I have made available the latest find in our "REIT at Risk" search. This one has the makings of a grand slam. Subscribers, see Cashflows and Debt Preliminary Analysis (as usual, the latest downloads are listed in the left margin of the homepage). As excerpted from said report:

The shortfall indicates that it is virtually impossible for the company to retire the debt, thus it will have to refinance it at a higher rate or default. If the debt is refinanced in full, it will most likely breach covenants. Even if just the shortfall is refinanced, current credit facilities will be maxed out leaving no room for error and still possibly tripping covenants.

The Company has been meeting its debt obligations through credit facilities in the past 2 years. Its operating cash flows have not been enough to fund its debt repayments and we forecast the retail CRE market to take a material and structural downturn from here. Reference:

    1. The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet!
    2. The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
    3. Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate

    image001_copy_copy_copy_copy_copy_copy

In addition...

  • 18% of its rents will likely be reduced in 2012 and an additional 21% will be reduced in 2012, unless we see a material firming in lease prices, an occurrence which we not only see happening but to the contrary we anticipate additional softening as demand dwindles.
  • More than 75% of the property portfolio was purchased during the period 2003-2005. This was very close to the apex of the bubble, meaning the there is a very material chance that most (if not all) of these properties have declined significantly in value.

We are in the process of valuing this trust’s portfolio of properties on an individual basis in order to ascertain an accurate enterprise value and gauge both the likelihood and potential scenarios for default and/or fire sale of assets.

Published in BoomBustBlog

Reggie_Middleton_Says_Real_Estate_on_FIRE_on_CNBC

This is a post for paying subscribers to update them on my search for prospective casualties in the real estate sector of the FIRE collapse (new subscription content available below and as always in the most recent downloads section in the right hand margin of the home page once you have signed in as paid subscriber). Below is an overview of my opinion the FIRE (Finance, Insurance & Real Estate) sector for 2012

We have reviewed the finance portion extensively throughout 2011. See Commercial & Investment Banks section of the subscription content area. The last forensic report was centered around an insurer - see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! and Our Next Forensic Analysis Subject Is In The Insurance Industry. The actual report is available here:

I have also detailed the risks in commercial real estate in the Dutch markets, see

Now available for download to all paying subscribers is a US REIT headed for distress - File Icon US Commercial REIT Distress Overview
(Commercial Real Estate)
. Professional and institutional subscribers will have an addendum published with additional companies that just missed the shortlist, but may see problems in the near to medium term.

See also:

  1. The Greatest Risk To Retail Commercial Real Estate Is? Sovereign Debt! Macro Headwinds! Popping Bubbles! Busted Banks! No, It's The Internet!
  2. The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History.
  3. The Real Estate Recession/Depression is Here, Eurocalypse Style
Published in BoomBustBlog
Wednesday, 04 January 2012 07:42

Reggie Middleton Sets CNBC on F.I.R.E.!!!

thumb_Reggie_Middleton_on_Street_Signs_Fire

Last week I offered my susbscribers examples of the 2nd and 3rd sectors of the FIRE (Finance, Insurance & Real Estate) group that we see getting burned. I spent much of last year on the "F"portion of FIRE. Subscribers should reference  the last 5 or so documents in the Commercial & Investment Banks section of the subscription content area. I then illustrated a Dutch real estate company facing the FIRE (again subscribers reference the latest submissions in Commercial Real Estate), and I will be offering US REIT entities at risk in the next day or two. Of particular interest was my explicit warning on the insurance industry two weeks ago, both publicly and to subscribers, which included a full forensic analysis of the company we thought would be make the best short candidate as the feces hits the fan blades. See You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! and Our Next Forensic Analysis Subject Is In The Insurance Industry for more on my opinion on such. I even appeared on CNBC yesterday, apparently the only investor/analyst/pundit warning on the FIRE sector for 2012. I outlined my summary outlook for 2012 here: Reggie Middleton on CNBC StreetSigns Sees 2012 As Reluctant/Manipulated Continuation of Q1 2009… The actual CNBC appearance is available below...

From this point on, start this YouTube video and let it play in the background as you go through the balance of this post. It''ll help set the mood...

So, the day following the CNBC appearance warning of the risks to the FIRE sector, and specific risks to the insurance industry in the guise of combined ratios bumping heads with massive investment losses on sovereign and financial entity debt, guess what appears in the headlines of those very same media outlets??? Insurers’ 2011 Catastrophe Losses Hit Record:

Japan’s earthquake and U.S. storms helped make 2011 the costliest year on record for insurance companies in terms of natural-disaster losses, according to Munich Re (ARN).

Several “devastating” earthquakes and a large number of weather-related catastrophes cost insurers $105 billion, more than double the natural-disaster figure for 2010 and exceeding the 2005 record of $101 billion, the world’s biggest reinsurer said in an e-mailed statement today. Competitor Swiss Re earlier estimated that the industry’s claims from natural catastrophes reached $103 billion.

Global economic losses jumped to $380 billion last year, surpassing the previous record of $220 billion in 2005, with the quakes in New Zealand in February and Japan in March accounting for almost two-thirds of the losses, Munich Re said.

“We had to contend with events with return periods of once every 1,000 years or even higher at the locations concerned,” Torsten Jeworrek, Munich Re’s board member responsible for global reinsurance, said in the statement. “We are prepared for such extreme situations.”

In Beware Even Those "Safe" Insurer's Portfolios I illustrated to my susbscribers the risks that insurance investors face. Munich Re said 2011 was the costliest year on record, but they failed to state how difficult it would be to handle said record losses with additional and potentially greater losses on bond and FI porfolios. Munich Re's net exposure to sovereign debt of PIIGS as % of tangible equity at the end of 2009 = 41.2%. Damn! Many compmanies are worse than that (and I'll delve into those a little later). Now, by revisiting the insurance primer that I offered in You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! you can see that combined ratios may very well break 100 while investment losses spike. Somebody may not get their claims funded, eh?

Professional Subscribers, reference the addendum to the icon Sovereign Debt Exposure of European Insurers and Reinsurers (439.61 kB 2010-05-19 01:56:52) whcih can be found online here: Insurer and Reinsurer Sovereign Debt Exposure Worksheets - Professional

Published in BoomBustBlog

Here's the rub upfront for those who desire quick summaries:

  1. We had a massive CRE bubble which bust - See The Commercial Real Estate Crash Cometh, and I know who is leading the way.
  2. The CRE bubble bust, even as disguised and manipulated as it was, claimed some serious retail casualties. See GGP and the type of investigative analysis you will not get from your brokerage house.
  3. A public-private partnership of misdirection allowed the popping bubble to be disguised. See The Conundrum of Commercial Real Estate Stocks: In a CRE "Near Depression", Why Are REIT Shares Still So High and Which Ones to Short?
  4. Even with the "kicking the can down the road mentality", fundamental and macro realities are bound to rear their heads. See The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance and then see Reggie Middleton ON CNBC's Fast Money Discussing Hopium in Real Estate 
  5. ... and will do so both in the US and abroad, see The "American Realist" Says: Past as Prologue - Re-blown Bubble to Pop Before the Previous Bubble Finishes Popping!!!!
  6. Those who truly believe that the more conservative EU nations will skate past this are sorely mistaken. See "Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?" Then see The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History
 
The fact of the matter is that there is a very fundamental, and sparsely recognized reason for retail real estate to take a tumble.
When discussing the proposed Dutch real estate short release to my subscribers a couple of weeks ago (see The Real Estate Recession/Depression is Here, Eurocalypse Style and The First Major Real Estate Collapse In Europe? I've Found The EU Equivalent Of GGP, The Largest Real Estate Failure In US History), I asked my analysts if there was evidence of increeased retail web activity affecting European mall sales. I know that was the fear in the Netherlands (see the last two videos at the bottom of the post here) and the reality in the states (see below). After all, Amazon.com doesn't pull in all of those hypergrowth billions of retail online dollars through physical malls. And if Amazon is making it, some mall store is losing it. Now, said mall store could open up its own website and potentialy successfully compete with Amazon (think Walmart.com, etc.) but exactly where does that leave the overbuilt, and probably over leveraged mall operator???
Exactly! Fu@ked! Professional subcribers can see the rapid growth of online retailing in Europe via this document -File Icon Online Retail Sales Penetration, as excerpted...
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Online retail sales in Europe - Source: comScore Media Metrix

               In 2010, the online retail sales penetration increases noticeably among all major European nations, reaching an average 74.5% in Jan 2011 versus 66.0% in Jan 2010. This is a sharp increase. 

The UK recorded the highest Retail site penetration at 89.4% of the total online audience (up 6.3 points from last year). The Netherlands was ranked fifth with penetration of 80.2 percent (up 4.9%). The average minute per visitor for Europe was 52.4, close to 50.2 for Netherlands. For UK and France, this figure is above 80 minutes. This could imply that online spending would increase more sharply in the Netherland than in the UK, France and Germany. 

You see, during the bubble, a massive amount of retail space was built - much more than could possibly be effiiciently utilized. This is particularly true in the US, but also valid in Europe and even Asia as well (re: Ordos of empty cities fame). According to Howard Davidowitz, "We have 21 sq. ft. of retail selling space for every man, woman and child in this country." That's a tad bit much, eh? Do you know what makes it even worse? That selling space is becoming even less valuable, becuase more and more (and more) sales are being done online versus in a physical mall. I commented on Davidowitz's take, which is lockestep with mine this time last year: Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past 

In December of 2009, I posted and article and accompanying research titled, "A Granular Look Into a $6 Billion REIT: Is This the Next GGP?" The following are excerpts from it:

The results of these activities have been congealed in our analysis of Macerich’s entire portfolio of properties (118+ properties), including wholly owned, joint ventures, new developments, unconsolidated and off balance sheet properties. Below is an excerpt of the full analysis that I am including in the updated Macerich forensic analysis. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).image001.pngimage001.pngimage001.png

Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV’s above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis. Even if we were to assume that we are still in the midst of the credit bubble and REITs can still refi at 70LTV (both assumptions patently wrong), rents, net operating income and cap rates have moved so far to the adverse direction that MAC STILL would not be able to rollover the debt in roughly 37 properties (31% of the portfolio) whose LTVs are above the 70% mark – and that’s assuming the credit bubble returns and banks go all out on risk and CMBS trading. Rather wishful thinking, I believe we can all agree.

For those of you who didn't catch it in the table above, I'll blow it up for you...

Notice anything familiar??? There is a very strong chance that every single property on the list detailed in the forensic reports will be taken over by the lenders, that's a lot of properties. Subscribers should reference MAC Report Consolidated 051209 Retail MAC Report Consolidated 051209 Retail 2009-12-07 03:46:49 580.11 Kb , MAC Report Consolidated 051209 Professional MAC Report Consolidated 051209 Professional 2009-12-07 03:48:11 1.03 Mb, those who don't subscribe should download my  CRE 2010 Overview CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb. For those who want access, click here to subscribe!

So, why has Macerich and the entire REIT sector defied gravity despite the fact they are getting foreclosed upon faster than a no-doc, subprime, NINJA loan candidate who just lost his minimum wage job amongst all of these “Green Shoots”??? Well, I took the time to answer that in explicit detail... I urge all to read The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short?

More hard hitting BoomBustBlog commercial real estate commentary and research from Reggie Middleton:

Archived retail research and opininion from BoomBustBlog...

This is an example of exactly what we were talking about in our subscription documents regarding the ridiculous run up in consumer discretionary shares when taken in context of  the American consumer and the stress born from the Pan-European Sovereign Debt Crisis (click the link for our detailed analysis). You can find the earlier articles in this consumer mini-series as follows:

  1. What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
  2. What We’re Looking For To Go Splat! Part 2: A list of 147 retail stocks with attributes that causes on to question their gain in prices, with a shortlist of companies who may very well go “splat”!
  3. Is the Consumer Really Back? Well, It Depends On If You Believe What the Government Tells You or Whether You’re An Indendent Thinker – The American Recovery and the North American Economic Outlook.

  

Published in BoomBustBlog

I've been renown for calling the housing crash in 2006-7 and the commercial real estate crash in 2007. Late in 2007, I penned a piece titled "The Commercial Real Estate Crash Cometh, and I know who is leading the way!" wherein I made it clear that the CRE party was over, the music stopped and the DJ was packing up. Part and parcel of this general CRE warning (the first of which was the introductory post to BoomBustBlog in September of 2007) was the identification of a particular short candidate whose profligate spending and excessive leverage made for what ultimately was one of our most profitable and thoroughly analyzed shorts - Generally Negative Growth in General Growth Properties - GGP Part II. This company was investment grade (AA) rated and it's common equity traded in the $65 range when I initiated my short position. Roughly twelve months later it filed for bankruptcy. It was the 2nd largest mall REIT in the US and the largest real estate bankruptcy ever although the CFO explicitly called my research and opinion "trash"! The entire story can be followed via: GGP and the type of investigative analysis you will not get from your brokerage house.

Unfortunately, many investors, the equity market, commercial, investment and morgtage banks failed to heed my admonitions. The result of which was the literal pillaging of investors by investment bank private equity and asset management arms. For those who think I'm being rather bombastic and dramatic, reference "Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!", to wit:

 Oh, yeah! About them Fees!

Last year I felt compelled to comment on Wall Street private fund fees after getting into a debate with a Morgan Stanley employee about the performance of the CRE funds. He had the nerve to brag about the fact that MS made money despite the fact they lost abuot 2/3rds of thier clients money. I though to myself, "Damn, now that's some bold, hubristic s@$t". So, I decided to attempt to lay it out for everybody in the blog, see "

The example below illustrates the impact of change in the value of real estate investments on the returns of the various stakeholders - lenders, investors (LPs) and fund sponsor (GP), for a real estate fund with an initial investment of $9 billion, 60% leverage and a life of 6 years. The model used to generate this example is freely available for download to prospective Reggie Middleton, LLC clients and BoomBustBlog subscribers by clicking here: Real estate fund illustration. All are invited to run your own scenario analysis using your individual circumstances and metrics.

realestate_fund.png

To depict a varying impact on the potential returns via a change in value of property and operating cash flows in each year, we have constructed three different scenarios. Under our base case assumptions, to emulate the performance of real estate fund floated during the real estate bubble phase,  the purchased property records moderate appreciation in the early years, while the middle years witness steep declines (similar to the current CRE price corrections) with little recovery seen in the later years.  The following table summarizes the assumptions under the base case.

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Under the base case assumptions, the steep price declines not only wipes out the positive returns from the operating cash flows but also shaves off a portion of invested capital resulting in negative cumulated total returns earned for the real estate fund over the life of six years. However, owing to 60% leverage, the capital losses are magnified for the equity investors leading to massive erosion of equity capital. However, it is noteworthy that the returns vary substantially for LPs (contributing 90% of equity) and GP (contributing 10% of equity). It can be observed that the money collected in the form of management fees and acquisition fees more than compensates for the lost capital of the GP, eventually emerging with a net positive cash flow. On the other hand, steep declines in the value of real estate investments strip the LPs (investors) of their capital. The huge difference between the returns of GP and LPs and the factors behind this disconnect reinforces the conflict of interest between the fund managers and the investors in the fund.

re_fund_returns.png

re_fund_returns_tables.png

re_fund_returns_tables.png

Under the base case assumptions, the cumulated return of the fund and LPs is -6.75% and -55.86, respectively while the GP manages a positive return of 17.64%. Under a relatively optimistic case where some mild recovery is assumed in the later years (3% annual increase in year 5 and year 6), LP still loses a over a quarter of its capital invested while GP earns a phenomenal return. Under a relatively adverse case with 10% annual decline in year 5 and year 6, the LP loses most of its capital while GP still manages to breakeven by recovering most of the capital losses from the management and acquisition fees..

re_fund_returns_tables3.png

Anybody who is wondering who these investors are who are getting shafted should look no further than grandma and her pension fund or your local endowment funds...

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/volcker/MSREF%20V%202.jpg

What many do not understand is that the real estate crash of the previous decade is far from over, because The True Cause Of The 2008 Market Crash Looks Like Its About To Rear Its Ugly Head Again, With A Vengeance. This is true for not only the US, but the EU countries as well. Unlike our European and Asian counterparts, many US investors are much too detached to what occurs overses, quite possibly from a hubristic, apathetic or even ignorant stance that what happens over there has littel effect on us stateside. Unfortunately, that is not the case. What do you think, pray tell, happens when the liquidity starved, capital deprived, overleveraged banks faile to roll over all of that underwater Eu mortgage debt?

Slide21Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

Do you really think they will rollover the US debt anyway? How about the result  of the guaranteed losses that both bank and investor will take as said debt either fails to get rolled over or is forced to do equity cramdowns? Then think about EU banks going down and American banks being called to pay CDS!

image015.png

 

Then think about those sovereign states that truly cannot afford to bail out their banks.

image009.png

I made this perfectly clear as the keynote speaker at ING's CRE Valuation Confeence in Amsterdam this past April.

Yes, "The Real Estate Recession/Depression is Here, Eurocalypse Style". We have already identified a Dutch real estate short candidate - subscribers (click here to subscribe), please download Northern Europe CRE short candidate #1. This company is suffering from a variety of maladies that, on an individual basis, may not seem that bad but once aggregated put it on the same path that GGP was on. The difference? This is after the so-called economic recovery, in the conservative EU state of the Netherlands, and right before the massive rate storm that will be the Pan-European Sovereign Debt Crisis that I have warned about since 2009. The result, many properties that will either be difficult or impossible to refinance or roll over. Again, subscribers, reference Dutch REIT Debt Analysis, Blog Subscriber Edition. This is a succinct illustrtion of how this company will not be able to rollover much of its debt, and the absolute lack of recognition of such by the markets. Of interest is the fact that the number 3 short candidate on our short list is over 50% owned by this company  (which came in as #!). With friends such as that, who needs enemies!

Yes, this company's share price does not reflect its financial condition. Hedgies, macro speculators, and those looking to generate alpha - this is the opportunity for you!

For those who have not followed my CRE forensic analysis in the past, below is an excerpt of the full analysis that I included in the updated Macerich (a large US developer/REIT) forensic analysis from several years ago. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).

image001.pngimage001.pngimage001.png

Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV's above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis

The same is the basic case over in Europe.

Click the following pages to englarge...

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 Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

I have actually discussed the Dutch market in depth at the ING conference

Keynote presentation

Q&A and discussion, part 1

Q&A and discussion, part 2

As usual, I can be reached via the following (or directly via email), and urge all who rely on the perenially wrong sell side to subscribe to BoomBustBlog:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

 

Published in BoomBustBlog

In April, I warned of and impending real estate crash in Europe - much of Europe. At the time, the headlines were occupied with the spectre of Greek and Portuguese sovereign defaults, but failed to see the bigger picture. The stresses put on the banks by devalued sovereign bonds purchased with high leverage puts the banks and their respective domiciles at risk, but the risks are vastly exacerbated as the banks shy away from rolling over CRE loans coming due on devalued (and potentially underwater) mortgage loans. You see, the less liquidity devaluing properties have access to, the less they are worth - further devaluing said properties in a vicious cycle of who gets to lose the most money first. We have started releasing preliminary BoomBustBlog research along these lines and a few of the companies found have not been recognized by the market yet, most likely because we are still in the earlier stages of the CRE decline/crash.

Subscribers, please download Northern Europe CRE short candidate #1

Contrary to popular belief, this  malady is no just the purview of Greece, Portugal and the more profligate nations, but is actually concentrated in what was (and still is by much of the uninformed) the stalwart economic base of the EU! Below is a chart derived from the research in the document above. Even better managed companies are coming to face with the reality of true Pan-European real estate recession cum depression.

image004

Yes, this includes the Netherlands, Belgium and Germany

Slide21

Investors seeking safety in Germany, the UK and France may truly be in for a rude awakening!

Slide22

Below are the articles and keynote presentation from Europe where I laid out these scenarios with explicit candor. Now, here we are just about there.

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Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Reggie Middleton as the Keynote Speaker at the ING Real Estate Valuation Seminar in Amsterdam

Published in BoomBustBlog

Some rather hard hitting reporting and analysis on the Vampire Squid...

Start at 2:20 into the video.

I have much more on this...

Yes, The BoomBustBlog Forecast Pan-European Bank Run Has Breached American Soil!!!

The Ironic, Prophetic Nature of the MF Global Bankruptcy Filing and It's Potential Ramifications

The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

MF Global ran into a liquidity squeeze while betting on the European debt that I have warned my subscribers for two years to avoid like the plague. Goldman is doing the same thing, no?

As excerpted from the model that powers BoomBustBlog subscriber document Goldmans Sachs Derivative Exposure: The Squid in the Coal Mine?

goldman_balance_sheet_risk

As you can see, Goldman traded its derivative book risk for sovereign risk - just in the nick of time to catch the tail end of a derivative crisis  & the start of a sovereign debt crisis. Excellent job fellas! Goldman has literally doubled its sovereign assets, starting the exact year that I started warning in the Pan-European Sovereign Debt Crisis series. BoomBustBlog subscribers covered this scenario over a year ago.

Go to the 26:40 marker in the video...

Published in BoomBustBlog

Slide1Last week I illustrated the interconnected EU master duo with the most ironic of divergent agendas: When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!  Basically, Germany and France are pulling in two different directions trying to get off of a boat that will drown them both, regardless. Then I posed the taboo question: Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly?

The Dutch are probably in for a banging that the vast majority of the populace are not expecting. The presentation below is a subset of the keynote speech that I gave at the ING CRE Valuation Conference in Amsterdam last April. Some may say it was quite prescient. I'd say it was a matter of paying attention.

Before you peruse through the Power Points and related videos, glance over Interbank_Contagion_in_the_Dutch_Banking - 2006 (pdf)  and then review Cross_Border_Bank_Contagion_in_Europe_- 2006 (pdf). It is apparent that I wasn't the only one who used calculators and common sense before it was too late. To wit:

We investigate interlinkages and contagion risks in the Dutch interbank market. Based on several data sources, including survey data, we estimate the exposures in the interbank market at bank level. Next, we perform a scenario analysis to measure contagion risks. We find that the bankruptcy of one of the large banks will put a considerable burden on the
other banks but will not lead to a complete collapse of the interbank market. The exposures to foreign counterparties are large and warrant further research.

The following presentation shows not only Euro-area banks going bust but European CRE as well. So, why aren't German and UK banks - and REITs (yes, even Dutch REITs) on negative watch with the ratings agencies? And even more interesting question is why isn't the industry that I prepped my subscribers for in regards to the next forensic report beng put on watch by the ratings agencies? The quick answer is... Because they know they'll get paid to come to a pile of smoldering ashes with a fire hose, anyway. Let this be the official declaration: The man that called the fall of WaMu, CountryWide, Bear Stearns, Lehman Brothers, and GGP as well as the problems of about 32 regional US banks as well as the Pan-European Sovereign Debt Crisis (all while these enttities were investment grade and AAA rated) is now calling BS to the ratings agencies as they fail to take it to the UK, Germany and CRE. You heard it here first, and you'll probably hear an "I told you so" in a few months as well.
Below, click the graphic to advance it, or you can click the play button at the bottom of the black box for "autoplay".

Subscibers are welcome to discuss this in the private forums:

Published in BoomBustBlog

Bloomberg reports unsaleable Spanish real estate nearly three years after I warned of this situation, in explicit detail. See ‘Unsellable’ Real Estate Threatens Spanish Banks:

Spanish banks, under pressure to cut property-backed debt, hold about 30 billion euros ($41 billion) of real estate that’s “unsellable,” according to a risk adviser to Banco Santander SA (SAN) and five other lenders.

“I’m really worried about the small- and medium-sized banks whose business is 100 percent in Spain and based on real- estate growth,” Pablo Cantos, managing partner of Madrid-based MaC Group, said in an interview. “I foresee Spain will be left with just four large banks.”

Spanish lenders hold 308 billion euros of real estate loans, about half of which are “troubled,” according to the Bank of Spain. The central bank tightened rules last year to force lenders to aside more reserves against property taken onto their books in exchange for unpaid debts, pressing them to sell assets rather than wait for the market to recover from a four- year decline.

Land “in the middle of nowhere” and unfinished residential units will take as long as 40 years to sell, Cantos said. Only bigger banks such as Santander, Banco Bilbao Vizcaya Argentaria SA (BBVA), La Caixa and Bankia SA are strong enough to survive their real-estate losses, he said. MaC Group is an adviser on company strategy focused on financial services.

The banks will face increased pressure if Mariano Rajoy becomes prime minister as expected after national elections on Nov. 20. The People’s Party leader has said the “clean-up and restructuring” of the banking system is his top priority as he seeks to fuel economic recovery by boosting the credit supply.

... Land in some parts of Spain is literally worthless, said Fernando Rodriguez de Acuna Martinez, a consultant at Madrid- based adviser R.R. de Acuna & Asociados. More than a third of Spain’s land stock is in urban developments far from city centers. About 43 percent of unsold new homes are in these areas, known as ex-urbs, while 36 percent are in coastal locations built up during the real-estate boom.

“If you take into account population growth for these areas, there’s no demand for them, not now or in ten years,” he said. “Around 35 percent of Spain’s land stock is in the ex- urbs, which means it’s actually worth nothing.”

... Spanish home prices have fallen 28 percent on average from their peak in April 2007, according to a Nov. 2 report by Fotocasa.es, a real-estate website, and the IESE business school. Land prices dropped by more than 60 percent in the provinces of Lugo, A Coruna and Murcia, and 74 percent in Burgos since the peak in 2006, data from the Ministry of Development and Public Works showed. Land values fell 33 percent nationwide.

If there were to be a proper mark to market of real estate assets, every Spanish domestic bank would need additional capital,” said Daragh Quinn, an analyst at Nomura Holdings Inc. in Madrid, in a telephone interview.

Santander has 9.2 billion euros of foreclosed assets, followed by Banco Popular SA with 6.05 billion euros, BBVA with 5.87 billion euros, Bankia with 5.85 billion euros, Banco Sabadell SA with 3.6 billion euros and Banco Espanol de Credito SA (BTO) with 3.36 billion euros, according to an analysis by Exane BNP Paribas.

... Dozens of Spanish banks have failed or been absorbed since the economic crisis ended a debt-fueled property boom in 2008. Spain’s bank-bailout fund took over three lenders on Sept. 30, valuing them at zero to 12 percent of book value. Bank of Spain Governor Miguel Angel Fernandez Ordonez said the overhaul of the industry was complete after 45 savings banks merged into 15 and lenders increased capital levels.

... The cost to the public of cleaning up the industry’s books has so far been 17.7 billion euros in the form of share purchases from the government bailout funds known as the FROB.

Banks have made provisions for a potential 105 billion euros of writedowns since the market crashed. Lenders may need to make another 60 billion euros in provisions to clean up their balance sheets, including real-estate debt, according to Rafael Domenech, chief economist for developed nations at BBVA.

...“Since the crisis began, banks have only put their lowest- quality assets on sale while they waited for a recovery, so as not to sell the better properties at a loss,” said Fernando Encinar, co-founder of Idealista.com, Spain’s largest property website. Idealista currently advertises 45,912 bank-owned homes in Spain, up from 29,334 in November 2010. In 2008 it didn’t list any.

Spain is struggling to digest the glut of excess homes in a stalling economy where joblessness is among the highest in Europe. Unemployment has almost tripled to 22.6 percent from a low of 7.9 percent in May 2009, according to Eurostat.

Property transactions fell 28 percent in September from a year earlier, the seventh consecutive month of decline, according to the National Statistics Institute.

Financial institutions have foreclosed on 200,000 homes and that will balloon to as many as 600,000 in coming years as unemployment continues to rise, according to a report by Taurus Iberica Asset Management, a Spanish mortgage servicer which manages 35,000 foreclosed properties for 25 lenders.

... “Spain has 1 million new homes that won’t be completely absorbed by the market until the middle of 2017,” Fernando Acuna Ruiz, managing partner of Taurus Iberica, said in an interview in Madrid. “Prices will fall a further 15 to 20 percent in the next two to three years.”

About 13 percent of Spain’s 25.8 million homes are vacant, according to LDC Group, an Alicante-based specialist in real- estate management. The hardest-hit areas are Madrid, with 337,212 empty properties, and Barcelona with 338,645, LDC said in a report published yesterday.

Lack of financing and concern about economic growth has choked investment in Spanish commercial real estate, currently at its lowest level in a decade, according to data compiled by U.K. property broker Savills Plc. (SVS)

A total of 1.25 billion euros of offices, shopping malls, hotels and warehouses changed hands in the first nine months, 52 percent less than a year earlier, Savills estimated.

... There is an “enormous” gap between prices offered by banks and what investors are willing to pay, preventing sales of large property portfolios, MaC Group’s Cantos said.

He proposes that banks create businesses, in which they can hold a maximum stake of 19 percent, that attract other investors to help dispose of their real estate assets over five to eight years. The investors would manage the businesses.

Cantos says that prime assets can be sold at a 30 percent discount, while portfolios comprised of land, residential and commercial real estate may only sell after 70 percent discounts.

“Therein lies the problem,” he said. “Banks have already provisioned for a 30 percent loss, but if you are selling at 70 percent discount, you have to take another 40 percent loss. Which small and medium size banks can take such a hit?”

I discussed European real estate yesterday in the post Are The Ultra Conservative Dutch Immune To Pan-European Pandemic Contagion? Are You Safe During An Earthquake Because You Keep Your Shoes Tied Snugly? If you have an economic interest or even curiosity in European Real estate, it is suggested you read the afore-linked post as well as...

Those who wish to download the full article in PDF format can do so here: Reggie Middleton on Stagflation, Sovereign Debt and the Potential for bank Failure at the ING ACADEMY-v2.

Excerpted from yesterdays CRE post focusing on the Dutch, but suitable for most of the EU:

As clearly stated in the very first posts of the Pan-European sovereign debt crisis in 2010, this is a pandemic contagion. The media's focus on specific countries must be mollified and modified. Reference the first five posts of the aforemetioned series, published a year and a half ago...

    1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one.

    2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect

    3. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. – attempts to illustrate the highly interdependent weaknesses in Europe’s sovereign nations can effect even the perceived “stronger” nations.

    4. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries

    5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

Now, reference yesterday's Bloomberg headlines - Spanish, French Debt Auctions Disappoint; Yields Rise: Yield spreads of Spanish and French 10-year government bonds over German equivalents hit euro-era highs on Thursday.

What do you think happens when contagion spreads to Spain? Please don't tell me you think that Italy, France, Greece, Portugal and Ireland are having rate shit fits, but somehow Spain will remain unscathed - with all of those NPAs and highly overvalued, uber leveraged, supposed assets floating around in their bank's balance sheets?

I warned of this happening nearly three years ago. I issued several reports to subscribers. Of course, about a quarter after I warned, Goldman comes around (changing their stance of course, because they were bullish on European banks, cough.. cough... nasty phlegm being held down...). Hey, has anyone ever told you that Goldman's investment advice SUX! Don't believe me? Well, follow the two links below, or you could just continue reading this article...

  1. Is It Now Common Knowledge That Goldman's Investment Advice Sucks???
  2. I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!!

Over a full year and a quarter after I warned of Spanish banks, and a full quarter after I gave the full out warning of European banks in general, guess who comes to the party late bearing stale party favors....

This impetus of this video stemmed from the post Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe, as excerpted:

I will attempt to illustrate the "Overbanked" argument and its ramifications for the mid-tier sovereign nations in detail below and over a series of additional posts.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

image015.png

This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.

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Notice how Ireland is the nation with the second highest NPA to GDP ratio. This was definitely not hard to see coming. In addition, Ireland has significant foreign claims - both against it and against other countries, many of whom are embattled in their own sovereign crisis. This portends the massive exporting and importing of financial contagion. Reference my earlier post, Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? wherein I demonstrate that Ireland's banking woes can easily reverberate throughout the rest of Europe, affecting nations that many pundits never bothered to consider. Irish banks will be selling off assets, issuing assets and bonds in an attempt to raise capital just as the Irish government (contrary to their proclamations) will probably be issuing debt to recapitalize certain banks. This comes at a time when the Eurozone capital markets will be quite crowded.

Expected higher fiscal deficit and bond maturities due in 2010 have increased the need for bond auction financing for all major European economies. Amongst all major European economies, France and Italy have the highest roll over debt due for 2010 of €281,585 million and €243,586 million, respectively.

BoomBustBlog Susbscribers, if you're paying attention, this was the one year warning of this series of posts:

eurodebt1.png

While Germany and France are expected to have the highest fiscal deficit of €125.1 billion and €96.0 billion, respectively in absolute amount for 2010 (this is without taking into consideration any possible bailout of Greece and/or the PIIGS, which will be a very difficult political feat given the current fiscal circumstances), Ireland and Spain are expected to have the highest fiscal deficit as percentage of GDP of 12% and 11%, respectively. See our newly released Spanish fiscal analysis for a more in-depth perspective, see our premium subscriber report on Spain's fiscal condition and prospects: Spain public finances projections_033010 Spain public finances projections_033010 2010-03-31 04:41:22 705.14 Kb...

As you can see, when properly researched, one can literally write the Bloomberg/CNBC/MSM headlines a full year and a half into the future. Notice the date on the post excerpt you just read, then reference this post from yesterday concering the bickering between Germany and France: When The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink!

CNBC reports: France and Germany Clash Over ECB Crisis Role

France and Germany, Europe's two central powers, have stepped up their war of words over whether the European Central Bank should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets. 

Facing rising borrowing costs as its 'AAA' credit rating comes under threat, France urged stronger ECB action, adding to mounting global pressure spelled out by U.S. President Barack Obama.

BoomBustBlog readers and subscribers saw this coming a mile away. The Duopoly that ruled the economics of the EU have divergent needs now, hence divergent interests. Expect this to get worse in the near term. The reasons have been spelled out in Italy’s Woes Spell ‘Nightmare’ for BNP - Just As I Predicted But Everybody Is Missing The Point!!! You see, France, As Most Susceptible To Contagion, Will See Its Banks Suffer because stress in the Italian bond markets will be a direct cause of a French bank run - with the largest of the French banks running the hardest BNP, the Fastest Running Bank In Europe? Banque BNP Exécuter. For those who don't follow me regularly, I warned subscribers on BNP due to the Greco-Italiano risk factor causing a liquidity run born from imminent writedowns. No one from the sell side apparently had a clue.

Is it eastern European mysticism or west African Voodoo magic? No, it's a spreadsheet and an objective mindset, something that the EU leaders apparently don't have nor are willing to hire me for!

Oh yeah! Back to that little side thesis about Goldman's investment advice sucking till the lips bleed...

LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog Warns Of Failure! Saturday, 24 April 2010

Will someone explain to me why the world is so enamored with Goldman. It appears that their research department is now recommending clients to bet on European bank contagion risk. LTTP (Late to the Party), we first warned on European bank risk in Spain with BBVA in January of last year (The Spanish Inquisition is About to Begin...). Starting in January of this year, I went in depth into the European contagion thing when practically all of the banks, pundits, analysts and rating agencies said this was contained to Greece.

In February, I posted "The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one."

In January of 2009, that's right - 35 months ago, I made it clear that Spanish banks will suffer years from Spanish real estate bubble's that had more effort behind being reblown than cured, coupled with I coined the Pan-European Sovereign Debt Crisis a year later...

The Spanish Inquisition is About to Begin…

Now, it is time to see if fundamentals return to the market.

From Bloomberg: BBVA Fourth-Quarter Profit Plunges 94% to $44 Million on Asset Writedowns

Jan. 27 (Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA said fourth-quarter profit slumped to 31 million euros from 519 million euros a year earlier as the lender wrote down the value of some assets.

BBVA fell the most in eight months in Madrid trading after saying net income fell to 31 million euros ($43.6 million) from 519 million euros a year earlier, the Bilbao, Spain-based bank said in a filing today. That missed the 1.05 billion-euro median estimate in a Bloomberg survey of nine analysts as the bank took a 704 million-euro writedown for its U.S. franchise.

BBVA said it took the writedowns after analyzing its “most problematic portfolios” as it prepares for a tough year with recessions in its biggest markets of Spain and Mexico. This was foreseen nearly one year ago, to date. This bank got caught up in the bear rally and apparently (like many banks) was not deserving of the outrageous boost in the share price. Reference the past analysis.

Reggie Middleton on the New Global Macro - the Forensic Analysis of a Spanish Bank Wednesday, 28 January 2009

Declining housing and stock prices, and rising unemployment levels are squeezing consumer wealth globally and are expected to weigh heavily on the banking system in the form of rising loan defaults. Until very recently, the global banks have experienced most of the impact in the form of distressed securities, capital shortages and funding problems, however the problems have now started to engulf their consumer and commercial loan portfolios as well.

In Spain, BBVA, the second largest domestic bank, could see a massive deterioration in its real estate and consumer loan portfolio. The Spanish real estate sector is making a high horsepower a U-turn after years of a massive housing bubble that has burst - culminating in an unemployment rate that has risen to an outrageous 13.4% level. The power skid is showing no signs of reaching an inflection point, and we believe is only in the beginning throes of a sharp downturn. In addition, the banks' other key growth areas including Mexico, the U.S and South America are witnessing a slowdown in economic activity, restricting BBVA's growth prospectus amid the current turbulent environment. With increasingly challenging economic conditions in each of these economies, BBVA's asset quality has deteriorated sharply with non-performing loans rising to 36% of its tangible equity without corresponding (equal) increase in provisions. As the bank deals with these tough times ahead, we expect BBVA's bottom line growth to remain subdued due to a slower credit off-take and higher provisions in the coming quarters....

...

Key Highlights

Sharp slowdown seen in Europe - According to the European Commission forecasts, the European economy is expected to contract 1.9% in 2009 with a modest recovery in 2010. Spain, in particular, is expected to be one of the worst hit due to the humbling of its housing sector which had, for several years, been a significant contributor to the country's economic growth. This will impact BBVA by slowing down its credit and loan growth in addition to significantly deteriorating the credit quality of its loan portfolio.

BBVA's asset quality is set to deteriorate rapidly as Spain enters recession - Problems in Spain are more pronounced than in most of its European counterparts. The Spain's budgetary deficit has already crossed the 3% threshold limit set by the European Commission and is expected to cross 6% by 2009, only behind Ireland. The unemployment has reached a 12-year high of 13.4% in November 2008, the highest in the Euro zone, while the real estate sector bubble (particularly residential vacation homes purchased by foreigners), the pillar of economic growth engine, has burst. BBVA, with nearly 40% of its total loan exposure tied to real estate & construction loans and individual loans in Spain could see massive deterioration in its asset quality.

Besides Spain the bank has to deal with other challenging economies including Mexico and the U.S - In 3Q2008, U.S and Mexico contributed nearly 29% and 16% of total revenues, respectively. The downturn in the U.S economy is showing no signs of stabilization, with an unabated fall in housing prices and frozen credit markets continuing to shatter consumer confidence. Recession in the U.S has also led to a sharp slowdown in Mexico which is highly dependent on US for exports and remittances. The slowdown in both of BBVA's key markets will not only impact the pace of BBVA's growth but also augment the risk profile for the bank as it now has to deal with vagaries of these economies to navigate itself in these turbulent times.

BBVA's NPAs have skyrocketed on back of economic slump - Since January 2008, BBVA's non-performing loans have increased 92% to €6.5 bn. As at the end of 3Q2008, BBVA's loan losses as a percentage of tangible equity stood at an astonishing 36%. Eyles test, a measure of banks' delinquent loans (net of reserves) as percentage of its tangible equity, has increased to 12% in 3Q2008 from 4% in 2Q2008. This sharp rise in the bank's NPA levels, particularly in context of its lower equity cushion, could substantially erode shareholders' equity.

Inadequate provisioning to impact BBVA's bottom line - Owing to deteriorating loan portfolio, BBVA's NPAs have almost doubled to 2.0% of the total loans in 3Q2008 from 1.1% in 3Q2007. Despite an increase in NPAs, the bank's provision has declined to 2.3% of the total loans from 2.4% a year ago. As loan losses are expected to increase in the wake of economic slowdown, BBVA will have to increase its provisions considerably, denting its near-to-medium term net income.

BBVA's valuation at... Subscribers can download the full archived report Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis 2009-01-28 16:04:04 439.80 Kb

For those who haven't been to the Spanish coastal areas to see for themselves or are not familiar with the Spanish situation, I have included random research on Spain from pundits around the Globe!

Now, speaking of Spain, Pan-European pandemic and War... Yesterday, I gave an interview with Benzinga radio wherein I referenced the distinct possibiity of European war as the natural result of the collapse of the European banking and sovereign debt system. You can hear the interview here. It appears that certain rather outspoken British MEPs have a very similar outlook.

That's not all. Here are two other occasions, one as recently as yesterday...

This is early 2010...

I've been asked in the past why I don't run for political offce. Well, the answer is I'm just too damn honest and straightforward. I'd make this guy look shy, and probably end up with a car bomb in trunk before long... Has anyone ever seen the movie Bulworth, starring Warren Beatty? If you haven't seen it, take six more minutes of your time to view this clip before you move on...

And the British version of Bulworth returns as of yesterday. You can call him whatever you want, but you have to call him right, as well...

And in closing, here are the two Dutch real estate videos I posted yesterday that were never released before...

Part 1

Part 2


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