As we all know, residential real estate in many countries such as the US, Europe, and some Asian countries shows signs of deteriorating price rises. Coupled with a slowing economy which gives less people the opportunity to buy into the market (or at least, pay a premium), this leads to asset depreciation. Its largely believed by investors that retail and commercial investing is immune to this effect. Unfortunately, each part of the real estate market is tied into the same business cycle, and like every other option in investing, nothing is the perfect hedge against economic recessions.

The retail real estate market has already started to slow. In the third quarter of 2007, 7.4 percent of retail space nationwide was vacant, according to Reis Inc. A vacancy rate of 7.4 percent isn’t tragic by any means. But it’s the highest level since 2002, and it’s up from 6.8 percent at the end of 2005. The third quarter of 2007 marked “the tenth consecutive quarter of flat or deteriorating retail occupancy at the national level,” noted Sam Chandan, chief economist at Reis Inc., in a recent report. Thanks to continuing growth in supply and flagging demand, there was about 140 million vacant square feet of retail space in the third quarter of 2007, up from 124.4 million vacant square feet at the end of 2006.

That’s a lot of wide open space, considering that on paper, retail hasn’t started to slow yet. My advice is this — be wary about investing in large REIT or other types of real estate funds. As Centrino found out, being over exposed to one type of asset can make it a difficult task to offload and free up extra cash flows.

Yes, Australian banks do have some exposure to the US subprime crisis. It turns out, for some reason, that the big 4 decided to join a consortium that injected liquidity into the hardest hit of the mortgage backing companies, Countrywide. At first glance, it seems like the Australian banks lied when they publicly stated “we have no subprime exposure“.

Like a good politician, however, their use of weasel words and ambiguous statements could be used as a ‘get out of jail free card’. Its true, prior to the subprime crisis, the major banks had no positions. They weren’t part of the group who were bed ridden with ’subprimitis’. In becoming a doctor, however, for those who were sick, they contracted the subprime virus themselves. Technically, this means they didn’t have exposure, at least, not before the subprime term was coined.

Was it wise to get involved? I’m sure their financial modeling told them they were getting a bargain. What interests me the most isn’t so much that some Australian banks were involved, but that none of the big boys decided to stay away. Among banks, there’s usually one contrarian. Goldman Sach’s provided this rule in the US, betting against subprime loans and scored a record profit. I detect a trend in Australian banks becoming more sheepish. Maybe its because of the small Australian market which leaves little for financial diversity, but either way, its a worrying trend for those who like to diversify.

According to Morgan Stanley:

The US has entered its first full-blown economic recession in 16 years, according to investment bank Merrill Lynch.

Merrill, itself one of Wall Street’s biggest casualties of the sub-prime crisis, is the first major bank to declare that a recession in the world’s biggest economy is now underway.

David Rosenberg, the bank’s chief North American economist, argues that a weakening employment picture and declining retail sales signal the economy has tipped into its first month of recession.

It goes without saying that these guys have access to vast amounts information that I don’t, but since when does a definition of a recession take a month for fruition? Wikipedia quote:

In macroeconomics, a recession is a decline in any country’s gross domestic product (GDP), or negative real economic growth, for two or more successive quarters of a year.

Sounds like Morgan Stanley are combining forecasting and current data to make a prediction sound like an economic certainty. Do you really trust the same people whom were the most exposed in the sub-prime debacle?

 From slate.

• Barack Obama is the alternative-energy sector. Hybrid, next-generation upstart, unafraid of entrenched market leaders, and embraced by corn-growing Iowans, Silicon Valley venture capitalists, and East Coast moneymen.

• Mike Huckabee is Chick-fil-A. Cheaper, healthier Southern alternative to steak and prime rib dished up by urban rivals. Explicitly fuses religion into business strategy in a way that no competitor does.

• Hillary Clinton is Citigroup. New York-based, enormously well-capitalized, longstanding market leader whose name is synonymous with the sector it dominates. A powerhouse in the 1990s is having difficulty reclaiming past glory.

• Mitt Romney is the Blackstone Group. Insecure private-equity player that tries to wow the masses with ostentatious displays of wealth—kitted out Mitt-Mobile for Romney, $3 million birthday party for Blackstone head honcho Steve Schwartzman.

• John Edwards is McDonald’s. Disdained by the media elite as déclassé, shunned by the fashionable as too populist and unhealthy to body politic, manages to thrive by working hard and dishing out cheap meat and potatoes to working-class patrons.

• Rudy Giuliani is Bear Stearns. New York-based firm spent years since 2001 raising easy money and globe-trotting. Initials of both should be B.S. Questions raised about judgment and adolescent personal behavior of standard-bearer—alleged dope-smoking for Bear Stearns CEO James Cayne, sex on the city for Giuliani.

• John McCain is General Motors. Old warhorse with solid reputation as patriotic brand takes repeated kicks but refuses to give in. Buoyed by poor performance of two top domestic rivals and by positive developments overseas—Iraq for McCain, growth abroad for GM.

I should do one of these for the next Australia election. Could be fun!

Oil and Gold have both hit new highs. Like I commented before, I see no real fundamental reason why oil continues to climb, other then the strong bullish trending that seems to creating a huge reluctance for anyone to sell or short. Commodity markets are not like stock markets. Commodities rise in price out of fear, stocks fall in price for the same reason. A weird inverse effect in sentiment seems to occur in both the stock market and commodity markets. General investor pessimism/optimism seems to teeter between the two markets like a seesaw, largely because commodities are seen as a hedge against economic problems.

Interestingly enough, this rarely applies to the price of both markets. Even with the grand amounts of stock market worries and concerns last year, it still finished the year in the black (as did commodities). It seems volatility, not price, is the key link between the two markets. This relationship makes commodities an excellent hedge; but not against a fall in the stock market. It’s a hedge against turbulent periods of time. Many are quick to jump on the ‘commodity and emerging markets’ portfolio as a way of continuing positive gains. The problem is, once stability returns to the US markets and long term funds become more comfortable with slowly acquiring positions, the volatility will shift from the US to elsewhere.

For the savvy investor, this is fine, as they possess a deep belief in their well researched fundamentals. For your investment bandwagon-er, the guy who merely takes ideas he here’s and applies it without understanding the logic it entails, this fellow may end up very disappointed with the performance of his portfolio.