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Baseball and Business

Sigma Investment Counselors

March 19, 2012

What do you get when you trap four middle-aged, baseball-loving friends (three liberals/progressives – a real estate lawyer from Michigan, a general practice lawyer from Washington DC, and a pediatrician from Chicago, and one conservative – that would be me, an investment advisor from Michigan) in a car for a several hours, traipsing across Florida en route to Detroit Tigers spring training games in early March, 2012? Some great laughs, some well-timed and good-humored insults, and some very provocative dialogue.

I expect to spread my reflections on these sunshine state discussions over the next several blogs as there was far too much fruitful discussion to pack into one days submission. The conversation was both broad and well informed as these gentlemen are quite learned and insightful. For example, we talked about the prospects for the global economy, the upcoming US Presidential election, the pros and cons of Republican candidate and supposed front runner Romney, the changed fortunes of the Michigan economy, the Israeli/Iran conflict, the role and impact of media on shaping public opinion generally, and the tragedy of Rush Limbaugh specifically and toll roads in Florida (it seemed about a dollar a mile). We also weighed in heavily on the Detroit Tigers infield with Miquel Cabrera switching to third base from first base to make room for Prince Fielder (and lots of room he will need – the man is huge!).

To ease into these discussions gently, and to temporarily avoid controversy, I will start with an observation from my real estate lawyer friend about construction activity resuming in Florida along I-4. This led to shared insights on the durability of that turnaround. We concluded that bank lending would be the key. Upon our return to the real world of our desks and examining tables this week, the banks made the headlines as the Federal Reserve Board released the results of the “stress tests” that the banking industry had been subjected to, indicating that they largely had returned to health. Hence, it would appear that lending might resume on a more vigorous path.

As I contemplated the prospective return of the banks in the supply of debt capital, I reflected on the demand for loans. Through in-laws, we have a connection to a very powerful, western Michigan based real estate development family enterprise. At a wedding celebration in Grand Rapids a year and a half ago, I happened to be seated next to one of the executives of this family business. He relayed to me how devastating the real estate collapse had been for them and how painful the burden of debt had proven. My neighbor is a real estate developer and I have seen in very real terms the repercussions of his debt laden entity. With these first hand observations, I have been pondering how the real estate lending business might look in the future. I am not convinced that we are heading back to a period of business as usual/lending as usual. Hopefully we/they have learned something from the financial crisis of the last three years.

I am not a real estate professional and I also personally abhor debt. Given what I know about real estate, and my aversion to debt, I would think that there is a strong possibility that future construction activity might be funded quite differently than what we have witnessed in the past. This could make for changed fortunes (both positive and negative) for companies involved in the financing of the industry and for the construction and related companies themselves. From an investment standpoint, it would make sense to consider the winners and losers and we will do so as we contemplate our investment advisory responsibilities.

All questions and comments are welcomed.

Robert M. Bilkie Jr., CFA

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