Note: Please be sure to check the twitter feed in the upper right hand corner of this site for real time updates, as well as the comment section below.
It is now time to start putting in some serious short positions across the board - globally - for all those who have not already done so. Anyone who has followed me on BoomBustBlog knows that I have clocked heavy four digit gains (250% to 450%), mostly unlevered, throughout the first leg of the financial crisis - see Sample Research & Performance. This was accomplished by keeping my eyes open and objective, and in doing so recognizing the enormous holes in economic value that were trading at ridiculously high risk adjusted prices. The result of which enabled me to publicly call the fall of nearly every major collapsed FIRE sector institution that did actually fall, and do so months in advance, including Bear Stearns, Merrill Lynch, WaMu, Countrywide, Lehman Brothers, General Growth Properties, etc. The near 100% equity run up at the height of the correction was easily seen by my and my staff, but I (and I put the blame squarely on myself and no one on my staff) severely underestimated the breadth and depth of this synthetically contrived, central bank centrally planned, bear market rally. This underestimation of the depths that our Federal Reserve would stoop to in mortgaging the future of this country, and this country's children of the next generation cost me 50% of the gains that I made over the previous two years. For this I was actually forced to apologize to my subscribers in a lengthy letter with tears dripping off of my virtual typewriter, reference 2009 Year End Note to BoomBustBlog Readers and Subscribers. I felt horrible about underestimating the self destructive staying power of the concerted efforts central bankers around the globe attempting to rescue a failed oligarchy, but despite this significant shortcoming, I still ran many circles around what the best Sell Side Wall Street had to offer, reference Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?
Yesterday, I went through a quick timeline that illustrated what was once considered sensationalist now considered by most to be fact: The ECB, several national central banks, and a good portion of the private banking system are insolvent. This is the case regardless of what name you want to cut and paste on the state of insolvency. As excerpted from Over A Year After Being Dismissed As Sensationalist For Questioning the ECB’s Continued Solvency After Sovereign Debt Buying Binge, Guess What!:
European Banks’ Capital Shortfall Means Greece Debt Default Not an Option: A failure by European regulators to make banks raise enough capital to withstand a sovereign default is complicating efforts to resolve Greece’s debt crisis. The “fragilities” of Europe’s banking industry mean a Greek default isn’t an option, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in New York last week. By delaying a decision some investors consider inevitable, policy makers risk increasing the cost to European taxpayers and prolonging Greece’s economic pain. “European officials are trying to buy time for the troubled economies to get their house in order and the banks to be strengthened,” said Guy de Blonay, who helps manage about $41 billion at Jupiter Asset Management Ltd. in London. While estimates of the capital shortfall vary, the vulnerability of European banks to a sovereign shock isn’t disputed. Independent Credit View, a Swiss rating company that predicted Ireland’s banks would need another bailout last year, found in a study to be published tomorrow that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 percent, even before any sovereign default.
Here’s a newsflash for all of you who are still not grounded in reality. The loss to the banks have already occurred it just hasn’t been officially recognized. You see, their bond and debt holdings are already devalued. The value is gone, vamoosed, disappeared. I have made this perfectly clear, both in my keynote speech at the ING valuation conference and here on BoomBustBlog.
There has been a lot of noise in both the alternative and the mainstream financial press regarding potential risk to the ECB regarding its exposure at roughly 48 to 72 cents on the dollar to sovereign debt purchases through leverage, and at par at that. This concern is quite well founded, if not just over a year or so too late. In January, I penned The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults. The title is self explanatory, but expound I shall. Before we get to the big boy media's "year too late" take, let's do a deep dive into how thoroughly we at BoomBustBlog foretold and warned of the insolvency of both European private banks and central banks, including the big Kahuna itself, the ECB! The kicker is that this risk was quite apparent well over a year ago. On April 27th, 2010 I penned the piece "How Greece Killed Its Own Banks!". It went a little something like this:
Yes, you read that correctly! Greece killed its own banks. You see, many knew as far back as January (if not last year) that Greece would have a singificant problem floating its debt. As a safeguard, they had their banks purchase a large amount of their debt offerings which gave the perception of much stronger demand than what I believe was actually in the market. So, what happens when these relatively small banks gobble up all of this debt that is summarily downgraded 15 ways from Idaho.
Well, the answer is…. Insolvency! The gorging on quickly to be devalued debt was the absolutely last thing the Greek banks needed as they were suffering from a classic run on the bank due to deposits being pulled out at a record pace. So assuming the aforementioned drain on liquidity from a bank run (mitigated in part or in full by support from the ECB), imagine what happens when a very significant portion of your bond portfolio performs as follows (please note that these numbers were drawn before the bond market route of the 27th)…
The same hypothetical leveraged positions expressed as a percentage gain or loss…
CNBC ran an article this morning, Bank Shares Take a Beating, and It May Not Be Over Yet. Talk about obvious. We have been bearish on banks since they collapsed a couple of years ago. Yes, they soared 100% to 200% after dropping 80% (you do the math and see which side of the bet made the most money), but those share price spikes are the result of pure and explicit government manipulation. There are no fundamental reasons that come to bear to buy these companies. As a matter of fact, they are the new "tobacco" companies and are lightning rods for litigation, and that is the least of their problems. The big issue is that the cause of the their collapse in 2008 has went nowhere but deeper in into their respective balance sheets, hidden by captured government regulators and funny money accounting shenanigans. The bulk of most bank lending in this county is done for the purchase of real estate. How do you think that business is doing now? How about those ever so valuable legacy assets?
The chickens are coming home to roost, dude. When you send your chickens out in the morning, they return to your barnyard. Not your neighbor's barnyard, not the guy across the street, but your barnyard. Oh, I say it and say it again... You've had! Been took! Hoodwinked! Bamboozled! Led astray, run amok! This is what they do!
Do you remember my recent missive "There’s Something Fishy at the House of Morgan"? Well, in it I queried how it was that JP Morgan can continuously pull risk provisions and reserves to pad quarterly accounting earnings at time when I not only made clear that we are in a real estate depression but the facts actually played out the same. As excerpted from the aforementioned article:
I invite all to peruse the mainstream financial media and sell side Wall Street's take on JP Morgan's Q1 earnings before reading through my take. Pray thee tell me, why is there such a distinct difference? Below are excerpts from the our review of JP Morgan's Q1 results, available to paying subscribers (including valuation and scenario analysis): JPM Q1 2011 Review & Analysis.
Well, I’ve a confession to make. I really do know why there is such a distinct difference. A very similar situation was illustrated in my article on Apple's presence on the Goldman Sachs' "Convict"ion buy list, which I fear is a must read before you finish this article. Reference Goldman Sells Nearly Half $Billion Of Apple Stock Directly Into Their Client’s Conviction Buy Recommendation: Guess Who Really Agrees With Reggie Now! These shenanigans were clearly and plainly illustrated in two recent mainstream articles, believe it or not. Here they are…
On 5/24/11 I recorded a podcast interview with the Sound of Money, an interesting financial show that airs on NYC's WNYE radio. You can listen to 46 and a half minutes of my viewpoints and opinions via this link, Sound-money-interview-of-reggie-middleton-05-24-11. Be sure to peruse the blog of the show as well.
Summary: I called it the coming RE Depression in 2007! I put MY money where my mouth was and sold off all of my investment real estate. I put YOUR money where my mouth was and shorted all that had to do with real estate (REITs, banks, builders, insurers). I called almost every major bank collapse months in advance. I warned the .gov bubble blowing does not = organic economic recovery. Now I'm saying we need to, and will, continue what's left of the crash of 2009, with ample global company. There will be no RE recovery this year, and there will be a crash. OK, you heard it here!
First, let's go through the headlines for the day then proceed to breadcrumb trail that clearly led us to where we are now and where we will ultimately end (oh yeah, In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse Wednesday, February 23rd, 2011)
Commercial Real Estate
U.S. commercial property prices fell to a post-recession low in March as sales of financially distressed assets weighed on the market, according to Moody’s Investors Service.
The Moody’s/REAL Commercial Property Price Index dropped 4.2 percent from February and is now 47 percent below the peak of October 2007, Moody’s said in a statement today.
The national index has fallen for four straight months as sales of distressed properties hurt real estate values. Investor demand is strongest for well-leased buildings in such major markets as New York and Washington as vacancy rates decline and the economy grows.
The index “continues to bounce along the bottom as a large share of distressed transactions preclude a meaningful recovery of overall market prices,” Tad Philipp, Moody’s director of commercial real estate research, said in the statement. “Indeed, the post-peak low in price has been reached in the same period as a post-peak high in distressed transactions has been recorded.”
So-called trophy properties in New York, Washington, Boston, Chicago, Los Angeles and San Francisco are helping those markets avoid the drag caused by distressed asset sales nationwide, Moody’s reported. Prices of properties of $10 million or more have risen 23 percent since their July 2009 low, according to a separate report issued today.
No Recovery Signals
The overall index shows “no sign of recovery,” Moody’s said.
Almost a third of all March transactions measured by Moody’s were considered distressed, meaning the properties’ owners faced foreclosure, had difficulty covering their mortgage payments or experienced other financial problems. It was the largest proportion of distressed property sales in the history of the index, Moody’s said.
For all of those wondering how CRE can be doing so bad while REITs are doing so well, well I explained it in explicit detail several times in the past. Once we eliminate rampant fraud and bring back mark to market, all will be good again...
For all of those who felt I was too bearish on the Euro region in 2009 and 2010, thus far nearly every proclamation that I have made has come to light or shown a direct path to doing so. I believe I was unequivocally clear in my assertion that Greece will default at least a year or so ago (even if said default would be marketed by some other name for the sake of political expediency). I would consider this a must read for anyone in the mainstream media reporting on this topic, or any investor/stakeholder who may fear the Grecian domino effect, even if you feel you have seen some aspects of it before.
Well, now its time to call Greece out on its perversely circular reasoning being used to justify its alleged stance that it will not default. I read a humorously crafted ZeroHedge article this morning which immediately cause the following image to pop into mind...
For more on the origin of said circle, I first refer you to an article ran yesterday in Bloomberg:
Note: This is a very long post, and would have been longer if I didn't decide to break it up into pieces. I am presenting plenty of background material in it that regular readers have probably seen before because the subject matter is so pertinent to asset values both today, and tomorrow. I suggest those with interest in the real estate and/or banking arena read it in its entirety. The latter portion of the post is all new material that leads into valuations of real CRE properties that are currently on the market and ties in seemingly unrelated issues such Portugal's bailout and Greece's inevitable restructuring.
Last night, I spent an interesting time with the esteemed and world reknown macro economist, entrepreneur, NYU professor and strategist, Dr. Nouriel Roubini. Nouriel is a very, very bright guy. He has to be, he agrees with many of my viewpoints :-). Dr. Roubini had a client reception at his downtown loft in NYC. It was a delightful affair, plenty of heavy thinkers, a bevy of beautiful women, engaging debate of things geopolitical, macro-economic and financial... and of course at least one trouble maker. That would be that tall handsome fella in the middle who had the nerve, after Roubini literally deadened the room with his proclamations of what could come in the case of China crash, European default or US hard landing, to actually burst out and say the esteemed economist was actually being TOO OPTIMISTIC!
Hmmm, and they have the nerve to call Roubini Dr. Doom. Don't they know Dr. Doom wears a mask, a suit of armor, and is truly no joke?.
Anybody who has been following me since 2006 knows me to be a real estate bear. I was massively bullish from 2000 to 2005, after which I started selling off my investment assets. No, it wasn't perfect timing, luck or a gift from God. It's called a spreadsheet. Simply do the math and the truth will be self-evident! The Wall Street Journal and Bloomberg ran articles earlier this week on the home market tumbling further in the US: Home Market Takes a Tumble - WSJ.com.
I warned thoroughly of this occurrence throughout last year and this - see The Latest Case Shiller Index – Housing Continues Freefall In Aggressive Search For Equilibrium Monday, February 7th, 2011. The .gov bubble blowing accomplished the mission of taking observers eyes off of the fundamentals and macro environment and back into optimism central. To Bloomberg TV's credit, they gave me the opportunity to call it like it is.
Yesterday, I revisited the US employment vs inflation situation, which itself was an extension of my warnings on Employment and Real Estate Recovery. In the second post, I included the story from a BoomBustBlogger who was an investor of a large multi-family properties. As a BoomBustBlogger, he uses math to make decisions and the math simply doesn't pan out. Of course, due to .gov bubble blowing, unintended consequences often occur and this time around it is a bubble within a bubble burst in multi-family housing. The dilemma is, do you pull the trigger m/f investments that have increasing net effective rents even though we are almost certain to have higher interest rates (see Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate), more of a depression in housing (In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse), stagflation (Inflation + Deflation = Stagflation ~ Lower Real Estate Values!) and most importantly... obvious activity that is indicative of rampant speculation that goes against the fundamentals...
I will try to use math to address this conundrum in my next post as I'm running out, but realize that the recessionary (depressionary) pressures of s/f housing is not going anywhere soon. Let's look at the data taken from the February 11. 2011 HUD FHA Portfolio Analysis report: