August 2009
		Optimism over an improved economic outlook has pushed the markets considerably higher from the lows reached in March. Recent earnings releases from companies have beat estimates causing expectations to be raised. On closer examination, profits have slumped 30 percent in the period, a record eighth straight quarter of falling earnings, and sales slid 16 percent. We have rebounded from a freefall in business activity along with the paralyzing fear that came with it. Government actions have stabilized many at risk banks, auto manufacturers, and insurance companies. U.S. GDP growth while turning negative in recent quarters are projected to climb to 2 percent or higher in the second half of 2009 after the biggest drop in gross domestic product in any recession since the 1930s. The laws of physics include the law of gravity which explains why water flows downhill. Unfortunately, we do not have a law of real estate which states real estate prices always go up like so many believed and preached during the boom years. The recognition that this law does not exist came too late for many investors and developers who have been turned upside down in terms of personal wealth. The commercial real estate market has shown a rapid increase in the total delinquency rate in the first half of this year, with figures at 4.1% at the end of Q2.		Prices as reflected in the Moody's CRE price index show the deterioration in the real estate market. According to Moody's, property prices have fallen 35% since October 2007. That presents a challenge for owners to refinance almost $165 billion of mortgages for skyscrapers, shopping malls and hotels this year.     Transaction volume has fallen dramatically from $133.2 billion in Q2 2007 to $4.8 billion in Q2 2009, down 95%. A recent report on the U.S. residential real estate market by Deutsche Bank analysts predicts that national home prices will decline another 14% into the first quarter of 2011. The analysis estimates that there are approximately 110 million households in the U.S. Of the 110 million, about 75.5 million are homeowners. Of those 75.5 million homeowners, approximately 68%, or 51.6 million have mortgages. As of the end of Q1 2009, 14 million U.S. homeowners had negative equity, or approximately 27% of all homeowners with mortgages, Deutsche Bank estimates. Using price projections, they estimate that 25 million homeowners will have negative equity before home prices stabilize, or 48% of all mortgagors. Besides the grim figures for many parts of the economy, there remains opportunities for investment in areas that have a potential to rebound more quickly than others. The problems in the United States have dampened growth throughout the world, however there are some countries that are seeing growth return faster. China’s banks and government issued a record $1.1 trillion in loans in the first half to help drive a 7.9 percent economic expansion in the second quarter. General Motors Co. reported a 78 percent increase in vehicle sales in China in July. Even in the U.S., select companies also show valuations that may be too restrained and not reflective of the strength and recovery potential.