12-31-08

   I'm sure that in the last six months, you had some long thoughts about your investments. I appreciate your loyalty through it all. Despite what you are hearing in the press, yes things are bad in comparison to past years, but not nearly as desperate as they like to promote. The year of 2008 is coming to end. For nearly everyone it can't come fast enough! The last six months have been called the worst financial melt down since the great depression. I believe that with all that the government is doing, we won't experience a Depression, but I'm a little concerned about what our financial regulations will look like in the years to come.

   For capitalism to flourish, we have to have a level playing field, where everyone is comfortable to take risks, invest, and to expect an appropriate return on their investment. The government role is to ensure that everyone is playing by the rules, and if not, there are penalties to pay to either keep players in line or to put them out of business. After what we have experienced, clearly there wasn't enough regulation to do either. However, the natural reaction is an over-reaction by the government. This, in the end, could hamstring the ability of the market to correct and return to the best place to do business in the world.

   I didn't think we would fall into a full blown Recession a year ago, but I wasn't wise enough to see what was on the horizon. My only consolation is that I don't think any one could have predicted this past year. Not to the degree that it unfolded.

   There has been over a trillion dollars directly thrown at the markets, plus another two trillion if you count all the Fed intervention in the commercial paper, mortgage markets and loan guarantees. Early next year there will be a stimulus package of at least half a trillion. We have already had a trillion dollar boost just in lower oil prices in the last six months. Now, if all of this can't head off a Depression, I don't know what would! It should make the Recession officially end some time early next year. However, there will still be headlines of unemployment, poor retail sales numbers and bankruptcies that will make it seem like it's not ending. Just like we didn't know we were in a Recession until we were deep in the middle, we won't know we are out until we are done with it.

   Looking at the mortgage rates, they are lower now than they were several years ago. They are talking about intervention that would push them well below 5%. The average home price is now 180k, and heading lower. The affordability index is at an all time high. There is pent up demand for houses because so few people have bought in the last 18 months and few will buy in the coming three to six months, because they are now fearful of the economy and their jobs. When things turn, they turn more abruptly upward than most would forecast, but that's at least two quarters away.

   Here in the Phoenix metro area, we've seen a plateau of inventory, measured by the number of houses on the market. The number of foreclosures has slowed, but still heading upward. We have some price stability in some areas; other areas have dropped so low, like under 50k that they will eventually double up in price when the entire inventory gets bought up.

   I have been keeping the money at work at all times without much issue. I have had a handful of properties that I've taken back that it made more sense to rent than it did to sell. I can rent them on a cash flow basis equal to cost of capital. The properties could be sold, but in the areas which they are located, the people that would want to buy just can't attain credit at this point. When things improve I'll sell them. I have taken some properties back which I have sold, and will determine in the future which the best option is. My plan is not to create a large rental portfolio, but if it's the best option at the time, it's manageable.

   I have added $400k in new investment funds, but now, some of the temporary funds are being requested, so I ended the quarter at the same level, $17.3 million, in the portfolio. I have additional requests for some more funds, as April 15 approaches next quarter.

   I have updated the pictures of the current properties on the website. Thanks again for your trust, investment, and referrals.

   Denny J. Chittick