Continuing to lighten up
Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?


   This Week’s Data

    Weekly mortgage applications fell 11.7%.

    Weekly jobless claims dropped 12,000 versus expectations of a 2,000 decline.

The government announced its October and 2009 fiscal year budget deficits, $176 billion and $1.4 trillion respectively, both of which were larger than prior estimates.


    This is a scary must read article on the increasing likelihood of further Fed stimulus (long):

    Rail traffic down in October (graph):

    The latest GDP report from the Eurozone (short):

    The latest look at the Fed balance sheet (short):

    Friday morning humor (cartoon):



More information on the tax provisions in the House healthcare plan (medium):

    This article is on the problems associated with making health insurance mandatory as the current versions do (long):

    This one is on the likelihood that the new bill will ‘bend the cost curve’ (long):

    The problem with having a ‘super regulator’ as envisioned in the Dodd bill (short):

    Nevertheless, there are some positive aspects of the Dodd bill, like giving shareholders greater control of the Boards of Directors (medium):

  International War Against Radical Islam

    More on how the media (and many others) judged the Hasan massacre (long):

The Market
    Despite yesterday’s decline the DJIA (10197) remains within an up trend defined by 9835-11793.  However, as you know, I question its reliability as an accurate Market indicator and prefer the S&P (1087)--which made another stab in yesterday’s early going at 1102, couldn’t cut the mustard and rolled over.  Volume remains a problem and the VIX rose staying above its prior low (hence, not re-setting a down trend) but below the down trend line off its October 2008 high--in other words, it is in a trading range.

    Another look at breadth (short):

    The dollar trade re-asserted itself: the dollar was up, stocks, gold and commodities were down; and that seems to be what most of the talking heads focused on as primary moving force in the pin action.
    Whatever the reason one wants to attribute to the failure of the S&P to surmount the 1102 level, the simple fact is it didn’t.  So our Portfolios are taking a little more money off the table (cash will go from 17.5% to 18.5%) at the Market open this morning.

    Thoughts on Investing

    Lots has been made of the coming commercial real estate crisis.  Here is Cramer’s take:

If there is a commercial real-estate firm in trouble, at this very moment I can see a host of companies able to raise money right here to buy that real estate at very good prices.

Right now, Federal Realty (FRT - commentary - Trade Now), the classic example, has a gigantic war chest to buy large commercial malls, just waiting for developers to get into trouble. It was able to fill this war chest by offering equity at $57.50, which is nine dollars lower than where the stock is now. If you go over the quarter, occupancy is virtually unchanged year over year and the actual leases have gone up in price. So, you have a company that can raise its dividend and buy properties on the cheap.

But here's the issue. There aren't any. Nobody's defaulting fast enough for Don Wood, the CEO, to buy malls. The "crisis" in commercial real estate in something that should be very stressed; stores related to crimped retail spending isn't a crisis. It's actually humming!

So, you shoot back, how about commercial real estate? Can I point you to some very inexpensive debt deals done by Boston Properties (BXP - commentary - Trade Now) to raise money, coupled with a fantastic secondary at $50, which raised a huge amount of money, $731 million?

Why does this matter? Again, you are up hugely if you participated in that deal.

These deals are not the exception. They are actually the rule. Given how much money's been made on these secondaries, it is natural to presume that if they were to do more secondaries, there would be many eager participants.

I think you could argue, based on the leverage on which these companies can run, that they have the firepower to absorb a huge amount of property that could be in bankruptcy.

  The problem, the "crisis", has more to do with the difficulty of unwinding the securitized mortgages that were sliced and diced. But you know where they reside? In the big insurers. Have you noticed their stock-price movements? If you were to force them to recognize a big decline in the value of their portfolios, they, too, could come to the stock market for more equity, because the buyers made a great deal of money on almost all of the tranches of debt and stock that were issued.
So now you have ready buyers of the loan defaults, outfits like Boston Properties and Federal Realty (I could also argue that the apartment complex REITs have had similar success, but they are levered to the stabilization in housing prices, so they are in much less trouble at this phase of the economy), and you have the securitized portfolios in safer hands that do not need to dump them, outfits like Lincoln (LNC - commentary - Trade Now), Principal Financial (PFG - commentary - Trade Now) and Hartford (HSF - commentary - Trade Now).

Hence, the question is, WHERE IS THE CRISIS GOING TO COME FROM? I am not oblivious to the problems that can come from individual projects that were bought during the 2006-2007 period, like the ill-fated Stuyvesant deal in New York. There are plenty of Macklowe's out there, particularly those who bought Zell properties at the high. But they, again, can be dealt with by outfits like Boston Properties buying them?

The simple truth is that the "crisis" is really about transferring properties from one outfit to another at a lower price. It is NOT about $7 trillion in sliced and diced residential mortgages, often with second liens on them and, more importantly, deeply inflated by fraud and further complicated the valuations. These are big, one-time pieces of recognizable real estate, many of them trophy properties for which over-extended people paid too much.

Put simply, the sheer volume of the number of homes and the complexity of the securities has created the crisis in residential real estate. The commercial properties are not in great volume and the complexity of the securities is not so difficult, although I do not want to minimize them. The Treasury Department is trying to rewrite tax laws to make any redo of mortgages more advantageous and you do not have the tedious foreclosure process that has stretched this moment out in time.

Of course, there is one cohort that will be and is currently being damaged: the community banks. We see some community banks that are levered to commercial properties closed every weekend. But they are being closed in a methodical manner that has not put the "system" in crisis. In fact, the buyers of the banks have done quite well, as witnessed by PNC Financial (PNC - commentary - Trade Now) (great article about that on our flagship site), or BB&T (BBT - commentary - Trade Now), or US Bancorp (USB - commentary - Trade Now), or, most recently, East-West Bancorp (EWBC - commentary - Trade Now).
The commercial real-estate crisis? Just a good talking point that doesn't hold up under scrutiny. In fact, my conclusion of this exercise is simple: Buy the iShares Dow Jones U.S. Real Estate ETF (IYR - commentary - Trade Now). It might be the best bargain among all of the ETFs I follow.

Posted 11-13-2009 8:23 AM by Steve Cook