Many people have asked me how SRS and REITs share prices can defy gravity the way they have given the abysmal state of  commercial real estate (CRE). Well my opinion is that the equity and the debt markets have allowed agent and principal manipulation to the extent that it materially distorts and interferes with the market pricing mechanism. Put more simply, its the result of widespread fraud and shenanigans - subprime 2.0, just with bigger numbers! If you have a trust or a company that owns a basket of X assets on a 50% leveraged basis, and those assets have decreased 40% in value, one should expect a requisite 80% drop in the equity value of said trust or company. Granted, this is an oversimplification, but the premise is solid. Instead, we have companies whose portfolios have fallen over 40% and whose share prices have increased over 100% from the market lows - heading into what is unmistakeably a worse macro environment and outlook in terms of interest rates, employment and economic activity.

This is a relatively long post, and purposely so, for its goal is to illustrate why REIT prices are defying gravity and what it will take to bring them back down to earth (a significant fall), as well as when. If you are the impatient type, or feel you have read this material already, you can jump straight to the bottom to access our freshly released REIT short list scan finalists for paid subscribers.

Make no mistake about the state of CRE, it is in bad shape. For those of you who react to graphs and spreadsheets, reference Reggie Middleton’s CRE 2010 Overview CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb. Tuesday, December 15th, 2009. Those of you who like pretty pictures, unmistakeably grounded in reality, reference my visual tour of downtown Manhattan to Downtown Brooklyn from last year - “Who are ya gonna believe, the pundits or your lying eyes?” (for pictures) and “Who are you going to believe, the pundits or your lying eyes, part 2″ (for numbers and a very shaky video. It is not just the big city urban areas either. Here is an anecdotal snapshot of CRE business parks in Washington state, contributed by a BoomBustBlog reader:

Published in BoomBustBlog

Here is a the final list of companies culled from a group of nearly 1,800 that we feel have the most profit potential for the year going forward.

This is a professional/institutional level document, but annual Retail subscribers and any subscribers who have been with me for a year ore more can email customer support for a copy as we show our gratitude for your continued patronage. Professional and Institutional subscribers should download this document in its entirety here: icon Financial and Non-Financial Short Scan Review & Analysis - Pro (392.88 kB 2010-06-28 05:33:44)

This is the culmination of four blog posts:

  1. 1. Non-Financial Companies to Short in 2010: methodology and short listing results;
  2. 2. BoomBustBlog Bankruptcy Search: Focus on British Petroleum and Collateral Damage: an objective look at the prospects of BP’s potential insolvency;
  3. 3. The BoomBustBlog Pan-European Sovereign Debt Crisis Bankruptcy Search:  a review the financial and bank holding companies whose economic and financial outlook do not support their current valuations;
  4. 4. and On Shorting Stocks, Double Dips and the UAL/CAL Merger: a drill down of suspect airlines stocks.

Note: The embedded spreadsheets contained in the posts above should be used to access the extensive fundamental data used in calculating the results below.

After two separate and rigorous short exercises, one each for financial and non-financial companies, we have narrowed down the list of potential candidates from nearly 1,800 companies to just 10 (with 13 runner-ups) – all of which we are confident are materially overvalued given their current and prospective financial condition and economic  outlooks. What is of particular interest is the fact that a full 50% of these companies landed on our computer screens as finalist in 2008, before the great market melt-up of 2009. They were overvalued and in bad shape during the lower prices of the turbulent times, hence they are significantly more so after seeing their share prices ride the wave of irrational, recession double-dipping, "recovery" exuberance. We have even released forensic analysis of 4 of these 10 companies over the last two years, and all of the banks in the list were also members of the original Doo Doo 32 of May 23, 2008. Members of this list provided significant profits for bears and short sellers as their prices gyrated and collapsed and the market began to realize the precarious situation that they were in. Now that low volume melt-ups are [starting to] giving way to realistic fundamentals, one can expect more of the same. The more things change, the more they stay the same. We plan to refresh the analysis of the repeat offenders, and offer fresh analysis of those who are new to the list.

The two separate short scans that we have conducted were for the non-financial sector and the financial/banking sector resulted in a short-list of 23 companies, with 10 of those companies targeted for full blown forensic analysis, time and resources permitting.

Below is the outline of the methodology used to produce them as well as a select excerpts from one of our previous reports on a particularly egregious "valuation" repeat offender that has proved profitable in the past whose macro outlook tied to the housing sector is a gloomy as ever - despite a near 100% pop in its share price. This the obligatory "freebie" that I toss in to entice non-subscribers to take the plunge. This particular "freebie" happens to be quite actionable, at least in my humble opinion.

Published in BoomBustBlog
We've got a particularly heavy dose of BS in the mainstream news channel this morning. I believe it to be my duty to throw some facts amids this boiling cauldron of fiction, fantasy, propaganda, marketing and straight up lies. First up (yeah, you guessed it), those gosh darn Europeans...

June 9 (Bloomberg) -- France and Germany called on the European Union to speed up curbs on financial speculation, saying some bets against stocks and government bonds should be banned as markets suffer a resurgence of “strong volatility.”

Published in BoomBustBlog

Relevant commentary from BoomBustBlog and sources throughout the Web on the accounting change that added 80% to the S&P since March 2009!!!

Warning Shots from the IASB: FT

  • The IASB came under fire in the fall/winter of 2009 in regards to mark to market rules
  • Banks wanted continued relaxation of valuing models in order to “smooth out volatility swings in asset prices”
  • IASB and FASB plan to converge on mark to market ruling by 2011, both have stated a desire for more transparent financial statements, but have been politically compromised by bankers and commercial lenders

FASB Plan Would Force Banks to Report Loan Fair Value: BusinessWeek

  • FASB is seeking to approve a proposal that would force banks to mark loans at market value by 2013, potentially having billions of dollars at risk for writedowns
  • In April 2009, FASB gave significant leeway to banks in regards to pricing and modeling loan values, banking consultants are very opposed to a reversal of the measures
  • Pension obligations and leases will be exempt from new measures
Published in BoomBustBlog

Moody's has released data that shows CRE has fallen for a second straight month. Thus far, things are rolling along exactly as we anticipated in our  CRE 2010 Overview (2.85 MB 2009-12-16 07:52:36), available for free download.

moody's real estate research

Published in BoomBustBlog

To all of your pension funds, UHNW, foundations, and family offices, you have been fleeced. I am about to walk you through (for the second time) the deci-billion dollar donation to the Wall Street Bonus Pool!

The second line of my very first post on BoomBustBlog in September of 2007 warned of an impending commercial real estate crash. I then went on to warn of this crash in specific detail:

Published in BoomBustBlog

Commercial Delinquencies Rise Again, Data Goes Ignored: Mortgage Bankers Association

  • Commercial Real Estate delinquency rates for loans held >30 days rose to 5.69% (as REITs continue to hit record highs)
  • CMBS debt has continued to have the highest delinquency rate of all debt by sector
  • For a reminder of the early warnings on regional bank exposure, see the Doo Doo 32
  • For my 2010 commercial real estate outlook (which thus far has been right on the money) see CRE 2010 Overview CRE 2010 Overview 2009-12-16 07:52:362.85 Mb

retail_cre_vs_cap_rate.png

Published in BoomBustBlog

Commercial Delinquencies Rise Again, Data Goes Ignored: Mortgage Bankers Association

  • Commercial Real Estate delinquency rates for loans held >30 days rose to 5.69% (as REITs continue to hit record highs)
  • CMBS debt has continued to have the highest delinquency rate of all debt by sector
  • For a reminder of the early warnings on regional bank exposure, see the Doo Doo 32
  • For my 2010 commercial real estate outlook (which thus far has been right on the money) see CRE 2010 Overview CRE 2010 Overview 2009-12-16 07:52:362.85 Mb

retail_cre_vs_cap_rate.png

Cron Job Starts

Commercial Delinquencies Rise Again, Data Goes Ignored: Mortgage Bankers Association

  • Commercial Real Estate delinquency rates for loans held >30 days rose to 5.69% (as REITs continue to hit record highs)
  • CMBS debt has continued to have the highest delinquency rate of all debt by sector
  • For a reminder of the early warnings on regional bank exposure, see the Doo Doo 32
  • For my 2010 commercial real estate outlook (which thus far has been right on the money) see CRE 2010 Overview CRE 2010 Overview 2009-12-16 07:52:362.85 Mb

retail_cre_vs_cap_rate.png

Cron Job Starts
Tuesday, 23 March 2010 00:00

Newscan from the Weekend Past

Comments on global news from the weekend past...

Bloomberg.com:

  • $7.88 billion of slices underwritten by Deutsche Bank under downgrade review since underlying CMBS have been downgraded (CDOs are MAX CMBS I Ltd. Series 2007-1 and Series 2008-1), S&P has already downgraded 2007-1 to BB+
  • A BlackRock presentation stated that Deutsche Bank's CDO portfolio does not forecast for tranche losses
  • The MAX CDOs are among the Federal Reserve's holdings in Maiden Lane III
  • AIG provided Deutsche Bank with $5.61 billion in collateral before the Maiden Lane III transfer

FT Article: Merkel v. Greece Round 239,084.67 (Ding, ding) @ http://www.ft.com

  • Merkel insists Greece has not asked for money, and Greece does not need any [Let's permanently attached this to Merkel's credibility rating]
  • European Commission and IMF officials are far from same page as Merkel
  • The article wasn't dense with info, which is not unusual considering the subject matter, but what is clear is that the bazooka everyone was talking about has no trigger, and probably loaded with more baby powder than gunpowder!
  • That is going to be a big issue with Greek debt maturing in April if they have no revenue to pay it off

FT Article @ http://www.ft.com

  • British Airway strikes did nothing to dampen travel plans over the weekend
  • Examples like this are calling the union's bluff, they are not stopping society, potentially leaving room for union break ups by private companies, sovereigns and municipalities if they choose so, this could be a blip on the radar or an emerging trend, so something to continue to watch
Published in BoomBustBlog