Articles from 07/20/08 to 07/26/08

Hey, it’s the intern again. This particular story is of great interest to me. My family has been involved in commercial real-estate since they came to America in the early 1900’s. I have grown up in an environment that has seen enormous growth in not only commercial real estate but residential as well. Since last year, the housing market has seen a rapid decline in home values in various regions across the country. There has been ongoing controversy about the state of the commercial market, and worries about it falling victim to the same problem as residential.

An article in the Wall Street Journal yesterday morning caught my eye. It discussed issues with office and retail space in Phoenix, Arizona. It described how the commercial real estate market there has suffered as a result of the plunge in home values. When viewing old videos of interviews from February 2008, experts seemed to think that the commercial market would stay immune to the problems that were going on in the residential sector. They cited that overbuilding was not an issue and that the loans made to commercial investors were much safer then the sub-prime loans that caused the housing disaster. I wonder how much of this still holds true, and if this is the beginning of a pattern. Will commercial real estate follow the lead of the residential market in the country’s most distressed areas?

The most certain thing about the massive housing bill passed by the House today is that it will be revisited. The authority given the Treasury to backstop Fannie Mae and Freddie Mac expires in 18 months. Tom Stanton who wrote a book in 1991 with the title “State of Risk: Will Government-Sponsored Enterprises Be the Next Financial Crisis?” says the regulatory framework for the GSEs needs to be as strong as it is for commercial banks. Under this bill, it’s not.

In fact, there is a need to massively overhaul the entire financial regulatory system. Treasury Secretary Henry Paulson has made some recommendations and hearings have begun, but this process will likely take years.

Of course, if lawmakers were really on top of the situation, and had reformed Fannie and Freddie years ago, we may have avoided the need to pass this “emergency” legislation.

Big Pharmaceutical companies are big earnings gainers this quarter, thanks to strong overseas sales.

That begs the question, why are US sales lagging? Aren't drugs one of the most recession-resistant sectors of the economy? When you need medicine, won’t you buy it, no matter what?

Lehman analyst Tony Butler believes the sector is vulnerable to economic downturns in ways you might not expect.

For example, it would be easy to theorize that people don't want to pay top dollar for brand name medications, so they "trade down" to generics. If that were the case, Butler points out, generic companies would be faring much better than the rest of the industry. But, he says, their sales have slowed too.

Istead, he believes many people are going to over-the-counter alternatives. Instead of a prescription allergy medicine with an expensive co-pay, analyst say people will make do with Sudafed, or better yet -- the store brand equivalent of Sudafed.

If there is an upside to the current U.S. economy it's this: you can probably get a table pretty easily at an expensive restaurant. Much of the disposable income that consumers spent in recent years on everything from lattes to luxury SUVs is now being spent on gasoline and staples. That means fewer people are dining on steak at Smith and Wollensky, and more people are dining on Big Macs at McDonald's.

So, what does all of this mean for businesses that cater to consumers? Mesirow Financial Chief Economist Diane Swonk says they are going to have to cut costs and focus on value. We're already seeing that. Starbucks is closing 600 stores and luxury department store Nordstrom is having more sales. Swonk thinks we're likely to see even more specials.

It seems like I’m always blogging about oil prices….but I guess that’s the “topic du jour.” Anyhow, one thing I came across in today’s reporting that did not make it into my story was that crude futures are falling much quicker than retail gas prices (big surprise there…right?). In the last seven days of trading the price of crude oil is down about 13 percent…now at $128 a barrel. In that same time frame, the national average for a gallon of gasoline has dipped only 6 cents or 1.5 percent to $4.05 a gallon. I’m not exactly sure why this is the case…although I could probably hazard a few guesses. But, I do know that gas prices moved higher at a much slower clip than crude prices. So, it’s only fair that they fall at a slower pace. Right?

While this blog is usually reserved for entries with a business angle, I was compelled to write something a bit different this time because of what happened on my family vacation. We spent the week at the beach. On the drive there, my seven year old daughter warned my husband not to wear his red bathing suit, "because red attracts sharks, Daddy." We chuckled at her warning. "Don't worry," I told her, "sharks feed at dusk and Daddy won't be swimming then." But he encountered another, perhaps less publicized danger on our trip. There was a hurricane off the coast that caused the ocean to be especially rough. My husband and a friend decided to take our kids boogie boards into the ocean. My husband somehow got caught between the board and the wave. He says he felt his neck strain and heard a popping noise and realized he couldn't climb out of the surf. Instead he crawled as far as he could before lifeguards came to his rescue. They braced his neck, strapped him into a back board, and sent him by ambulance to the nearest hospital.