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Market Report: Questioning the Fed’s decision on interest rates

In the wake of the Federal Reserve’s decision to keep interest rates unchanged, here’s a roundup of how the development is being digested across the real estate and financial markets.

Nikki Vasco

Vasco

“Some are questioning the decision of the Fed to keep borrower rates unchanged due to global concerns. With employment and inflation near targets, if the Fed would have raised rates, it would have given a level of confidence to the market that would likely have led to a rally. Instead, the market fell flat and volatility continues.” — Nikki Vasco, Chief Investment Officer at FullCapitalStack.com.


Jeff Lee

Lee

There was a lot of speculation over the rate decision and many of our clients wanted to avoid closing in and around the Fed announcement.  Many accelerated closings for last week or earlier this week, while some chose to push off into next week and roll the dice post rate decision and post digestion of Fed Chairman Janet Yellen’s commentary. We did have a few defeasances that priced on Thursday and the clients who elected to buy defeasance securities in the morning were rewarded with higher yields/cheaper defeasance costs.” — Jeff Lee, Chief Operating Officer, Commercial Defeasance LLC


Rehling

You had a window, and you risk that between now and December you have things deteriorate, or you have some new and unexpected source of volatility. If something happens and they are not able to go in December, there is a credibility issue.” — Brian Rehling, fixed-income strategist at Wells Fargo Investment Institute. 


Paul Krugman

Krugman

“The Fed did the right thing last week: nothing. And the howling of the bankers should be taken not as a reason to reconsider, but as a demonstration that the clamor for higher rates has nothing to do with the public interest.” — Paul Krugman, New York Times columnist


Jeffrey Lacker

Lacker

“I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook. Further delay would be a departure from a pattern of behavior that has served us well in the past. The historical record strongly suggests that such departures are risky and raise the likelihood of adverse outcomes.” — Jeffrey Lacker, President of the Federal Reserve Bank of Richmond (the sole dissenter in the Open Market Committee’s recent vote)


Market Report: ‘Falling knife’ or ‘buy on fear’?

It’s hard to even look at the numbers right now. 

After a sharp slide to end last week, investors woke to more disturbing news Monday as international market declines sent the Dow Jones Industrials into a 1,000-point tailspin to start the day. Even a big late morning rebound eventually gave way to a sell-off later in the day.

So, let’s stay away from the absolute and instead, focus on the differential. Despite the massive rally in the Treasury market, refinance rates moved about 10 basis points lower. In other words, spread widening significantly muted the Treasury run. Typically in a bearish environment, credit becomes tight and financing more difficult. However, the numbers are showing a bottom to the correction.

Although credit products blew through support levels, the quick bounce on Monday indicates a probably near term correction and potentially continued strength in the CRE market.


NikkiBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

Market Report: On Track For Rate Hikes?

Expectations this week continue to point toward a September interest rate increase, supported by Friday’s jobs report.

The Labor Department said Friday that the U.S. economy created 215,000 net new jobs in July with a nationwide unemployment rate unchanged at 5.3%. The numbers illustrate a stable job market, no longer adding jobs at last year’s more rapid pace, but still churning along at a decent pace.

Is this enough to justify what is now a widely held belief that the Fed will hike rates in September?

Depends on who you ask. Many believe the threat of asset price bubbles and inflation make it an ideal time to begin rate increases, even if job growth is merely adequate.

“A similar report for August … would likely be enough to seal the deal for a mid-September rate hike,” Gus Faucher, senior economist at PNC Financial Services Group, told the Los Angeles Times.

However, some objectors continue to point to slow wage growth and global concerns as reasons to postpone rate increases.

“This morning’s report was hardly suggestive of improvement,” Lindsey Piegza, chief economist at Stifel Fixed Income, told NPR on Friday. “Status quo is hardly a step in the right direction, making it difficult for the Fed to justify a near-term rate increase.”

Still, consensus believes Friday’s jobs report supported the expected September rate hike. 

Here’s one more point to keep in mind as rate hikes are contemplated: When rate hikes begin, they have historically continued quickly. In the last Fed tightening cycle (2004-2006), the Fed raised rates 200 basis points in the first 12 months of the cycle and 425 basis points over 25 months.

Will refinance rates be 200 basis points higher at this time next year?


NikkiBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

Market Report: Volatility Is Here To Stay

How many hits does it take to become unaffected by the blow? 

The global markets calmed a bit last week. However, that didn’t continue as this week opened with the Greek stock market plunging after five weeks of being closed. Additionally, commodities were hit again after China announced a slide in manufacturing. 

And, of course, U.S. equities opened lower on global concerns despite the strength in personal spending.

This week is sure to be a repeat of the roller coaster ride with everyone waiting for the latest jobs numbers due to be released on Tuesday.

So, to address my initial question: Can we absorb so many hits that we become unaffected by the blow? Never.  But an investing world dominated by the global economy, real-time information and electronic transactions is here to stay.  Volatility is becoming the norm.

Take a picture of rates and the current lending environment. Tomorrow will be different.


Nikki VascoBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

Are you paying a ‘Liquidity Premium’?

Two investments with the same credit risk profile, potential for upside performance, tax treatment and expected investment period should have the same expected return.

Right?

Not in the real world. We know two very similar investment profiles can be priced very different. Why is that? For many deals, it boils down to liquidity.

Pricing differences in two seemingly similar investment options are often due to the investor’s ability to easily buy and sell the investment — the measure of how “liquid” it is.

Liquidity has been a hot topic lately.  Investors typically pay a significant premium to be in liquid investments such as blue chip stocks and U.S. Treasurys. Is it worth it?

Sure, investors can easily sell a liquid investment. However, on days when the market plummets, many investors lack the stomach to sell. Others sell in fear, regretting their quick exit later. On those days, the premium paid for a liquid investment may not feel like it paid off.

A recent article pointed out that sovereign wealth funds and other large institutional pools focused on long-term wealth creation have seen their allocations to illiquid alternative assets perform better over the long-term investment horizon, compared to more liquid holdings, according to research by Patrick Thomson, global head of Sovereigns at JPMorgan Asset Management.

Thompson says investing with a long-term view of alternative assets can help investors exploit tactical opportunities created by short-term investors forced to liquidate holdings, benefit from mispricing and valuation errors, and take advantage of their capacity to absorb additional risk.

“These advantages have rarely mattered more than now in a capital market environment of low yields, mounting volatility, unexciting global economic growth and subpar investment returns — nor have they contrasted more sharply with the prevailing transaction-oriented mentality,” Thompson writes in FTSE Global Markets.

“Yet today, as much as ever, long-term investors can (and should) access the full range of long-term non-public assets — value-added real estate, infrastructure, private equity and private debt — to diversify their holdings, mute the volatility of the public markets and earn steady and favorable risk-adjusted returns.”

The emergence of real estate investment offerings via online investment platforms makes this method of investing more accessible than ever. The average accredited investor can now follow similar strategies as those sovereign wealth funds.

On days when the public markets are fluctuating (or halting altogether), that a feels like good place to be.


Nikki Baldonieri

By Nikki Vasco | Chief Investment Officer | FullCapitalStack

Interest rates: How many increases are on the way?

Yes, investors, interest rates will go up this year.

Here’s the question we really want answered: Will two rate hikes happen before Christmas?

Historically, multiple successive rate hikes have followed a period of prolonged low interest rates. This was the case at the conclusion of the low-rate periods of the early 1990s and mid 2000’s.

“When rates go up, they usually keep going up,” says Nikki Vasco, chief investment officer at FullCapitalStack. “There’s a good chance that the Fed could raise rates this fall, and then again before the end of the year.”


source: tradingeconomics.com

Of course, this most recent period of low interest rates has set new historical standards. With federal funds rates at or near zero since 2009, the Fed is preparing to increase rates from unprecedented territory. Raising interest rates from this point forward will be new frontier.

In a speech in Chicago on Friday, Federal Reserve Chairwoman Janet Yellen remained steadfast in her expectation that the central bank’s Federal Open Market Committee will enact the initial rate increase before the end of the year.

“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” Yellen told the audience at the Chicago City Club. “But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

Yellen’s comments were closely followed by U.S. investors, who thought her outlook might change in response to the turmoil in Greece. She mentioned Greece just once in her speech, saying, “Although the economic recovery in the euro area appears to have gained a firmer footing, the situation in Greece remains unresolved.”

The Fed chair said she expects the U.S. employment market to keep improving, with inflation moving closer to its 2 percent target rate. Those expectations are coloring her plans to increase interest rates. She also indicated the Federal Reserve will move slowly and gradually, shaping decisions based on economic realities.

“I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time,” she said. “But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”

Reading tealeaves, the fate of rate hikes — and whether or not they’ll happen consistently, or in fits and starts — appears to depend Yellen’s view of economic growth. If U.S. economic growth is believed to be choppy, the rate increase schedule could reflect that. And if growth is steady? There’s a strong chance interest rates will follow suit.

Will peer-to-peer lending predict what happens next with real estate crowdfunding?

Peer-to-peer lending is about to get real — and commercial real estate crowdfunding won’t be far behind.

This week, we learned details of how Goldman Sachs will begin offering consumer loans via online platform. With plans to launch in 2016, there is little doubt the innovators who devised P2P lending will feel the heat.

As commercial real estate investment professionals, we need to pay close attention or risk being left in the dust. Technology is creating new opportunities for institutional investors and owners who are willing to adapt.

Innovators such as LendingClub and Prosper used financial technology (FinTech) to capitalize on a gap in the consumer and small-business lending markets after the Great Recession’s credit crunch. Seeing traditional banks and related lenders withdrawing, these platforms created a market for individuals to borrow small amounts from pools of cash supposedly invested by other individuals looking for new investment opportunities. The result has been billions of dollars in credit extended for debt consolidation, home improvements and other projects.

The concept is based on the idea that individual investors can now buy fractions of their peers’ debts — “peer-to-peer lending.” However, who really is the “peer” on the backside of this $15 billion to $30 billion market? It’s not savvy individuals making smart decisions for direct investing. Banks, institutional funds, and money managers looking for yield have powered the growth rate, funded the loans and have started to package the debt into securities. They are at times assisted by “first look” offers from the originators, and proprietary risk models to analyze the loans.

Most of the “peers” who own these loans are actually institutions, such as hedge funds and other investment pools. The borrower’s true peers likely end up only owning a piece of these loans through shares in a fund placed in their 401k, packaged and sourced by sophisticated institutions.

The standardization of consumer risk scores and credit profiling has propelled this new asset class into the securitization market, which has attracted new and additional capital. In turn, this will likely convert into more products at better rates for consumers.

What is the lesson here for commercial real estate investors? Our industry is on course to create the same type of standardization needed for institutional capital and lending efficiencies. These three factors are shaping the trend:

  • Crowdfunding has given real estate owners the ability to market their performance. Soon investors will be able to compare sponsor performance in standardized models.
  • FinTech is giving real estate owners the ability easily manage their investor base and post new, accessible offerings.
  • Real estate owners can now spend less time sourcing investors and more time managing their portfolios.

Although crowdfunding for real estate is in its infancy, there is already buzz about institutions and banks partnering with platforms to source product. Just like P2P lending, investors will soon find the ability to hold shares of a REIT in their 401Ks that primarily owns “crowdfunded” participations of equity in real estate.


Nikki BaldonieriBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

QuietStream Financial’s Nikki Vasco to speak at SCI’s Marketplace Lending Securitization Seminar

QuietStream Financial executive Nikki Vasco will be a featured panelist at Structured Credit Investor’s Marketplace Lending Securitization Seminar. Vasco is a QuietStream managing director and the Chief Investment Officer of FullCapitalStack, QuietStream’s commercial real estate crowdfunding platform for institutional and accredited investors.

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