Friday, August 29, 2008

A Real Estate bottom?

Good article written today putting some much needed perspective on all the recent news once again proclaiming the bottom of the real estate market:

http://www.financialsense.com/fsu/editorials/schiff/2008/0829.html

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Thursday, August 28, 2008

Fire Sale in La La Land

Wow, the numbers were just released on home prices in California. In July 2007, the median home price in Cali was $587,000. In July 2008? $350,000.

Oh my. That is a 40% drop year over year, and the equivalent of $4,500 lossed per week! Remember, this is the median home price dropping. If you owned a more expensive home the losses are unimaginable. Fortunately, most of those people tapped their entire equity on their home to go on vacations, buy big screens, and new cars. They can now just hand their keys over to the bank and go rent a home for a fraction of what the mortgage is. The banks will take all the losses, and those losses will be spread out all across the country to every tax payer who is paying for the bank bail outs.

So next time someone asks you if you've done anything for someone lately, tell them you personally financed the lifestyle of 80% of California the last few years. Remember, they get to keep the tvs and the cars. The only people you should feel bad for are the ones who bought homes they could afford with down payments and did not tap into their equity.

The same thing is coming in credit cards. It's going to be very unfortunate when the American public finally understands what the government is doing to their money. Anyone holding dollar denominated assets is going to be brutally crushed.

http://latimesblogs.latimes.com/laland/2008/08/fire-sale-calif.html
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Wednesday, August 27, 2008

Correction

Looks like I was a little too optimistic on the bank funds taken on by the FDIC discussed below. Here's the new estimate of FDIC money needed by bank analysts: $500 billion

http://www.cnbc.com/id/26421989

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Market Update

Let's take a second and figure out where we are at at this point in history and take a look at what's coming:

Fannie and Freddie will soon need their government bailout which will wipe out the common stockholders of the company. What will be preserved and backed is the debt (debt holders) who are mostly foreign countries. Hundreds of billions or perhaps trillions by the time it is over will be needed to make these investors whole.

The FDIC's current watch list is now at 117 troubled banks. There will most likely be many more that fail than that by the time the credit crisis runs it's course. The FDIC's reserves do not come close to what is necessary to cover all the banks and the government will have to step in and cover the remaining losses. The estimates are tougher to guess on this one. I would say $100 billion would be a low estimate up to $300 Billion if a few of the larger banks begin to wobble.

The investment banks continue every month to exchange their mortgage securities for treasuries from the Fed. Eventually the Fed's balance sheet will be full, and they will need additional funds to cover the losses for these banks. I would estimate the funds needed at $500 billion to $1 Trillion.

Our government and the Federal Reserve have no money to cover these losses. Our current deficit runs at around $500 billion per year before factoring the red ink just discussed. So as the losses continue to pour in they will be monetized, printed, and these fresh dollars will be exported overseas. Foreign central banks will continue to take in these dollars and print more of their own to keep their currencies from appreciating too fast causing a major slow down in their exports. Good article discussing that topic today:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/26/ccchina126.xml

Another good article today discussing foreign debt holdings:

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_pesek&sid=aqu59cnYfsFY

Last one:

http://www.financialsense.com/fsu/editorials/schiff/2008/0827.html

Tuesday, August 26, 2008

Commercial World

I spent the last six days in Chicago at a commercial real estate conference. It was a great event, and I got to spend time speaking with people that are currently involved in the business buying and selling buildings. I took away some common themes from the event that most people were discussing:

1. Credit is getting tighter

Most of these people have been in the business for many years and have a significant net worth. Many of them are having credit lines withdrawn on their properties in upwards of $500,000. Banks are cutting back home equity and property lines making it much tougher for borrowers to pull money out of their current properties to buy new ones.

There is very little money for properties that are not stabilized and producing positive cash flow. Land development capital has been shut off for about 10 months, but what is starting to turn off is money for available buildings with higher vacancies. The sellers of these buildings of course understand this and are being much more flexible/creative in negotiations to get deals done. This is presenting opportunities right now for buyers who have significant cash or have the experience to creatively put together deals.

2. Retail and Office are dangerous

We are at the point right now in this country where the consumer is tapped out and business is contracting. Consumers have been shut out of their home equity lines, the cost of living is rising, they have no savings, and they have now turned to the last option: Credit Cards. There has been a surge in new business from the credit card companies the past few months sending their profits temporarily higher. Unfortunately, the borrowers don't have the means to pay back the money they are borrowing and all these temporary profits will turn into massive losses. At that point, just like with housing, the credit limits will be withdrawn and the average American will finally be done spending. Retail sales are going to retract significantly, thus presenting great opportunities down the road to buy buildings dirt cheap.

3. Cap Rates are still too low

This was not as common as the first two, but it is one that I personally believe. Because the Fed continues to keep interest rates artificially low, money has continued to flow into commercial real estate simply because there is no attractive alternative right now. I believe that as interest rates are forced to rise, and credit continues to tighten, money will move out of the sector bringing cap rates up. (When cap rates rise, property values fall) This again, will present tremendous buying opportunities that are on the horizon.

I.O.U.S.A.

I went to go see I.O.U.S.A. on Thursday. It was released in theaters throughout the country for one night only, and I was pleasantly surprised to see that my theatre was full. It's good to know that there are other people in this world that are interested in the horrific state of the United States balance sheet.

The focus of the movie is the United States deficit; both how we got ourselves in the mess that we're in, and how bad things are going to get in the near future. We currently owe about $9 Trillion and the estimated budget deficit for next year was released a few weeks ago at $490 billion. However, with the current events taking place with Fannie and Freddie, I would personally estimate the deficit next year to top $1 Trillion for 2009. That would bring our total deficit to $10 Trillion.

When I talk to people about this I usually hear, "Well, people have been saying that the world is going to end for a long time and things just keep on going. We've had a budget deficit for a long time so why does it matter now." A similar misconception that I hear a few years ago was, "I make $5,000 per month, my expenses are $7,000 per month, but my home goes up by $5,000 per month so I can just borrow against that and still be ahead." That is not a problem as long as someone on the other side is willing to keep lending you the money, just as it is not a problem for the US as long as someone is willing to lend us money they know will never be paid back.

44% of the $9 Trillion is now held by foreigners. When discussing this people usually say, "Who cares?" During the movie they explained how in the past during war situations countries that held the debt of others could control the actions of the other countries by threatening to sell their bonds in the open market and destroying the value of their currency. They call this financial warfare. This is the exact situation the United States now finds itself in. The only thing keeping our currency from collapse is that it is being artificially held up by foreign countries. In return for doing this they get massive inflation within their borders and the growing threat of recession because of the losses they are taking from the money lent to the United States. This situation obviously is unsustainable, and in the best care scenarios the dollar is going to lose a lot of value.

The stock market took a pretty big beating on Monday. The credit markets have begun to seize up again, similar to what we saw a year ago. There are many big banks that are in serious trouble and banks are very scared to lend to each other because they do not know if their money is going to be paid back. The countdown has also begun for the wipe out of Fannie and Freddie's stock, and the full government takeover. Their stocks were destroyed last week, and it's only a matter of time at this point as the losses continue to pour in.

Oil had a major rally on Thursday followed by an enormous sell-off on Friday. It has regained it's footings and risen a small amount the first part of this week. It is a forgone conclusion at this point in the media that oil is now heading back to $100 and then $80. I guess all those people forgot a few weeks ago that they were calling for $150 then $200. The same goes for gold and silver, as well as the other major commodities. The same classic band of cronies are calling for the end of the "bubble." I would love to see one of those commentators put a major short position on silver right now and then come back on television at Christmas time.

The unbelievable sell off in silver the past few weeks has presented what will end up being the greatest buying opportunity of this entire bull market. Every time it drops I take a larger position. I am even buying silver right now with my tax money that I need to keep aside because I am self employed. The physical demand for metals right now is exploding. Dealers are having trouble finding metal to fill all the orders that are flooding in and there are delays right now extending months out in the future. At some point the paper market will get ripped upward by the physical market and it's going to be explosive.