I have been quite the slacker this week. Tuesday I didn’t get a video out because I was happily eating things not on my diet while watching the Orioles play the Braves. I am getting this note out a little earlier than usual as I am ducking out early today to head back over to Disney. The Money Show is at eh Contemporary Hotel this year and I am going over to get my office supply shopping done. I have a couple quick meetings scheduled and expect to run across a few friends while I am there but my primary purpose is to hit the exhibit hall. Along as all the REITs, Banks, MLPs and other concerns are passing out pens, highlighters, staplers and just about anything else I need I will accommodate them and fill my little goodie bag to the brim.

I make it a point to keep an eye on real estate activity. It is a good indicator of general economic conditions and of course I own a ton of banks that make loans based on real estate collateral. We also own several REITs that own residential rental properties so it is an area of concern. We saw the Beige book this week and the Fed noted that residential real estate sales were up since the last report across all Districts, with the exception of New York and Kansas City where sales were somewhat weaker in part due to normal seasonal patterns. Residential construction generally strengthened since the previous survey period, with only Philadelphia and Kansas City reporting declines. Contacts from the New York District reported sluggish single-family construction but robust multifamily construction. Boston, Richmond, and San Francisco also reported strong growth in multifamily construction, and St. Louis noted an increase in speculative multifamily construction projects.

On the residential side Realty Trac just released a study that shows the Flipppers are coming back to the market. The Real Estate data provider said that “Home Flipping Report, which shows that 179,778 U.S. single family homes and condos were flipped in 2015, 5.5 percent of all single family home and condo sales during the year. The 5.5 percent share of U.S. home flips in 2015 was up from a 5.3 percent share in 2014, marking the first annual increase in the share of homes flipped following four consecutive years of decreases. The share of homes flipped in 2015 increased from the previous year in 83 of 110 U.S. metropolitan statistical areas nationwide analyzed for the report (75 percent). Daren Blomquist, senior vice president at RealtyTrac noted that “As confidence in the housing recovery spreads, more real estate investors and would-be real estate investors are hopping on the home flipping bandwagon. Not only is the share of home flips on the rise again, but we also see the flipping trend trickling down to smaller investors who are completing fewer flips per year. The total number of investors who completed at least one flip in 2015 was at the highest level since 2007, and the number of flips per investor was at the lowest level since 2008.” While activity is up it is nowhere near a bubblicious frenzy just yet as Blomquist indicated “More inexperienced home flippers with a smaller financial cushion could be a sign of an over-speculative market, but the data indicates that flippers in 2015 continued to operate within relatively conservative margins. Homes flipped in 2015 were on average purchased at a 26 percent discount below estimated market value and re-sold by the flipper at a 5% premium above estimated market value.” Housing still has a long way to go to be considered anything like fully recovered and I think we still have a lot of upside ahead in our residential real estate related investments.

Warren Buffets shareholder letter was out last weekend and value investors all over the world got up to read it as soon as it hit the wire. I slept in again this year. While the Berkshire report is an MBA in business it is important to understand that it offer little of value to stock pickers. Both Warren and Charlie have said that if they had less assets they would practice more buy it cheap and sell it dear investing. Unless you have the same size issues that they do their decisions to buy entire railroads and insurance companies re not that relevant to how you approach the markets.

I did read the report later that day and there is one incredibly valuable section. Warren talked at length at productivity changes in business and their impact on the population. He said in the letter that” The productivity gains that I’ve just spelled out, and countless others that have been achieved in America – have delivered awesome benefits to society. That’s the reason our citizens, as a whole, have enjoyed – and will continue to enjoy, major gains in the goods and services they receive. To this thought there are offsets. First, the productivity gains achieved in recent years have largely benefitted the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a terrible price when innovation or new efficiencies upend their worlds. “

The world is changing quickly. The middle class is no longer manufacturing and corporate office jobs. Technology is replacing many former middle class jobs in healthcare, logistics, manufacturing and a host of other industries. The new middle class is going to be IT related. Make sure your kids know how to control and program technology and they will be assured of a strong future. Barring that have take business classes and operate a business that provides necessary services like plumbing, electrical, auto repair and other things people use every day. Ownership of these business is a mid-6 figure enterprise when well executed. The world is changing. Talk to your kids and grandkids about it and help them be in the part of the society that benefits from productivity increase and not the part that is damaged by rapid change.

That’s about all form me this week. I am heading over to the House the Mouse built to watch a bunch of thoroughly confused and yield desperate investors search for advice they are unlikely to find while I rebuild my supply closet.

Have a Great Week

Tim

Talk to your kids and grandkids. Make sure they are ready for the bright but rapidly changing future because

https://www.youtube.com/watch?v=0xerE0pbJKQ