Friday, August 14, 2009

Goldilocks Is In Foreclosure

CNBC's squawk box this morning featured an in depth interview with two titans of the commercial real estate world; Richard LeFrak and Ivanka Trump. (Ivanka is the daughter of Donald and now runs a significant portion of his real estate empire.)

Listening to people that spend their days actually involved in the business of real estate you get a much different picture than the talking bubble heads that the media spends most of their time interviewing.

Ivanka and LeFrak said that the banks have ceased lending on new projects across the board, and that they are essentially in full crisis mode. They both agreed that the commercial real estate meltdown has yet to even begin. There are $500 billion in loans scheduled to roll over this year and the market as a whole is about a $3.5 trillion problem that will run through 2012.

Meanwhile foreclosure data yesterday reported the highest month ever on record. Each month we receive the data we get a new record. One of the surprises to hit the list was Kansas, who reported a 97% increase in year over year foreclosures. Number 2 on the list in % gains.

How has this been spun by the media? They have now announced that we will have a "foreclosure" recovery in housing prices. The same notion has been spun for the overall economy. Perhaps you have heard the term "jobless" recovery in the past few weeks as the stock market has spiraled upward toward the insane asylum.

70% of our economy is based on consumer spending. We have had recent "better than expected" numbers from companies across the board as they have slashed expenses. That cannot continue forever as some point revenue has to grow. That revenue needs to come from the American consumer, the backbone of our economy.

The only problem is that the American consumer is completely broke and unemployment is growing relentlessly. Do not pay attention to the weekly jobless claims that show a decrease in the total number of people showing up to collect unemployment checks. The reason that number is falling is because a growing number of people are no longer qualifying for these checks because they have been unemployed for too long. As these people are no longer qualified they are skewing the numbers downward.

The truth is that our economy is heading toward full disintegration, not recovery. Larry Kudlow has continued to report on his nightly CNBC show that Americans not buying stocks today are going to miss their last chance to jump aboard the train to DOW 14,000. He should be put in jail.

The time to buy American stocks will be when CNBC has to shut down because the advertising dollars no longer support the network. Where will the DOW be at that point? I don't know where the actually number will be, but the value of the stock market will be around 1:1 DOW to Gold, as I've mentioned in the past. My best guess for that number will probably be around DOW 11,000, Gold 11,000, based on the money printing thus far and what's coming down the road.

We continue to move forward in the eye of the storm. As mentioned this morning by Ivanka Trump, banks and debt holders are currently both just looking at each other, with either side not sure what to do.

All the commercial loans were structured with 5 year balloons, (the loans have to be refinanced after 5 years) and the buildings are no longer worth what the bank debt was given for. It is estimated that commercial real estate has fallen in value by over 37% since the peak in 2007. Any loan given during 2004-2007 is either underwater or very close.

There is no money to refinance these buildings as the loans come due. The banks are hemorrhaging.

Or, maybe Goldilocks is real, and we will have a "foreclosure" led "jobless" recovery. Last chance to jump aboard DOW 14,000.

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