Interest Rate Roundup

Wednesday, January 17, 2007

Another bucket of bits this a.m...

Lots of things brewing this morning just like yesterday. Here are a few things I'm watching ...

* The December Producer Price Index rose 0.9% from November, versus expectations for a 0.5% gain. That's not a big deal for the market because everyone knows energy prices have tanked in January, and that should help lower the overall PPI.

* What IS potentially important is the gain in the "core" PPI -- finished goods prices, excluding food and energy, rose 0.2% in the month versus forecasts for a 0.1% gain. Core intermediate goods did slip 0.1% on the month, but core crude goods rose 1%. In other words, inflation pressure further up the goods "pipeline" is still there.

Bonds came into the number with small price gains. They gave those up after the 8:30 a.m. release, and are now trading roughly flat.

* Industrial production and capacity utilization figures for December also came in hot. Production popped 0.4% vs. forecasts for a 0.1% gain. Capacity utilization was at 81.8% vs. the 81.7% forecast (using Bloomberg estimates). Manufacturing activity had a big jump of 0.7%, the most since June.

* Purchase mortgage applications also gave back some of last week's gains -- dropping 7% on the week. Refinance activity remains elevated however, likely boosted in part by borrowers swapping from floating-rate loans to fixed-rate loans.

* One last little nugget: Several weeks ago, one of the brightest guys in the commercial real estate business, Sam Zell of Equity Office Properties, agreed to sell his company. The buyer was a private equity firm called Blackstone Group and the price was $36 billion. Rumors of competing bids have been rampant in the market as well.

But when you've got one of the smartest sellers selling, you have to wonder if he knows something the buyers are missing. My belief is that buyers are paying far too much for commercial property. Why? Because cash is pouring in from eager portfolio managers looking to diversify into a sector that has performed well for the past few years. In other words, it's too much money chasing performance. Fundamental measures of valuation (like capitalization rates, which measure the "yields" that properties throw off from rent at given purchase prices) are extremely stretched.

So I found it interesting yesterday when another company that's been in the real estate business for decades down here in Florida decided it was time to unload. St. Joe said it would sell its 17 office buildings, which consist of 2.3 million square feet of rentable space spread around seven Southeast markets. The company's Chief Executive Officer, Peter Rummell, had this to say:

"With capitalization rates in office markets across the nation at or near record lows, we believe this is the right time to be a seller ... That fact combined with the continued abundant flow of capital into real estate from a wide range of investors presents a unique time to potentially sell the portfolio."

I couldn't have said it better myself.


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