Real Estate - BVI Property Guide

Real Estate and Asset Allocation

by Adam Stauffer, CFA, Chief Investment Officer at Offshore Investment Advisor

US home equity peaked in 2005 at $13.1 trillion when it accounted for over 22% of households’ net worth, according to the Federal Reserve. Now five years later it stands at $7 trillion and accounts for only 13%. The magnitude of this fall and its unprecedented global reach have left many investors breathless—questioning the role that real estate plays in maximizing long-term wealth.

Historically, real estate has been an excellent way for individuals to not only save but to build wealth. Despite this, many wealth managers do not include it in their asset allocation calculations. In fact, there is a relative dearth of research on how home equity fits into an individual’s overall portfolio. In my opinion, this is a mistake. Not only can real estate offer great diversification relative to other assets, such as stocks and bonds, but it also forces investors into a regimented savings plan.

A Peak Ahead At 2011

2011 is going to be a year of contrasts—developed vs. developing, stimulus vs. tightening, spending vs. austerity, and bubbles vs. ranges. Nearly everywhere we look we find opposing extremes. Same goes for our 2011 Outlook. Whether looking at the US, Developing Markets or Europe, there are frictions within each market as well as across markets that gives us cause for concern. While we are beginning the year fully invested in all of our Model Portfolios, we feel that markets particularly equities could be nearing a top.


Within the United States, equities ended the year at fresh 2-year highs and investor sentiment, as gauged by the Investors Intelligence Advisors Sentiment Survey, posted its highest reading of bullish sentiment in several years. However, despite these green lights we see red. Typically, sentiment extremes are a contrarian indicator and often signal the top or bottom. Furthermore, credit default swaps on US municipals debt, which are bonds issued by US cities or other local governments, are widening, which means that professional investors are starting to bet that some states may need to be bailed out by the federal government. But with what money? We are watching the situation closely as it will have a significant impact not only on Municipal Bonds and US Treasuries, but also on the US and Global economic outlook. For the time being however, it seems that the combination of Fed stimulus in the form of QE2 and the Bush tax cut extension will lift US growth expectations and the equities markets for the foreseeable future.


In stark contrast to the developed countries, many of the developing countries, particularly China, Chile and Brazil, are trying to cool growth and tame inflation by tightening their monetary policies. If done too quickly or in the wrong way (overly strict capital controls) then this could have a hugely negative impact on rising commodities prices, developing equities markets as well as commodity producing countries such-as Australia and Canada. With that said we continue to like developing markets, particularly some of the smaller countries, such-as Chile, Colombia, Egypt, Argentina, and Peru. We think these countries will benefit as investors chase returns.


And then there is Europe. Europe is following a completely different path. Where the US is applying the gas to in theory build escape velocity from the economic slowdown and the developing countries are applying the brakes to prevent overheating and runaway inflation, Europe is doing neither. Europe appears to be stuck in neutral, while representatives from different constituent countries argue over the best way to solve their sovereign debt issues. Europe has a serious dilemma in that the core of the region is relatively strong while the periphery is weak. This means that it will be nearly impossible to create a solution that addresses the growth issues in countries like Ireland and Spain, while at the same time maintains the fiscal discipline that Germany demands. As such, we are completely avoiding Europe until there is more clarity around the situation.


Bottom line: A lot of diverging and conflicting signals often mean that something big is around the corner. We are fully invested now but anticipate turbulence ahead and could easily see reducing exposure across the board (equities, fixed income and commodities) within the year. See Appendix A for a quick snapshot of our views on various markets.


On a lighter note (pun intended) there is an article in The Economist’s “The World In 2011” on the global population. In 2011 the population is expected to reach 7 billion up from 6.1 in 2000 and 1 in 1800. 7 billion! The main point of the article is that we shouldn’t worry because the rate of population growth is slowing. But 7 billion people seems like a lot to me. 7 billion of anything seems like a lot. 7 billion ants … no thanks! 7 billion pennies … yes please! (But wait where am I going to put them all?)


I am not an “Armageddon is coming” type person, but It is easy to let your mind get carried away when you think of how much food, energy, water, etc. 7 billion people need. For The Economist article please see “Another year, another billion”. For a not so educated spin on the same topic please see “Ashton Kutcher Preparing For Armageddon”.


Happy New Year (7 billion times)!


James & Adam

CD rates fall to all-time lows | Prism Money

CD rates fall to all-time lows | Prism Money

Interest rates on bank certificates of deposit are at their lowest levels ever, Market Rates Insight reports. “For the first time since 1952, the average rate for all CDs dipped below 1 percent,” Dan Geller, the firm’s executive vice president, told Reuters. 

That’s bad news for savers, but, as Geller points out, “what’s the alternative?”

Offshore Investment Advisor's Analysis: Offshore Investment Advisor uses MLPs, which generally tend to have high yields, to enhance the yields of our portfolios. However not all MLPs are the same and depending on your tax status, you will want to favor some and avoid others. For Offshore Investment Advisor's analysis please see "The Case For MLPs".

Whipsawed

November could have been a case study in why trading can be so difficult. It is easy to imagine how someone could have got caught in the euphoria at the beginning of the month, bought equities, gold, silver (everything!) just to get hammered midway through the month. Reverse their position just in time for a head fake of a rally and then get carried out at the end of the month. 

The first week of November saw the greatest concentration of monetary policy action since October 2008. As expected, the Fed announced QE2—$600B in purchases of medium-term Treasuries by the end of June or around $75B a month—and the markets were off to the races.

By November 5th, equities markets were hitting 2 year highs.



Gold soared past $1400 and silver (as well as other commodities) looked like they were all going to the moon.



All the while, the US dollar index continued to get clobbered. 

And the Australian Dollar broke parity with the USD.



All systems go. Right?

Not quite. Mid month, China signaled that is was tightening—requiring banks to set aside larger reserves (which in theory drains an overheating economy of fuel … cash)—and worries over the European sovereign debt crisis flared up again; this time with Ireland in the spotlight. Then North Korea bombed the South, and concerns over the success of Ireland’s bailout spread to Portugal, Italy and Spain. This all caused a flight to the US Dollar and reversed the trade that has worked so well over the last several months—USD down / everything else (equities, commodities, non-USD currencies) up.

To cap off the negative tone for the month, Wikileaks has thrown a wrench into closed door politics and, in my opinion, has turned a nearly impossible situation in the Middle East into an impossible one. What concerns me most are the documents that discuss King Abdullah of Saudi Arabia negative comments towards Iran. I do not know enough about the politics of the region to make an educated forecast of the repercussions, but it seems to me that in a region that is already so unstable these comments not only undermine relations at the political level but also create subversive tensions at the individual level within Saudi Arabia and across the region. 

Looking forward: In December investors will likely play defensive in an attempt to hold onto gains made over the year. The markets seem a little toppy, however we continue with the thesis that as long as the US Fed is printing easy money, the dollar will continue its slide down and nearly everything else will go up. However, now we have all of our positions on a shorter leash. China's monetary policy will have significant short-term implications on the commodity and commodity related markets. Meanwhile, the Euro is displaying a fairly negative chart pattern—making lower highs and lower lows—which could temporarily stall the USD’s fall.

Labour Lowdown - BVI Yacht Guide

Labour Code Lowdown: Retirement Benefits

by Adam Stauffer, CFA, Offshore Investment Advisor

After 35 years without revision, the territory enacted a new labour code, Labour Code 2010 on October 4, 2010. As with most change, the new code is not without critics. One controversial section on Retirement Benefits has scared many employers. Their fears are warranted, given the gloomy state of the economy and slow pace of recovery. However, there are steps employers can take to minimize the impact to their bottom line.

With the average life expectancy steadily increasing, retirees find themselves in the bittersweet position of having to make their savings last longer so they can enjoy their longer lives. The retirement benefits section is one way to address the issue. However, it is by no means an end all—everyone should have a retirement strategy in writing and save accordingly.