Altus Insight - December, 2013

 

The Altus Insight

Market news, commentary and relevant topics for today’s alternative asset investor

Date: December 31, 2013
FR: Forrest Jinks
RE: A Walk Through the News

Given the busy holiday season, this month’s letter will focus briefly on several items in the news and how those news items may affect future investment performance and decisions.

Before getting started however, I want to recommend a great book I just finished reading - “The Most Important Thing Illuminated” by Howard Marks. A friend gave me this book after reading a recent Altus Insight article. The book is focused on stocks as opposed to alternatives, but Marks does a great job of explaining his investment philosophies, many of which are principals we also adhered to here at Altus.

Also, we are now raising money for our Altus Multi Tenant Income Fund. As is standard for Altus funds, the investors get paid before we do. This is a great opportunity for investors looking for strong long term tax advantaged returns.  Reply to this email or call our office at (707) 932-5887 for more information.

A Turn for the Better?:  Several years after officially exiting the Great Recession, the economy finally looks like it may be turning the corner. Supporters of recent economic policy and Federal Reserve actions will trumpet the success of those actions as opposed to examine why a recovery has taken longer than any recession since the Great Depression (so far), which also happens to be the last time such a large scale economic intervention occurred.  In the economic good news of this past month we learned that the economy grew at an annualized rate of 4.1% in the third quarter, the highest growth since 2011. Possibly more impressive is that the rate of growth was revised upwards after the initial reporting, as opposed to the far more normal downward revision. Also in the news was that sales of new homes exceed expectations in November, a sign that people may be shaking off the interest rate increase earlier in the fall.

Only a Grinch could not love good news and sometimes I wonder if I am indeed a Grinch. My concern is that an increase in fortunes will cause the population to forget about the structural issues that need to be taken care, and the longer we go without addressing them, the more pain will occur when we sure are forced to deal with the issues in the future. That we have an official bi-partisan budget for the first time in years is a good thing, but it doesn’t go nearly far enough to change the debt trajectory of the country. There will be a day of reckoning on the debt. Additionally, the beasts that are Medicare and Social Security have not been addressed. These are issues that simply must be dealt with.

The improvement in the economy and the delay in dealing with the “big” issues effects investors and business owners two ways. The first is we will likely see interest rates start to increase on long dated debt (more so than has already been happening). Bernanke stressed after the Fed’s last meeting that the Fed will keep interest rates low for at least a couple more years, but he doesn’t have any control over retail rates. Banks, fearing an increase, even if it is in a couple years, will increase their spreads now to make sure they don’t get caught later. I have been saying it for several months: long term rates should be locked in where possible. If for some reason the economic improvement is short lived and we enter another deflationary skid, those loans can always be refinanced to lower rates. The second effect is that at some point in the future, maybe in 2 years, maybe in 20 years, there is going to have to be major changes to the tax structure of the US. Whether this means a general increase in tax rates or something more exotic like a onetime wealth tax, the piper will be paid.

Speaking of Taxes: Earlier this month CNBC reported a nugget they found in a recent report done by the CBO. After years of it being understood that the “rich” pay most of the taxes, we now know that the upper income earners don’t pay most of the taxes, they pay all the taxes. In fact, they pay more than all the taxes, 106% of all the taxes as it turns out, are paid by the top 40% of income earners. The bottom 40% pays -9% (yes, negative) through the receipt of distributable tax credits.

Germany in the Cross Hairs: The book “Atlas Shrugged” by Ayn Rand has been referenced in these articles in the past as a literary example of what is currently happening across the world. Rand’s premise in the book is that people that are producers and contribute to society are eventually turned on by the very people benefitting from their products/jobs/etc. due to the “unfairness” of their success in providing a better service/product. Generally this illustration is used to describe situations with individuals or industries, with the bailout of GM being an excellent recent adventure. However, not an entire country is being told it is in the wrong. Various bureaucrats with the IMF and ECB, the leaders of several European countries, and even President Obama have complained to Germany that they need to be less competitive and spend more money to purchase products built outside of Germany. Boiled down what they are saying to Germany is they need to be less good at what they do and be less wise with the way they spend their money. They need to save less and spend more on products of inferior quality to the products being manufactured within their own borders. I applaud the Germans for politely telling everyone to take a flying leap. In societies where many people give lip service to doing the best job we can do, saving money for the future, and investing wisely, it is sad that our leaders push both citizens as individuals and in this case entire countries to do the wrong thing, simply because others are already doing the wrong thing and it just isn’t fair to those poor people/countries that weren’t responsible to start with.

Federal Government Sells GM Stock: Tax payers took a $105 Billion (yes, with a B) hit on our government’s investment in GM. That works out to a roughly $2000 loss for every person included in the aforementioned 40% of tax payers. Enough said.

Dodd Frank: The Dodd Frank regulations are longer than all previous banking regulation documents combined. The effect? At least one of them is a loss of banking options. There are now the fewest banks in the US since the Great Depression. This is despite a population base considerably higher than the population base at the time of the Great Depression and continuing to grow at a consistent rate. The stated purpose of the Dodd Frank Act was to reduce the size of the banking institutions and eliminate the government’s need to step in and save “Too Big to Fail” institutions. While the large banks have divested from some of their non-core business operations the Dodd Frank has largely failed. The large banks are larger than ever and smaller banks, the lifeline of small communities and small businesses, simply can’t afford the increased compliance measures required under the Act. The outcome should be no surprise. Representatives from various Wall Street and banking organizations helped write the regulations. It is no surprise that small banks are not well represented by Wall Street or the banking lobby. A reduction in banking options hurts peoples’ ability to start new businesses. This is bad for the economy but a benefit to entrepreneurs who have the requisite understanding of the banking world to get the needed financing. Less competition for local opportunities may mean higher profit margins for those able to maneuver the difficulties to take advantage of the opportunities.

 

Thanks for being a reader of the Altus Insight and thank you to all our readers who have also partnered with us as part of their investment portfolio. We look forward to a great 2014 and wish the same for all our readers.

Until next month,

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Forrest Jinks Altus Equity Group, LP off: 707/536-1711 fax: 707/544-2972 www.altusequity.com