Monthly Letter for September 2007

It’s not whether the glass is half full or half empty; it’s whether it’s filling up or emptying out!

Dave Scott, the famous tri-athlete, went into the 1989 Japan Iron Man like this; His wife was due to have their first child any minute. His knee was hurting. He had gotten lost two days before the race and rode for five hours in what was supposed to be a short tune up. The night before the race he thought he wouldn’t finish, so he called the airline and moved up his flight. He pumped up his tires and left the spare and the pump behind. On race day, he took the lead 100 meters into the swim and went on to win, setting a world record at 8:01. When he picked up his bike the next day, he had a flat tire.

Feeling lousy, thinking about not doing a deal or postponing a meeting? Think of Dave Scott. You never know.

The bottomless pool of liquidity around the world is the business story of 2007. It has been driving everything: low borrowing rates, high stock prices, buybacks, hedge fund growth and the private equity boom. So here is the trillion-dollar question: Is the global cash glut mainly the result of the Federal Reserve’s loose monetary policy, or can it be explained by the rapidly rising prosperity around the world? The answer matters. If it is loose money causing the global surplus then we’re resting on thin ice. But if rising productivity, prosperity and profits have brought the glut, then we are on firm ground!

We continue to be in a stagflation economy (stagnation and inflation) but we may be moving to a “newspaper induced recession”. Foreclosure is a default of debt which is deflationary. Tighter underwriting is deflationary. Oil, food and raw materials have all skyrocketed – that’s inflationary. Rates are going to continue to jump around as markets try to adjust to the sub prime debacle and the Fed tries to walk a thin line. One thing I know for certain is that rates will go up, then come back down and then back up. I just can’t tell you when, how much or in what order!

How far will the current credit crunch reach? In some markets and products, it is an outright crisis. To have a credit crunch you need fear and uncertainty, and lenders are certainly feeling

that. However, as mentioned earlier in my letter, I think global productivity, global liquidity and the Fed will allow this ship to settle out and sail smoothly again.

Despite my rosy prognostications there will still be some blood to pay. When pension funds take losses, companies have to make it up or workers get smaller pensions. Insurance company losses translate into higher rates. And when mutual funds take losses, you’ll see it in your monthly statement.

Closer to home (you heard it here first), vacancy rose during the summer (you will read it in the papers in a few months). Most of it is still a fall out in real estate and construction related business. It’s no secret that millions of Americans pulled equity from their homes for years to finance cars, vacations and shopping trips. Thus far the cash registers have kept ringing in spite of the deflating housing bubble. I am afraid that there is still more fall out to come in the retail arena as tenants struggle with higher rent, higher energy costs, higher labor costs and now a fall off of business. While vacancies have crept upwards, landlords remain in a strong position. Large amounts of free rent, big TI allowances, and rent cuts are not on the table at this time. In fact rental rates continue to trend upwards.

August was surprisingly slow but in its final days it picked up strongly (probably why San Diego was the #1 destination in the U.S. for Labor Day! In these tumultuous times remember that; “time kills all deals.” We’ll be doing everything in our power to expedite leases and sales so that deals aren’t side-lined by shifts in the economy or inflammatory headlines.

If you haven’t already, call 1-800-466-4411. It’s Google’s new 411 service. It’s automated and the voice recognition is better than the human operators and best of all, it’s free (you can even have the info texted to you). If you think that is cool try 1-800-555-8355 (TellMe). Here you can get everything from stock quotes to weather all by voice request. It kind of turns your cell phone into a little robot or personal assistant!

 

Three Strings Attached: The Strength of Recovery

Itzhak Perlman. An extraordinary violinist. An amazing virtuoso. He walks with the aid of two crutches, both legs braced as a result of procuring polio as a child, but with the touch of his bow on a string he ignites sheer brilliance at his fingertips. Here is a story I recently read about him.

One night he was performing at Lincoln Center in New York City. His audiences are used to his slow and painful entrance on stage, waiting with an inspired silence for him to play. On this occasion, after a few pristine bars, the unmistaken sound of a string snapping brought a hush over the concert hall. The audience sat in silence. They anticipated the sure need for him to replace the string.

He took a moment. The audience watched him carefully, expecting him to slowly and painfully leave the stage, replace the string and then return. Instead, he closed his eyes, and signaled for the orchestra. He picked up the piece where he had left off. With beauty, passion and power he continued to play with only three strings. With the last magnificent notes he brought the audience to a silent reverence followed by explosive applause.

When the audience quieted, he humbly stated, “You know, sometimes it is the artist’s task to find out how much music you can still make with what you have left.”

Know that we’re here for you day in and day out trying to make music for you no mater what the market or economy might throw us!

Team CDC Commercial

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