This mornings news flow is essentially a "Didn't Reggie tell us this in full detail up to two years ago" fest. Indebted Europe is falling apart for the new year just a day after the liquidity driven romp in equities. The Portugal T-Bill Yield Almost Doubles in Auction, from 3 months ago. The yield Portugal pays on its debt has increased 522% since this last year. This is after the Pan-European bailout fund was announced and implemented to put an end to such pressures. Alas.... The best laid plans. CNBC reports, as does Bloomberg:
Portugal sold six-month bills today, the first of Europe’s high-deficit nations to test investor demand in 2011 after the threat of default forced Greece and Ireland to seek bailouts last year. The government debt agency, known as IGCP, auctioned 500 million euros ($665 million) of bills repayable in July. The yield jumped to 3.686 percent from 2.045 percent at a sale of similar maturity securities in September, with investors bidding for 2.6 times the amount offered. A year ago, the country paid just 0.592 percent to borrow for six months.
"I am not surprised by the strength of retail sales, because i knew that 30% of consumers are responsible for retail sales, and these 30% did much better because of the performance of capital markets. I don't think it is indicative of anything going forward. I don't think the economy is going to get any better. If you look at our fiscal and monetary policy, we went two trillion in the hole last year. Two trillion... to produce this... and unemployment went up to 9.8%! We've spent two trillion we're printing money we're going bananas. Our balance sheet, we've got $2.6 trillion on there, and what;s on there government securities, and MBS."
..."If interest rates go up a point Bernanke's bankrupt. Everything he's bought is underwater. All the MBS are underwater, the whole country is underwater."
It has come to my attention that several banks have actually blocked rank and file level access to my blog through their intranet. That, my dear friends, is asinine, and does nothing but engender distrust. While I admit I can be rather flamboyant in my writings, I am nonetheless quite fair. In addition, my opinions are analytically driven, by design. Thus, if you have a differing opinion all you really need to do is challenge me with the facts. One of us will be proven to be right, or at the very least it will be shown to all how we came to our conclusions. I have absolutely no problem admitting when I am wrong or have made a mistake. I have been right long enough and often enough that I have plenty of emotional and even egotistical room for error. I know fully that no one is perfect, and while I would much rather catch any error first, before a third party does it (particularly a dissenting third party) I know that things don't always happen that way.
A commenter had a very intelligent dissent against my Goldman Sachs post on Zero Hedge the other day. While cogent, eloquent and very lengthy, it was still wrong but it definitely exemplified what a bank (or any other entity) should do when they feel that I am not in the right. Of course, if you put yourself out there, there is always the risk that you can be proven wrong as well. Believe it or not, and contrary to what you marketing and PR advisers may tell you - it is alright. As a matter of fact, it is actually good sometimes. You see, to many of the people that matter, it is not only acceptable, it is expected that you will not be right all of the time. Anybody who is right all of the time should be held up to a much higher level of scrutiny. Just ask Bernie Madoff. The true test of character and fortitude is to be able to publicly admit when you have made a boo-boo, and be willing to do something about it. That goes a lot farther in my eyes, than abject perfection. This is a lesson that the global and national banking industry in the US has yet to learn.
On that note, let's go over a few emails that I have received recently...
The FDIC bank data from the 2nd quarter reveals that banks, despite extend and pretend, regulator passes, and kick the can down the road policies, are still feeling the CRE crunch. Notice the "Construction and land development" line below. Nearly 15% of bank assets are in non-accrual status (dead money), almost 6% charged off, and merely 6.24% recoverable.
Back in September of 2007 when I was preparing to launch a hedge fund, I came up with this interesting name for a blog. It was BoomBustBlog. What made it interesting is that I can literally blog ad infinitum on the synthetically crafted booms and busts of the global economy, for the method of shepherding the economy in this day and age is actually predicated on the existence and/or creation of Booms and Busts. Of course, from my common sense perspective, one would think that the job of a central banker would be to ameliorate the effects of, and in time eliminate booms and busts... Apparently, that doesn't appear to be the flavor du jour. As a matter of fact, it appears as if central bankers are doing the exact opposite. Of course, attempting to cure a bust with a boom, or worse yet attempting to prevent a boom from busting with another boom is a recipe for disaster, and worse yet the probability of success is close to nil, yet central bankers try anyway. This leads to overt and explicit policy errors, which leads to outsized profit opportunities to those who pay attention. Enter "The Great Global Macro Experiment, Revisited", from which I will excerpt below. Please keep in mind that this article was written in October of 2008, and turned out to be quite prescient, I will annotate in bold parentheticals the portions of particularly prescient relevance. The original macro experiment piece was posted on my blog in September of 2007... For those that are interested, I plan on discussing this topic live on Bloomberg TV today: “Street Smart” with Matt Miller & Carol Massar at 3:30 pm.
Trump SoHo, the flashy 46-story downtown hotel and condominium, is taking another unusual step to boost sluggish condo sales—offering substantial discounts to buyers who have already signed contracts but not yet closed.
These discount offers run to around 25% of the agreed-upon purchase price, according to documents reviewed by The Wall Street Journal. They're being used as a special encouragement to convince buyers who might be getting cold feet to close their deals.
Discounts are being offered to prod Trump SoHo buyers to close.
Rodrigo Nino, president of Prodigy International, the sales and marketing company for Trump SoHo, declined to discuss the size of the discounts or how many buyers have accepted them. He said Trump SoHo "is not unilaterally offering concessions. The requests have been handled on a case-by-case basis."
Even taking into account these markdowns, Mr. Nino added, "the average net closing price is in excess of $2,500 per square foot."
The price cuts aren't the first measure Trump SoHo has taken to get committed buyers to close on their deals. The developers, the Sapir Organization and Bayrock Group, are putting together a plan to offer direct financing to potential buyers who can't secure enough credit to purchases condos. Mr. Nino said the program would be implemented "shortly."
Aug. 27 (Bloomberg) -- Blackstone Group LP is refunding some performance fees earned during the commercial real estate boom, the first time fund investors have clawed back cash from executives at the world’s largest private-equity company.
Blackstone and some of its managers returned $3 million in carried interest to investors in Blackstone Real Estate Partners International LP during the second quarter, said a person with knowledge of the payments. They may pay back an estimated $15.7 million this quarter to another fund, Blackstone Real Estate Partners IV, according to the person and a regulatory filing.
Blackstone’s property buyout funds recorded performance fees totaling $1.74 billion, some of which was allocated to the firm’s partners, as the market for office towers, hotels and apartments soared from 2004 to 2007. Prices have slumped about 39 percent since then, leaving New York-based Blackstone and its rivals in a position similar to that of venture capital firms about a decade ago, when the collapse of technology stocks forced them to return profits earned on Internet companies during the 1990s.
“The acute situation for clawbacks is when you have had a very successful period of gains and then the remaining deals don’t do well,” said Michael Harrell, co-head of the private funds practice at the New York-based law firm Debevoise & Plimpton LLP. “That is what happened when the Internet bubble burst and there is certainly the potential for that with the sharp downturn in the real estate market.”
Private-equity funds, which raise money from institutions including pensions and endowments, pay a share of profits from investments, usually 20 percent, to the firm and its investment managers. If the fund’s remaining holdings suffer a permanent decline in value, clawback provisions can require the executives to rebate cash distributions in order to prevent their share of profits from exceeding the 20 percent.
One of Dallas' oldest regional shopping centers has been handed over to lenders. The owners of Valley View Center mall have quietly transferred title to the 37-year-old mall at LBJ Freeway and Preston Road to a lender group headed by Bank of America.
The shopping center, which in recent years has lost anchor tenants, contains more than 1.6 million square feet and has J.C. Penney and Sears department stores. The mall is less than 75 percent leased.
Macerich Co., a California-based real estate investment trust, declined to comment Wednesday on why it gave up ownership of the shopping center. [No need to worry, you do realize that I have plenty of comments on why it gave up ownership of the shopping mall, don't you?]
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 finalistsfor paid subscribers.