By Ambrose Evans-Pritchard
Published: 9:20PM BST 25 May 2010

Flight to safety drove yields on 10-year German Bunds to 2.56pc, below the levels touched in the depths of the Great Depression. The spreads over peripheral European debt rose sharply again, jumping to 137 basis points for Italy, 157 for Spain and 220 for Ireland.

The strains in Europe's sovereign debt markets are nearing levels that forced EU leaders to launch their "shock and awe" rescue package. "If a $1 trillion (£700bn) bail-out did not finally turn sentiment, I struggle to see what can," said Tim Ash, an economist at RBS.

Dollar Libor rates gauging stress within the interbank lending market have jumped to a 10-month high of 0.5363pc, with credit contagion spreading to every area. The iTraxx Senior financials index – banks' "fear gauge" – rose 20 basis points on Tuesday to 184. "It turns out we weren't seeing the light at the end of the tunnel after all, but a train with a big light on it coming towards us of double-dip," said Dr Suki Mann, at Societe Generale.

While the Libor rate is still far below peaks reached during the Lehman crisis, the pattern has ominous echoes of credit market strains before the two big "pulses" of the credit crisis in August 2007 and September 2008. In each case a breakdown of trust in the interbank market was a harbinger of violent moves in equities and the real economy weeks later.

RBS's credit team said Libor strains were worse than they looked since most banks in Europe were paying much higher spreads, especially in Spain. The "implied" forward spreads were nearer 1.1pc.

The damage has spilt over to corporate bonds, effectively shutting the market for new issues. May will be the worst single month for debt issues since December 1999, with seven deals being cancelled in recent days. Volume has collapsed to $47bn from $183bn in April, according to Bloomberg.

Mr Ash said North Korea's decision to cut all ties with the South and abrogate its non-aggression pact – coming days after Thailand sent tanks into Bangkok to crush the Red Shirts – has played into the chemistry of angst gripping markets, adding it was a reminder that Asia has "political/social stress points". This risk was overlooked during the honeymoon phase of emerging markets when investors were intoxicated by the China story.

Fears that America may slip back into a double-dip recession are returning. Larry Summers, the White House economic tsar, has called for a second stimulus package to keep the recovery on track, warning that the US economy is still in a "very deep valley".

The S&P Case-Shiller index of home prices is declining again as incentives for homebuyers expire and the slow-burn effect of rising delinquencies exacts its toll. Prices fell 3.2pc in the first quarter of this year. "There are signs of some renewed weakening in home prices", said David Blitzer from S&P.

The epicentre of the credit crisis is moving to Spain where the seizure by the central bank of CajaSur over the weekend has torn away the veil on credit damage from Spain's property crash.

Bank stocks fell 6pc in Madrid in early trading on Tuesday on fears that funding will dry up for the cajas – or the savings banks – setting off a broader credit crunch. The cajas hold the lion's share of loans to property companies and developers, estimated at €445bn (£380bn) or 45pc of GDP by Goldman Sachs.

Spanish construction reached 17pc of GDP at the height of the bubble as real interest rates of minus 2pc set by the European Central Bank for German needs played havoc with the Spanish economy. This was almost double the level in the US during the sub-prime booms. The result is an overhang of unsold Spanish properties equal to four years' demand.

Markets have been rattled by reports in the German media that the Greek rescue deal contains two secret clauses. The package will be "immediately and irrevocably cancelled" if it is found to breach the EU Treaty's "no bail-out" clause, either in a ruling by the European court or the constitutional courts of any eurozone state. While such an event is unlikely, it is not impossible. There are two cases already pending at Germany's top court in Karlsruhe, perhaps Europe's most "eurosceptic" tribunal.

The second clause said that if any country finds it cannot raise funding for the rescue at interest rates below the 5pc charge agreed for Greece, it may opt out of the bail-out. BNP Paribas said this would escalate quickly into a systemic crisis if Spain were in such a position, because the other countries cannot carry an ever-rising burden. The bank warned the euro project itself may start to disintegrate rapidly if these rescue provisions are ever seriously put to the test.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7765383/Double-dip-fears-over-worldwide-credit-stress.html

STRATEGY & INNOVATION May 26, 2010, 4:40PM EST

How to Succeed at M&A

All too often, mergers and acquisitions fail dismally. That, says Innosight's Mark Johnson, is because executives don't understand what they're really buying

By Mark W. Johnson

Companies constantly seek new growth opportunities, but organic new growth is far from a sure bet. While business model innovation is a powerful path to sustained, robust growth, new businesses can take years to mature. The skills needed to conceive and incubate them present a unique set of challenges that many companies find difficult to overcome. "A large enterprise has trouble making an investment in innovation," says Brad Anderson, the recently retired CEO of electronics retailer Best Buy (BBY). "It's in part because Wall Street has trouble imagining a new way to operate but, more important, because people inside the company can't see the value of a new idea and so won't allocate the resources and support the new initiative needs to succeed."

But organic growth is not the only option available to companies seeking transformational growth. Though most of my book Seizing the White Space: Business Model Innovation for Growth and Renewal is dedicated to developing new business models within incumbent organizations, I don't mean to imply that incumbent companies shouldn't seek to achieve transformative growth and exploit opportunities in their white space through mergers and acquisitions—they should. Building models in-house is not the only option for companies seeking transformational growth. Corporations can transform their business models through acquisitions as well. When Anderson took over Best Buy, in fact, he led the company through a series of strategic acquisitions that helped it grow beyond a pure retail sales model.

But it's no news to point out that acquisitions, at the best of times, are tricky. Study after study finds that acquisitions tend to disappoint, variously estimating that half to as many as 80 percent fail to create value. The high-profile struggle of AOL (AOL) after its $180 billion acquisition of Time Warner (TWC) is one obvious example of an acquisition gone bad. But there are others: Daimler/Chrysler, Sprint/Nextel, and Quaker Oats/Snapple, to name only a few. Quaker Oats paid $1.7 billion for the Snapple brand in 1994 but sold it to Triarc three years later for a mere $300 million.

BUSINESS MODEL DEVELOPMENT

I believe many M&A disappointments stem from a failure to understand the fundamentals of business model development. When one company buys another, what it's really purchasing is the target company's business model—its customer value proposition, its profit formula, its resources, and its processes. The new company's resources can be folded into the core of the acquiring company, but new business models resist such integration. Consequently, successful acquisitions tend to fall into one of two camps. 

• An acquirer can buy a company solely for its resources, which it would then fold into its own business model, while jettisoning the rest. The bulk of Cisco's (CSCO) acquisitions follow that pattern. 
• Alternatively, a company can seek to acquire another company's business model, which it then needs to keep separate, but can strengthen by injecting into it its own resources. That's what Best Buy did with Geek Squad.

Johnson & Johnson (JNJ) has understood this, buying business models at an early stage and then keeping them separate. For example, its Medical Devices & Diagnostics (MD&D) division bought three business models that were fundamentally new to its respective markets: Vistakon (disposable contact lenses), LifeScan (at-home diabetes monitoring), and Cordis (artery stents used in angioplasty procedures). J&J bought these companies young and incubated them into the larger enterprise, where they became the growth engine of the MD&D division for many years.

All too often, attempts to fold an acquired business into the core can kill what made it unique in the first place. Video game maker Electronic Arts (ERTS) learned this the hard way. Propelled by investor expectations, rising development costs, and an industry consolidation trend, EA aggressively bought up small companies led by creative teams that had found success in the market. To profit from anticipated economies of scale, it built up a standardized technical infrastructure and imposed streamlined production processes on its new acquisitions.

The results were abysmal. EA fell into a pattern of producing mediocre products based on movie licenses and sports franchises, which were updated each year. Forcing creative teams to follow core processes was killing their innovative spirit. Luckily, CEO John Riccitiello saw the writing on the wall and announced a sea change in EA's operations: Independent creative studios would operate as "city-states" within the EA corporate structure.

ACQUIRED MODEL TAKES WHAT IT NEEDS

Most of the principles that govern the incubation, acceleration, and transition of homegrown new business models apply to acquired ones as well. Equally important is leadership's ability to allow a newly acquired business model to pull what it needs from the core, rather than having elements of the core model pushed onto it. Best Buy's Brad Anderson expressed this idea succinctly when, referring to the Geek Squad deal, he said, "Geek Squad bought Best Buy, not the other way around."

Anderson knew that the new model would produce growth and transformation for the company, but he also knew that the low-margin, high-volume, retail mentality of Best Buy could easily suffocate the high-touch, high-margin service orientation of Geek Squad. He let Geek Squad pull from Best Buy what it needed to thrive. At the time of acquisition, Geek Squad had 60 employees and was booking $3 million in annual revenue. Today, working out of 700 Best Buy locations across North America, Geek Squad's 12,000 service agents clock nearly $1 billion in services and return some $280 million to the retailer's bottom line.

As Vijay Govindarajan and Chris Trimble noted in Ten Rules for Strategic Innovators, a newly acquired business based on a model distinct from the core should decide what it can borrow from the parent, what it should forget (or forget about), and what it will do or learn that is completely new. The key to understanding what to forget and what to learn lies in the business model. You must understand both your own business model and the new company's model completely, so you won't throw away the most valuable thing you bought—the very thing that will help your company grow.

Mark W. Johnson is Chairman and Co-Founder of innovation consulting and research firm, Innosight. He is the author ofSeizing the White Space: Business Model Innovation for Transformative Growth and Renewal, (Harvard Business Press, February 2010) and a co-author of The Innovator's Guide to Growth (Harvard Business Press, July 2008).

http://www.businessweek.com/innovate/content/may2010/id20100525_156769.htm

Dow slipped below 10,000

US stocks fall as China reviews holdings
May 27, 2010 - 7:06AM

Wall Street staged yet another late-day reversal on Wednesday to end lower as news suggesting China was reassessing its euro-zone debt holdings pushed investors into profit-taking mode.

The Dow slipped below 10,000, with the late turnaround in stocks showing investor psyche remains fragile, and investors are inclined to sell strength in this volatile rumor-driven market.

The Financial Times said representatives of China's State Administration of Foreign Exchange, which manages the reserves under the country's central bank, has been meeting with foreign bankers in Beijing in recent days to discuss the issue.

What you need to know

"There is still nervousness out there. Yesterday's turnaround does not mean the market correction is over or that investors are confident about the direction of European policy or the success of European policy," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

The S&P 500 has fallen more than 10 percent from a closing high on April 23, putting the benchmark index into correction territory.

Large-cap liquid holdings, including Microsoft Corp and McDonald's Corp, led the Dow lower as the software giant's stock dropped 4.1 per cent to $US25.01 and the fast-food restaurant operator lost 2.7 per cent to $US66.01. At the same time, Apple Inc, which shed 0.5 per cent to $US244.11, managed to surpass Microsoft to become the second- largest company in market cap behind Exxon Mobil Corp.

The Dow Jones industrial average dropped 69.30 points, or 0.69 per cent, to 9974.45. The Standard & Poor's 500 Index fell 6.08 points, or 0.57 per cent, to 1067.95. The Nasdaq Composite Index lost 15.07 points, or 0.68 per cent, to 2195.88.

Late-day volatility has been a hallmark during the recent slide on Wall Street, with investors quick to pull the trigger at the slightest provocation. On Tuesday, Wall Street staged a furious rally toward the end of trading to reverse initial declines of more than 3 per cent.

"It really seems like the same old thing," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.

"This is the kind of intraday volatility that we will be seeing continuously."

Earlier in the session, data showed sales of new US homes hit their highest level in nearly two years in April as buyers rushed to take advantage of an expiring government tax credit.

The Dow Jones US Home Construction Index added 0.3 per cent, while the PHLX Housing Sector Index edged up 0.2 per cent.

Luxury home builder Toll Brothers Inc gained 0.8 per cent to $US20.78 after it said its quarterly loss narrowed from the previous year.

Elsewhere on the economic front, orders for durable goods rose in April to their highest level since September 2008.

Volume was solid, with about 12.44 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq -- well above last year's estimated daily average of 9.65 billion.

Advancing stocks outnumbered declining ones on the New York Stock Exchange by a ration of about 3 to 2, while on the Nasdaq, nearly five stocks rose for every four that fell.

Reuters

A quick look at IOI (26.5.2010)

A quick look at IOI (26.5.2010)
http://spreadsheets.google.com/pub?key=t6k-5R8Ct5ImEhMAU1ZokUA&output=html

A quick look at KLK (26.5.2010)

A quick look at KLK (26.5.2010)
http://spreadsheets.google.com/pub?key=tiqZWoM_oZRjfGawqsN8J8w&output=html

A quick look at 3A Resources (25.5.2010)

A quick look at 3A Resources (25.5.2010)
http://spreadsheets.google.com/pub?key=t5sIgC4RjUfn6WTFOcjH0Jg&output=html

A quick look at Lion Diversified (25.5.2010)

A quick look at Lion Diversified (25.5.2010)
http://spreadsheets.google.com/pub?key=t81VR7MgWn4jn2yIKdVNceg&output=html

In Europe, Britain May Face Largest Debt Hurdle

In Europe, Britain May Face Largest Debt Hurdle
By LANDON THOMAS Jr.
Published: May 24, 2010


LONDON — As governments from Greece to Portugal to Spain try to sell markets on their budget-cutting zeal, the country that may face the biggest hurdle is Britain.

Propelled by a robust economy that finally collapsed in 2008, Britain’s spending boom was the most expansive in Europe, producing a welter of shiny hospitals, school buildings and highways, along with a cadre of well-paid public sector officials.

Now the new government must unwind not so much the debt incurred from two years of economic stimulus efforts, but more broadly, the structural deficits built up over more than a decade of expanded health care, education and pension commitments.

Prime Minister David Cameron has talked boldly of closing a British budget deficit now equal to 11 percent of its gross domestic product. But he also has said that he will allow health spending to outpace inflation, continuing a trend started by the Labour government that has doubled the cost of the government’s elephantine National Health Service since 2000.

It is this apparent disconnect between the promises of politicians and the harsh demands of investors for immediate and across the board spending cuts that is at the root of the financial crisis in Europe today.

Even after the nearly $1 trillion rescue package arranged by European Union leaders to shore up the weaker euro zone members, financial markets have gyrated as fears build that debt-plagued nations lack the will to stand up to powerful unions and pare back once generous welfare programs.

“You need a martyr to cut this type of deficit,” said Andrew Lilico, chief economist at Policy Exchange, a right-leaning London research group, who has argued that quick and immediate spending cuts would actually hasten economic recovery rather than derail it.

“You need someone to say, ‘I will do the right thing and everyone will hate me.’ ”

According to a recent analysis by Citigroup, Britain’s structural deficit — meaning the part of the budget gap that will not close even when the economy improves — was 9.2 percent of G.D.P. last year, ranking third in the world behind rapidly aging Japan and almost bankrupt Greece.

As is the case with other countries in Europe, like Spain, Greece and Ireland, Britain has a deficit that has grown mostly because of a decade of rising government outlays that seemed reasonable at the time, but rested heavily on rising tax revenue that disappeared when the bubble burst.

In a recent report, the International Monetary Fund warned that the countries that would have to make the biggest sacrifices in spending cuts and tax increases to return to precrisis levels of indebtedness — Britain, France, Ireland, Spain and the United States — also face the biggest increase in spending demands. These are driven by the rising number of the elderly, thus making the cuts all the harder to impose.

“All developed economies now have in-built structural components in their government deficits due to having pension and health systems and aging populations,” said Edward Hugh, an independent economist based in Barcelona. “And these costs will go up by the year.”

The British chancellor of the Exchequer, George Osborne, who has long urged the Conservative Party to trim the deficit, said on Monday that he would push through £6 billion ($8.65 billion) in spending cuts.

Though decidedly modest when compared with a budget deficit estimated to be about £178 billion, the cuts represent an effort to convince skittish markets that Mr. Cameron’s team is committed to fiscal restraint.

The latest menu of restrictions, freezes and spending reversals also represents an effort to convince the public that Britain must be in tune with the budget-cutting in Greece, Portugal, Spain and other parts of Europe.

“The years of public sector plenty are over,” Mr. Osborne said. “The more decisively we act, the more quickly we can come through these tough times.”

Mr. Cameron has fulminated publicly about cutting public sector pay and decreed that members of Parliament themselves take a 5 percent pay cut.

But it remains unclear whether he can force significant savings in what has become in many respects a public sector aristocracy of elite civil servants, heads of national railroads and top officials of obscure agencies, like the National Policing Improvement Agency and the Horserace Betting Levy Board. The heads of those two agencies, for example, were paid salaries last year that exceed Mr. Cameron’s pay of £197,000 (about $284,000) — £211,831 and £220,665, respectively.

Among the highest paid have been administrators and doctors within the country’s government-financed National Health Service, which has become its own separate economy with its 1.7 million employees and £100 billion plus budget.

For example, David Taube, a doctor, administrator and medical director for five hospitals comprising the Imperial College Healthcare N.H.S. Trust, was paid £260,000 (about $375,000) at the exchange rates last year. That is also more than the prime minister received.

According to the TaxPayers’ Alliance, an advocacy group for spending cuts, the highest-paid 805 government employees in Britain received a 5.4 percent pay increase last year, with the average official taking in £209,224.

Whether it be the £1.3 million paid to the chief executive of the Royal Mail, the £267,000 for the head of information technology in the Department for Work and Pensions, or the £270,000 earned this year by the chief executive of the Guy’s and St. Thomas Hospitals in London, the galloping pay of public sector workers in Britain has become a major component of the structural deficit and shows little sign of letting up.

“We have been doing this for five years now, and the numbers just get bigger and bigger,” said John O’Connell, an analyst at the TaxPayers’ Alliance.

Starting in 2000, the Labour government made it a priority to improve the N.H.S.’s lackluster reputation and invested billions in bricks and mortar as well as the salaries of its growing ranks of doctors and administrators.

Health care spending in Britain soared to 9 percent of G.D.P. from 3 percent. The image of the service has been transformed from one that exemplified drab inefficiencies of the British state to what is now hailed as a world archetype, even by Conservative politicians like Mr. Cameron.

As for Dr. Taube, a spokeswoman for the Imperial College Healthcare N.H.S. Trust said that he was a leading renal clinician and that the bulk of his salary, £180,000 to £185,000, came from his clinical work. He was paid an additional £75,000 to £80,000 for his administrative duties.

Now the new government must wrestle with whether it can restrain such pay and spending and at what political cost.


http://www.nytimes.com/2010/05/25/business/global/25debt.html?src=me&ref=business

Wall Street Slips and Then Recovers

By CHRISTINE HAUSER
Published: May 25, 2010


Wall Street traveled a long way on Tuesday, but the journey was circular.

Uncertainty in Europe and Asia spilled over into the American market Tuesday, pushing stocks lower for most of the day and stirring concerns that the debt crisis could stall a recovery.

The Dow tumbled at the opening and languished below 10,000 until the last half hour, when shares staged a comeback. At one point, the major indexes were down more than 2 percent losses.

The Dow ended mostly flat, down 0.2 percent, or 22.82 points, at 10,043.75. The Standard & Poor’s 500-stock index was 0.38 points, 0.04 percent, higher at 1,074.03. The Nasdaq slipped 2.60 points, or 0.1 percent, at 2,210.95.

The drop followed equity markets in Asia and Europe, where most major markets were down at least 2 percent.

As investors had feared for months, the uncertainty over the sovereign debt crisis in Europe exacerbated concerns about the health of the global economy.

“If there was a doubt about it, there isn’t any more,” said Marc Chandler, the global head of currency strategy for Brown Brothers Harriman & Company.

“The European debt crisis is not simply a Greek phenomenon,” he said in a research note.

Fiscal troubles have circulated in Greece, reached Spain, where the central bank has taken over a failing lender, and hit home in Portugal, which has taken steps to make cuts. The government in Italy was also announcing spending cuts.

Germany, which last week banned some forms of financial market speculation in banning naked short-selling, went further Tuesday, proposing a law that would broaden restrictions on instruments investors use to bet against stocks, bonds and currencies.

As the American markets tumbled, investors fled equities for the relative safety of United States securities, pushing the benchmark 10-year Treasury note lower to 3.14 percent, its lowest level in a year.

The president of the St. Louis Federal Reserve Bank, James B. Bullard, said in a speech in London that he did not think the current situation would lead to a repeat of the financial crisis seen after the collapse of Lehman Brothers in 2008.

The United States “may actually be an unwitting beneficiary of the crisis in Europe, much as it was during the Asian currency crisis of the late 1990s.”

“This is because of the flight to safety effect that pushes yields lower in the U.S.,” he said. “Of course the U.S. also has its own fiscal problems that must be directly addressed in a timely manner if the nation is to maintain credibility in international financial markets.”

He also addressed concerns that the crisis could lead to a recession, saying it would probably fall short of becoming “a worldwide recessionary shock,” partly because governments are working to contain the risks. “In most cases,” Mr. Bullard said, “there is little reason to think that such events by themselves have the power to trigger global recessions.”

“Of course, it is always possible that ‘this time will be different’ and maybe it will be,” he said

There were also renewed tensions on the Korean Peninsula.

President Lee Myung-bak of South Korea said Tuesday that he would redesignate North Korea as his country’s archenemy, as the South Korean and American militaries announced plans for major naval exercises.

Asian indexes closed lower as a result.

Adrian Cronje, chief investment officer of Balentine, said however, that problems on the Korean peninsula aside, the fiscal troubles in Europe were overriding confidence.

Mr. Cronje said markets needed more than the nearly $1 trillion European support package to restore confidence. Instead, he said, investors are looking for a credible plan for sustainable public finances in Europe.

“What is happening now is people are starting to wake up to the fact that this stands a chance of derailing the robust economy,” Mr. Cronje said.

The euro continued to weaken on Tuesday, falling to $1.2347 from $1.2371 late Monday.

“The fundamental fallout of all this is an increasing risk of recession again in the U.S. and global economies,” said Allen Sinai, president and chief global economist of Decision Economics Inc.

“The way the U.S. is getting hit at the moment is sneaking in via the stock market. It is like water flooding the house; water seeps, finds a way.”

Domestic economic indicators were watched closely for any sign that events in the Euro-zone were having an impact on the United States, said James O’Sullivan, chief economist for MF Global.

The Standard & Poor’s/Case-Shiller 20-city home price index released Tuesday showed a 0.5 percent drop in March compared to February, a sign that the housing market was weakening despite low mortgage rates and government tax credits.

But more important than the March housing statistics were more current figures showing consumer confidence rose this month, Mr. Sullivan said,

The Conference Board index of consumer confidence rose to 63.3 in May, from 57.7 in April, according to a report released Tuesday.

“The decent rise in U.S. consumer confidence in May suggests that the turmoil in financial markets and lower house prices have yet to have an impact on the real economy,” said Paul Dales, United States economist for Capital Economics.

Interbank lending is coming under increasing pressure. Conditions in the credit markets deteriorated further on Tuesday, with the London interbank offered rate, or Libor, for three-month dollar loans rising for a 12th consecutive day, to 0.53625 percent from 0.50969 percent Monday. It was the Libor’s highest rate since late July 2009.

Bettina Wassener, David Jolly and Sewell Chan contributed reporting.

http://www.nytimes.com/2010/05/26/business/26markets.html?src=me&ref=business

The New Touch-Face of Vending Machines

The New Touch-Face of Vending Machines

By STEPHANIE ROSENBLOOM 

At a hotel in Abu Dhabi, a cash machine dispenses gold. Futuristic vending machines are proliferating, selling high-end products, and not for small change

A quick look at Coastal (25.5.2010)

A quick look at Coastal (25.5.2010)
http://spreadsheets.google.com/pub?key=taWOgEdJSr517zWzGn9LnQA&output=html

FBM KLCI falls for eighth day running

FBM KLCI falls for eighth day running
Written by Surin Murugiah
Tuesday, 25 May 2010 10:40


KUALA LUMPUR: The FBM KLCI extended its losses for the eighth straight day on Tuesday, May 25, dragged by losses at key blue chips and banking counters.

On Wall Street, stocks slid on Monday, May 24, driving the Dow to its lowest level since Feb 10 as fresh signs of Europe's banking problems emerged, according to Reuters.

Concerns about Europe's banking system continued to weigh on markets, after the Bank of Spain took over a small savings bank, CajaSur, over the weekend, increasing anxiety among investors worried about debt problems spreading throughout financial markets, according to Reuters.

The Dow Jones industrial average dropped 126.82 points, or 1.24%, to 10,066.57. The Standard & Poor's 500 Index slipped 14.04 points, or 1.29%, to 1,073.65. The Nasdaq Composite Index fell 15.49 points, or 0.69%, to 2,213.55.

At mid-morning Tuesday,

• Japan's Nikkei 225 fell 2.37% to 9,526.67, 
• South Korea's Kospi lost 2.63% to 1,562.73, 
• Taiwan's TAIEX Index fell 2.02% to 7,175.14, 
• Singapore's Straits Times Index fell 1.12% to 2,693.29, 
• Shanghai's Composite Index down 0.86% to 2,650.20 while 
• Hong Kong's Hang Seng Index opened 1.8% lower at 19,317.14.

Maybank Investment Bank Bhd head of retail research and chief chartist Lee Cheng Hooi in a note to clients advised them to remain vigilant of a potential damaging and sustained bear trend in the coming months.

He said the euro zone crisis and the Dow Jones and European equity market malaise would persist, and it was best for investors to turn defensive and remain in over 90% cash at least.

"Recent price movements and global volatility suggest that investors should shy away from the FBM KLCI.

"We advise clients to sell and step aside for the next few months, as we believe that the market might revisit 801.27 and possibly 626.50 in the longer term," he said in a note Tuesday.

At 10am, the FBM KLCI fell 10.93 points to 1,262.76, dragged by losses at key blue chips including CIMB, Genting, PPB and Tanjong.

Losers thumped gainers by 322 to 62, while 143 counters traded unchanged. Volume was thin with 108.61 million shares valued at RM173.58 million.

Among the major losers in early trade, DiGi fell 42 sen to RM22.48, PPB Group down 32 sen to RM15.88, KLK 20 sen to RM15.60, Genting and Hartalega down 13 sen each to RM6.41 and RM7.60, while Tanjong fell 12 sen to RM17.34.

Among banking stocks, Hong Leong Bank lost 11 sen to RM8.44, and CIMB, Public Bank and Maybank fell six sen each to RM6.76, RM11.46 and RM7.19, respectively.

Meanwhile, Sime and IOI Corp lost eight sen each to RM7.73 and RM4.80, respectively.

Gainers included Petronas Gas that added 13 sen to RM9.79, HELP up 11 sen to RM2.34 and UEM Land up one sen to RM1.34.

CIMB, IOI Corp, UEM Land, Genting and Berjaya Corp were among the most actively traded counters.

http://www.theedgemalaysia.com/business-news/166709-fbm-klci-falls-for-eighth-day-running-.html

A quick look at Petdag (25.5.2010)

A quick look at Petdag (25.5.2010)
http://spreadsheets.google.com/pub?key=tJvGV-4QVGoRFu1hPL2GHDA&output=html

A quick look at Parkson (25.5.2010)

A quick look at Parkson (25.5.2010)
http://spreadsheets.google.com/pub?key=tXVsOu0LzdXykg2thm_IQrA&output=html

Shares tumble as all the bears come out

Shares tumble as all the bears come out
May 25, 2010 - 4:15PM

Australian shares tumbled today, hitting fresh nine-month lows as investors remain spooked by euro-zone instability, while rising tensions on the Korean peninsula also discouraged buyers.

The benchmark S&P/ASX200 index closed down 130.1 points, or 3 per cent, at 4265.3, its lowest close since August. The broader All Ordinaries index was off 126.5 points, or 2.9 per cent, at 4286.3.

At home, all the major sub-indexes were down, with energy shares off 3.9 per cent, materials down 3.7 per cent and financials slumping 3 per cent.

The Aussie dollar also resumed its retreat, dropping nearly 2 US cents to sink to 81.3 US cents.

About $150 billion has been wiped from the market this month, with the All Ordinaries off 11 per cent so far - the biggest slide since October 2008 when the collapse of US investment bank Lehman Brothers sent financial markets into a tailspin.

Europe's fumbling response to a debt crisis in Greece and bulging deficits in other euro-zone countries has unnerved markets, and the central bank takeover of a small Spanish lender at the weekend stoked the latest fears of a wider meltdown.

Across the region, other major markets were also sharply lower. South Korea's Kospi Index was down 4.3 per cent after a report said North Korea ordered its military to prepare for war last week. Japan's Nikkei 225 was off 2.7 per cent, with the benchmark indexes in Hong Kong and Singapore both down more 2 per cent.

“It appears that every single bear in Asia is emerging from its caves. It’s the complete reversal of what we’re seeing yesterday,” said Arab Bank Australia treasury dealer David Scutt. “Banks are being smacked. Commodity producers are being smacked. An all-around bad day for the markets.”

Also, short-term banks bill futures were selling off, Mr Scutt said.

"This is another sign that markets are wary of another liquidity crisis forming and mirrors the increase in Libor rates seen overnight in London."

Libor, the three-month US dollar London interbank offered rate - a key measure of the health of the credit markets - rose to 0.5 per cent overnight, the highest since July 2009. The increase suggests that there is growing caution among banks about lending to each other. Libor hit 3.6 per cent at the end of 2008, during the height of the financial crisis.

“Worryingly, the same feature was seen in the months leading up to and following the collapse of Lehman Brothers in 2008.”

Blue chips tumble

The world’s biggest miner, BHP Billiton, fell $1.52, or 4 per cent, to $36.28 and rival Rio Tinto dropped $2.45, or 3.8 per cent, to $61.70.

Iron ore miner Fortescue renewed its criticism of the government’s mining super profits tax plans and said it is likely to delay plans to start paying dividends due to the proposed tax, warning investors its shares could fall further as a result.

The shares duly extended early losses, to finish down 28 cents, or 7.5 per cent at $3.44.

The four major banks closed lower also.Commonwealth Bank was off $1.92, or 3.7 per cent, at $50.31 and Westpac declined 90 cents, or 3.9 per cent, to $22.26. ANZ closed down 56 cents, or 2.6 per cent, at $21.34 and National Australia Bank was 80 cents, or 3.3 per cent, lower at $23.76.

In the energy sector, Oil Search had dipped 26 cents to $5.25, Woodside was down $1.46, or 3.4 per cent, at $41.37 and Santos gave up 54 cents, or 4.4 per cent, to $11.75.

Flight Centre bucks trend

Flight Centre shares rosed 2.9 per cent to $16.80 after the travel firm upgraded its profit guidance for 2010 to a pretax profit of $190 million to $200 million, up from forecasts of $160 million to $180 million.

Healthscope saw its shares slip 1.9 per cent to $5.15, after private equity firm Blackstone Group joined a group bidding $US1.5 billion for the hospital operator, a source familiar with the situation said.

Minara Resources fell 4.5 cents, or 6.3 per cent, to 66.50 cents after it said it is looking offshore to more desirable tax jurisdictions.

Transurban declined 11 cents, or 2.5 cents, to $4.30 after the Takeovers Panel has refused to make interim orders sought to stop a rights issue by the toll roads operator.

Agribusiness and real estate group Ruralco Holdings was steady at $2.50 after it said it expected a solid full year financial result after boosting first half net profit by 23 per cent.

The most traded stock by volume was Australian Mines, with 222.32 million shares changing hands for $222,328 thousand. The stock was steady at 0.1 of a cent.

Preliminary national turnover was 2.26 billion shares worth $5.91 billion, with 250 stocks up, 867 down and 256 unchanged.

Losses 'overdone'

The Australian market has fallen 14 percent from its recent peak in April as the European worries, the Australian dollar's fall and a planned mining tax whacked sentiment.


"It is definitely overdone, the forward P/E of the market is 10 times which is extraordinarily low," said E.L. & C. Baillieu director Richard Morrow.

The long-term average forward price/earnings ratio for Australian stocks is around 14 times.

"People are staring down the barrel at this horrendous tax and everything has gone into abeyance ahead of that," he said.

http://www.smh.com.au/business/markets/shares-tumble-as-all-the-bears-come-out-20100525-w8i2.html

A quick look at KLCC Property (24.5.2010)

A quick look at KLCC Property (24.5.2010)
http://spreadsheets.google.com/pub?key=tNyYnPuP_011FQrdQxNx_AQ&output=html

How Do Real Estate Investment Trusts Grow?

How Do Real Estate Investment Trusts Grow?

One argument that might be made against real estate investment trusts is that, because they are required by the government to pay out at least 90% of net income to their shareholders, they don't have the cash from retained earnings to expand their businesses.

However, good REIT management teams have found ways to raise the money they need.

1. Sometimes they raise money by selling additional shares of stock, including preferred stock.
2. They can borrow money from the debt markets through issuing unsecured notes and debentures -- bonds.
3. They can do private placement offerings.
4. They can sell poor performing properties and reinvesting the proceeds in more profitable real estate.
5. Good REIT management also seek ways to raise additional cash from their existing businesses, by raising rents and reducing expenses *this includes reducing overhead.). This increases their Funds From Operations (FFO).

When speaking of this, even non-retail REITs make use of a retail industry term -- same store sales. That is, the more sales that can be generated by the same store, the more profitable it. The more rent and other revenue that can be raised from the same property, the profitable it is and the more cash it generates for the company.

This can include raising rents on existing occupants, upgrading properties to higher-level occupants and reducing vacancy rates. It can include upgrading or expanding the property.

Retail REITs, especially shopping malls, usually have percentage-rent clauses in their leases. This means that the mall gets a percentage of the store's revenue above a certain preset level. The more successful the store, the higher rent it pays. Keep that in mind the next time you hear a commercial for a shopping mall on the radio -- the mall wants you to come and shop there because the more money their individual stores make, the more rent the mall receives.

Some REIT leases include periodic rent bumps that are fixed amounts or based on an index of inflation such as the Consumer Price Index.

Some mall and other types of REITs save on expenses by getting occupants to pay for common needs such as security, advertising, and janitorial services. This is known as expense sharing or cost recovery.

Overall, the more cash the real estate investment REIT can raise through its operations, the higher its internal rate of return or IRR.

Obviously, the Higher a Company's Internal Rate of Return is, the Better for its Investors

Of course, the stronger the real estate trust company is to begin with, the more able it is able to raise additional money.

The REIT Real Estate Investment Trust can use the additional cash to purchase additional properties, or even to purchase entire private real estate companies, or even other REITs.

The goal is to find opportunities to make an additional internal rate of return that's higher than the company's cost of equity capital. The difference between the cost of capital and the FFO a company can earn from the property is called the spread.

Strong Real Estate Investment Trusts have picked up great properties at bargain basement prices following local and national real estate market collapses. Eventually demand picks up again, and the REIT is making money off the properties.

Some REITs are Able to Expand by Developing New Properties in their Specialization and Local Geographic Area

Of course, this depends on their ability to raise the necessary capital to fund the development until it begin making money.

Of course, such development projects come with the risk of cost overruns on the construction, the demand for the space may be reduced during the development period (perhaps a recession has just started), and the risk that interest rates rise during the construction period.

Some real estate companies have formed joint ventures (JVs) with institutions to develop, acquire and manage properties. The REIT provides the skills and experience to acquire, develop and manage the commercial properties. The institutions provide the capital. Both can benefit.

With the passage of the REIT Modernization Act, these trusts have been allowed to engage in real estate-related businesses.

REIT trust investors should look for management teams who are aggressively seeking to increase both Funds From Operations and Internal Rates of Return.

http://www.incomeinvesthome.com/growth/reit/equity/growth.htm


Related: Understanding REITS


Investing in Real Estate Investment Trusts (REITs)
http://www.pimco.com/LeftNav/Bond+Basics/2006/REIT+Basics.htm

Real Estate Investing through REITS
http://beginnersinvest.about.com/od/reit/a/aa101404.htm

Understanding Risks before Investing in REITS
http://findarticles.com/p/articles/mi_m0JQR/is_3_14/ai_30366025/