Risk Adjusted Investing

The Changing Climate

Ahead

Key economic indicators have signaled trouble ahead for some time now………………….

but are we listening?

Price of Oil

Housing

Housing

Domestic Car Makers

The Dollar

Savings Rate

Balance of Trade

Manufacturing

Get the Picture?

Top 10 Commercial Casket Models

10. The Dirt Master

9. Tupper Tomb

8. Krazy-Kasket from Whammo

7. The Slim Reaper

6. The 19th Hole

5. McCoffin Styrofoam Casket

4. The Comfort-King Velvetliner

3. Cap'n Crypt

2. The Cardboard Warrior

1. The La-Z-Boy Eterna-Lounger

Curriouser

Investor Confidence

And Curriouser

Over the last 12 to 18 months we have come to believe that we can weather any economic storm.

Over the last 12 to 18 months we have come to believe that we can invest with impunity.

However, yields are at historic lows

Bonds

RE Cap Rates

Stocks

The Result: We now look for high yields despite the risk!

(We can weather any storm, remember?)

Narrowing Bond Yields

CCC Bonds

• 25% Chance of Default!

• Historically less than 5% of the total bond market

• In the last 12 months they represent 25% of the market!

• Paying only 300 basis points over AAA!

Real Estate

• ½ Trillion Dollars lined up to buy real estate

• If you buy existing property the return is only 5%

• So the answer: build speculative property with a planed return of 10% and with no measure of the risk to sell or lease these up

The New Average Investor

• Now willing to accept a high risk for a relatively low yield

• No calculation of a Risk Premium

• Justifying this use of “outlying investments” by calling it diversification when it is just a search for higher yield.

A Note on Mortgages

• The National Association of Realtors say that the median price of a home will decline for the first time since the depression.

• 1/3 of all mortgages in 2006 were sub-prime or risky

• 75% of all written sub-primes come with an interest adjustment that kicks in in 2 to 3 years

The Open Questions

• Is this a permanent change in the investing environment?

• How does this impact our clients portfolio make up in the next ten years

• How do we manage this new level of risk