Commercial Real Estate

One of my friends who has a business tied to commercial real estate asked the other day for indicators on when that might reboud. I pointed him at Calculated Risk and once again they do not dissapoint. As they point out commercial real estate usually lags resedential by five quarters or more, which spells problems for commercial real estate. Now as all real estate reports, things vary geographically, but generally this says to hunker down, which continues to be my advice in all sectors.

http://www.calculatedriskblog.com/2009/01/non-residential-structure-investment.html

Disclosures: None

2+2 - Sunday Edition

I apologize for the multiple independent posts this evening but some of the functionality on this blog seems to be down for the day. Here is a nice piece from Calculate Risk on how home sales are doing poorly and usually reboud 3-6 months before a recession ends. Not doing so yet. There is probably some correlation explaining this but it escapes me. They also note how unemployment usually continues to do badly after a recession ends and this one is not there yet. As usual, they have nifty graphs. This site is one of my favorites for statistics in understanding how bad things are this time around. As the articles they quote note, this one is different. I think fourteen months into the recession, that fact is a bit hard to ignore.

http://www.calculatedriskblog.com/2009/01/new-home-sales-and-unemployment.html

Disclosures: None

"It's going to be a miserable ride."

I wish that I had said that. The chief financial analyst at Key Bank says it will be late 2009 before earnings rebound. I think he is a smidge optimistic, but generally on the right track.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoQVPQW1bTnY&refer=home

Disclosures: None

Go For It!!

Let me start by apologizing for the radio silence this weekend. Busy with stuff Saturday and did my first skiing in two years today. So while I wait for the ambulance to arrive so they can carry me to work tomorrow - these old muscles aren't what they used to be - I thought I might as well try to slip in a post. I will seek to add more after the family goes to bed and the pain dissipates.

So the "Go for it!" header refers to Yellen a yellin' about big time fiscal stimulus, as in the not seen in our life times kind of stimulus, as in pull-out-all-the-stops stimulus, as in act-now-think-later stimulus.

Don't get me wrong, I a big fan of stimulus, but one has to define what we are choosing to stimulate. Yellen seems to want to stimulate lending and spending. Let me check my blog archive a moment, and, yep, just as I thought, lending and spending is what got us into this mess. Call me silly but more of the same seems like a hair-of-the-dog cure. Feels good for a while.

Here are some things worth stimulating, in my opinion:

• Let' stimulate people to pay down their debts so they are not drowning in the stuff. It was not planned that way, but the stimulus package in 2008 mostly went to paying down debt and building savings. The right places in my view but not what the government wanted.
• Let's stimulate house prices getting to a rationale level with as little pain to (former) homeowners as appropriate. We need affordable housing for people but that does not mean they have to own the home. I have rented most of my adult life and it worked out just fine. Make sure those losing their homes have an affordable place to rent and put a roof over their heads and let home prices find their own bottom.
• Let's stimulate small, medium and large businesses, who simply need credit lines to do regular operations, such as for lines-of-credit for international trade, to actually be able to obtain the credit they need to operate. Those who do not deserve credit, so be it, but credit is the lubricant needed for many daily business functions by well run businesses of all sizes. The government should lend the money directly to worthy companies and skip the financial institutions. Giving the financial Goliaths money is like tearing it up and flushing it down the toilet.
• Let's stimulate lenders using appropriate underwriting techniques and borrows doing so responsibly. Wow, there is a heck of a concept for a change.
• Let's stimulate Congress to prohibit or at least highly regulate (going forward, at least) the risky derivative products, CDSs and other complex financial products that the companies dealing in them are not even able to understand. Seriously, someone needs to look over their shoulders a bit, at least for those that survive, and make sure shareholders and others are not being at too much risk.
• Let's stimulate the continuing search for affordable alternative energy. Here, I might mention, I define "affordable"with all variables considered. Cost is one (somewhat big) factor, but we need to consider sustainability, environmental impact, our ability to eventually take economic advantage of it, and the availability of it worldwide. By the latter factor, I am referring to wind, earth thermal, wave energy and other technologies that are highly geographically oriented. (And you thought I spent all my time on financial stuff.)
• Let's stimulate jobs in the right areas, like environmental, education, health and the like. Obama is going there and I like it.
• Let's stimulate from the bottom up. The financial imbalance between the rich and the poor and middle class in this country has been setting new records this millennium. The recession is trimming that difference a bit. Well, it is not too healthy for this discrepancy to grow too large as the bottom 90% are those that support our economy. Even the top 10% need to realize their success is tied to the ability of the other 90% to make ends meet.

Just a few thoughts here. More later.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXomybLEzm3U&refer=home

And as much as I like Obama's one plan, giving $300 billion in tax breaks for "stilumus" is wrong minded. Those recieving it I suspect will spend it the right way, as in paying down debt, not consumption, but when you call it stimulus, you suggest we want them to spend. He and Congress may want spending, but I want savings and debt reduction. Good old-fasioned values that need desperately to become new-fashioned imperatives.

http://www.bloomberg.com/apps/news?pid=20601087&sid=avkJ478jcrgo&refer=home

I do agree on Yellen on one point, however, this recession is going to be far longer and deeper than the garden variety. Good to see someone with a bit of street cred agreeing with me, though I do not like her solutions (not to downplay the street cred of Whitney, Roubini and the like).

Disclosures: None

Two Plus Two Equals a Long and Painful Recession

I received a number of comments on my 2009 predictions, some agreeing, some saying I was too pessimistic and some saying I was too optimistic. For those saying I was too pessimistic, let me explain further why I believe this recession will be longer and nastier than most and when we do come out of it, things will not be the same as they were in 2007.

First, the go-go years in the decade leading up to this recession were largely fueled by massive debt. Easy credit leads to foolish levels of over-consumption. So now we are deleveraging, both at the corporate level and at the individual level, though obviously not at the government level. I tend to think times of easy credit are not returning any time soon for the masses, nor should it. As Americans learn to live within their means (by choice or otherwise) the level of consumption in this country will adjust to a new, significantly lower, level, and hopefully it will remain there. That is the good news because if we do find a way to return to our foolish spending ways - as the government seems to be trying to get us to do with "stimulus" packages - then we will simply prolong the problem and increase the eventual pain.

Second, in a normal recession, the weak fold allowing the strong to survive and perhaps become stronger. The faster this process takes place, so long as it is done orderly, the better, at least in terms of moving forward and putting the mess behind us. This will take place in various segments of the economy, but at least for the financial sector we have a very big problem. We learned from the Lehman collapse that the financial industry is way too interconnected at the moment. Some of this is due to $62 trillion in notional value in the CDS market. There were a variety of knock on effects that followed Lehman's demise that has the government spooked enough that they are not letting any of the big boys fail. But the usual money making ways for the financial goliaths are toast, the junk on their books is continuing to fester and they will continue to be a black hole for capital. We will continue to throw money at them and hope time will allow them to get back on their feet. Nonetheless, they cannot all survive. So here is the problem, we cannot let them fail and the economy cannot support their existence (at least not all of them), so here we are - stuck with a government bailout for a very long time. No easy solution here. We just need to keep them on life support long enough to figure out a way to take a few of them down in an orderly fashion. This is a situation making the cure to this recession very complicated.

Don't believe me, look at AIG. We have - so far - committed $152 billion for its bailout. Why? Was it to save the millions of policyholders from losing their coverage? NO!! The problems were at the holding company. The insurance subsidiaries are regulated on a state level by state departments of insurance. The subs are having some problems due to their association with their parent, but the books for the subs were generally strong as state insurance departments did their job and made sure the insurance subs had adequate reserves and surplus and did not invest in risky assets. So, again, why would be spend ten times as much salvaging a holding company versus the long drawn out battle we had to support the auto makers, who support millions of jobs? Why??!!

The answer is in credit default swaps. AIG Financial Services got into these big time and just happened to issue a lot of contracts to Eurpoean banks. There, these banks are allowed to use the existence of these CDSs to support their capital structure. Had AIG gone down, it would have taken a host of European banks with it, among a host of other entities. The government had no interest in saving AIG, it had to do so, however, to avoid the knock on effects. Just imagine the calls Ben, Paul, W. and others were getting when AIG was on the brink. Complications like these spell big trouble for any quick recovery.

Third,a recession is a correction; it takes things back to where they should be. Usually, we overshoot and go too far the other way, but eventually we recalibrate back to mean. If you think the last few years leading up to this recession were the mean, you are sadly mistaken. The mean is significantly lower at a level of economic activity that cannot support all the companies out there. So being at mean may in itself feel like a recession. The party is over.

Fourth, Obama's plan, though I like it, will not stop the recession. I like the plan for the following reasons:

• America insists that something be done and needs hope that it is being done. So Obama has to do something. We could waste more money giving it to financial institutions, or we could spend it in a fashion that at least gives us something we need in the long run, whether or not it ends the recession. Infrastructure spending, alternative fuel and education are worthy causes.This spending will serve us well in the future.
• Unemployment is on the rise and will continue along that path for some time. We can either spend money feeding and housing the unemployed, or we can give them jobs. The latter allows them to have money to spend, which helps the economy. Not enough, in my opinion, to stop the recession, but better than them living in homeless shelters.
• Oil will rebound massively a few years from now, if not sooner, as a significant amount of the current supply chain will shut down. Too much of the supply is in nationalized hands and being poorly managed. Spending money now on alternative energy - even though gas prices are low at the moment - is incredibly wise. If the U.S. can develop efficient and cost effective alternatives, we can become a major exporter of energy, not an importer.

Overall, Obama's plan will lessen the pain and pave the way for better times ahead, but I expect it to do little to fix the mess we are in. But I really think there are few cures to the mess other than hunkering down and waiting it out. No one likes to hear this. We all want answers. We all want quick fixes.

I promise I will return to my usual fare of summarizing articles of interest, but I needed to get this out of my system. Now I feel much better. That extra second makes a world of difference.

Disclousures: None

New Year Same Mess

Well we turned the page on the caledar and I am feeling much better. Perhaps it was that extra leap second scientists gave us to synchronize the clocks with the planet or maybe just having some time off for the holidays. Either way, I am feeling at least a second younger. Go figure. Nonetheless, the recession is still with us - get used to it.

Won the Battle, Lost theWar

Wells Fargo fought tooth-and-nail to win Wachovia from Citigroup. I have read that the FDIC arranged the Citigroup/Wachovia deal as a stealth way to prop up Citigroup (too complicated to go there now (and I do not recall all the details but it was a good read)). Wells Fargo, on the other hand, saw an oppotunity to take advantage of the Wachovia losses to gain some tax benefits (thanks to a perhaps illegal IRS statement allowing them to do so) so they were all gung-ho to take Wachovia from Citigroup's grasp. Well, Wells Fargo won that battle.

Yet the war wages on and obviously the risk takers at Wells Fargo have not been reading my blog. Wachovia was well within the top five rank for subprime and option ARMs. The latter has yet to peak in foreclosures and will spell trouble well through 2009. All one needs to do is follow Calcuated Risk to understand this. They have very nice charts there showing it all in graphic detail. I highly recommend the site (especially to the folks at Wells Fargo).

Nonetheless, Wells Fargo - a financial company that until the Wachovia deal was faring the storm fairly well - rushed in to fight for a company worth fighting to avoid, and they got what they thought they wanted. Now things do not seem to be so nice and rosy. Go figure. I intended to put a put option on Wells Fargo at the time but options, in both directions, are too over-priced right now. Still, I could have made some money on that one.

The question you have to ask yourself is how many other major purchases/mergers this past year will lead to problems beyond what was anticipated. There are at least a couple of financial behemoths that are going to face some challenges this year. Don't worry though, Paulson will save the day.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJx1Gt0NKWgo&refer=home

Goldilocks and the Four Bad Bears

I mentioned above that Calculated Risk has some nifty charts. They have a few right now comapring the current decline to other notable bear markets. Seems we may have a bit to go to keep up with bears of the past. If my predictions for 2009 are accurate, we will get there.

http://www.calculatedriskblog.com/2009/01/four-bad-bears-end-of-year-update.html

Comment Response

One of my new challenges is to review comments here and at Seeking Alpha, where some of my posts get published. One that just showed up there recommended raw materials and financial companies as an investment. Raw materials are all over the board right now so make up your own mind. Eventually they will return but you need to define for yourself "eventually."

While I try very hard not to opine on any individual stock, I am not so shy when it comes to a sector. On the financial industry, decide for yourself, but here are some considerations:

• Foreclosures will continue through 2009 and housing has not reached a bottom;
• Commercial real estate is sinking fast and is lagging the decline in non-commercial;
• The traditional way for financial companies to garner big fees are gone or at least not happening right now, so they are not making money;
• CDSs will continue to plague them throughout 2009;
• The government, hopefully, will wise up and dissolve some of these companies; and
• With so many good companies with stock prices so low right now, why would you bother.

You decide.

Disclosures: None

2009 Predictions

I have seen a lot of people posting on predictions for 2009, so what the heck, let me give it a stab. Let me warn you in advance, this is not going to be warm and fuzzy.

1. Housing will continue its decline, probably for most if not all the year. Why? Well, for one thing there are a lot of adjustable rate mortgages (ARMs) resetting in 2009. Now you might think the low rates will allow them to reset lower, and in some instances that is likely correct, but the wonderful lenders came up with a nice product called an option ARM that lets the buyer chose among various payment options, which can include paying interest only or even less than that. Moreover, while rates are low now, ARMs almost always start with artifically low teaser rates well below where the reset will go, despite low rates today. Accordingly, there will be a host of new foreclosures adding pressure to prices, along with unemployment and other factors. Some markets are near a bottom already, like parts of California, but overall, I suspect housing will continue its decline throughout 2009.
2. Credit will continue in a nearly frozen state for the year. The banks we look to for lending are simply in a horrendous situation and will not be looking to lend their money any time soon. Housing declines will continue to pressure them, as will CDSs, off-balance sheet vehicles and their debtors going belly-up. Some local and regional banks might be more willing to lend, but increasing problems in commercial real estate will impact them too. Continue to look to the government (federal government only) as the lender of only resort.
3. The stock market. I am going on the record here and predicting that the market in the U.S. will be lower at the end of next year than it is right now, and I expect a good 10-20% lower. Not many people are predicting this direction for the market, so you are asking why. After all, doesn't the market typically start to rebound six months or so before a recession ends? Well, the problems we are facing are deeply entrenched and so far we are not doing the right things to fix the problem. I have ranted here enough about the TARP and other moves being taken, so I will not repeat it again. It is possible the next administration will make smarter moves, but I fear even the right moves will not avoid a few years of pain. Yes, a few years of pain. We are in some rather severe spirals that will take a long time to escape.
4. Bankruptcies, and lots of them. And I am talking the Chapter 7 liquidation kind becasue debtor in possession (DIP) financing is very hard to come by right now, which means Chaper 11 reorg is near impossible. For the shareholders and creditors of those that go under this is bad news, but overall for the economy it is a healthy move. We no longer have the massive debt-driven consumption that enabled all the companies to exist, much less the easy credit that let them make ends meet when they probably should have folded instead. Time to thin the ranks.
5. Unemployment over 8%. Even using the government's bogus unemployment numbers I anticipate unemployment going over 8% by year-end 2009. The real unemployment rate is already above that but the government plays games with the numbers to keep them artifically low.
6. Crime will be on the increase as desperate souls seek to make ends meet. Not a surprising call, but often overlooked. Lock those doors.
7. Political instability. A number of countries will become increasingly unstable over the next year. Riots and public protests, like those taking place in Iceland and Europe, will increase. What is truly troubling is the prospect that countries will increasingly turn to military action as political frictions escalate between countries.
8. EU with no U. The strains on the EU have never been greater and Germany's reluctance to play ball with the rest of the union will, in my opinion, cause a rift that cannot be fixed. I doubt the EU will disband in 2009, but pressures will reach a critical point and it may well happen in 2010.
   

Well, there you have it, for better or worse (actually no better here). I am first in line to hope that all these predictions are dead wrong.

Disclosures: None