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Pathfinder Partners' e-Newsletter
October,
2009 |
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| Pathfinder e-news is a
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CHARTING THE
COURSE
Stocks Up 50% in Six
Months - Beam Me Up, Scotty.
By Mitch Siegler,
Senior Managing Director
We are puzzled,
mystified and more than a little bit lonely. You see, we
missed out on the 50% run-up in stock prices over the
past six months. That's the strongest rally ever, three
times faster than the previous fastest recovery in 1982,
according to Birinyi Associates.
While the
slingshot rebound in equity markets this summer seems
like a triumph of hope over reason (though the $12
trillion government stimulus programs and the zero to
0.25% interest rates did sort of stack the deck in favor
of the market), that doesn't mean we're not kicking
ourselves just a bit for keeping our heads down. And,
though we've been searching mightily, we're just not
seeing all those green shoots folks prater on about. Nor
do we see how a little less bad is cause for champagne,
streamers and colorful, pointy hats. (Overheard at a
recent cocktail party: "Getting excited that job losses
of 570,000 aren't 670,000 is like rejoicing that your
120 golf score isn't 130.")
All around us,
folks are humming the Bob Marley tune, "Everything's
gonna be alright." Take the recent New York Times poll,
where 80% of economists surveyed said they believe a
recovery is underway. Maybe in some Star Trek parallel
universe but probably not just yet in the good ol' US of
A - where rising unemployment, a lethargic housing
market, skyrocketing defaults on commercial real estate
loans and plummeting consumer spending continue to
overhang the market. The strongest stock market rally
ever? Beam me up, Scotty.
A couple of weeks
back, in Washington, Fed Chairman Ben Bernanke boldly
proclaimed that the recession had ended. Phew, what a
relief. Actually, the Chairman's exact words were "very
likely" over. We were on the edges of our seats waiting
for the "but" or "unless" but must have missed those
articles commonly found in conditional sentences.
Helicopter Ben did, however, use the word "technically,"
as in "Technically, Joe, you're cured, you'll just need
physical therapy four times a week for the rest of your
life," or "Technically, Mary, you still have a job,
you're just being laid off temporarily." And, if "very
likely" and "technically" weren't enough of a hedge,
Bernanke added a further caveat that "It's likely to
feel like a very weak economy for quite some time."
Rising
Unemployment
Yeah, a weak economy -
particularly for the 15.1 million folks like Mary who
are out of work as of the end of September (7.2 million
of whom lost their jobs since the recession officially
began in December, 2007). And, don't forget the
additional millions of underemployed - part-timers
wanting full time work, the disillusioned that stopped
looking after six months without success and those at
imminent risk of losing their jobs. We hear there's only
one job opening for every six people looking for work.
Feeling better?
Well, we've always been a
little suspicious of numbers. To quote Mark Twain,
"There are three types of lies - lies, damned lies and
statistics." And government statistics are among the
most dangerous. So, we look past the headline
unemployment number and jump to the more obscure "U-6"
measure of unemployment, to gauge the health of the
economy. U-6, which includes part-timers who can't get
full-time work and those who have given up their search
after six months, was 16.8% at last count. That's one in
six Americans, some 26.3 million people, according to
Barron's
researcher Teresa Vozzo. Admittedly, not Great
Depression levels but pretty darn terrible by any
measure.
As Yogi Berra would say, it ain't
over 'til it's over - and it ain't over by a long-shot.
Even liberal economist and New York Times writer
Paul Krugman, who certainly has no axe to grind in this
regard, doesn't think unemployment will peak until
2011.
Weak Housing
Sector
Housing continues to struggle
with one in eight U.S. households (13.2%) with mortgages
behind on payments or in foreclosure during the second
quarter, per the Mortgage Bankers Association. That's an
all-time high and up from 9.0% a year earlier. The good
news: the worst may be over in sub-prime. The bad news:
prime loans now account for 58% of foreclosures and just
four states - Florida, Nevada, Arizona and California -
comprise 44% of foreclosures. The MBA's chief economist
expects this trend to continue until late 2010, at the
earliest. 'Nuf said.
Rising Defaults for Commercial
Real Estate Loans
Looking ahead, bad
commercial real estate (CRE) loans are estimated to be a
$3 trillion (with a "T") problem for CMBS holders but
also to banks and insurance companies, whose whole loans
account for 70% of the problem, according to
Shadowcapitalism.com. Rising vacancy rates (10% at malls
and 15% in office buildings) don't help. Neither does
the $1.6 trillion in CRE loans that mature between 2009
and 2013, according to estimates from Goldman
Sachs.
But, surely banks have already
marked down their problem loans to market values? Well,
Citicorp carries commercial loans and securities at
90-95 cents on the dollar, according to banking
analysts. Meanwhile, the Federal Reserve marked down the
CRE loans it and J.P. Morgan acquired from Bear Stearns
to 60 cents. And when BB&T acquired Colonial Bank in
August, it slashed CRE values down to a similar level of
63 cents. Ask any bank analyst whether a further 20 cent
write-down on CRE loans would bankrupt Citi (and just
about every big bank) and you'll get a resounding "Yes!"
We shudder to think about Citi's 30 to 35 cent upcoming
impairment. (Like most bank stocks, Citi is up a
whopping 92%, from $2.32 to $4.43/share in the six
months ended September 25th.)
Of course, banks make
loans because they expect to receive their money back,
with interest. They book revenues and expected expenses
when each loan is made. As we're now learning,
write-offs can be much larger than anticipated. When
this occurs, banks increase their loan loss reserves,
reducing earnings or generating losses. In cases of
massive losses, capital is destroyed and insolvent banks
are seized by regulators. In 2008, 27 insolvent banks
were seized by the FDIC. In 2009, more than 90 have been
seized. Many analysts, us included, think thousands of
banks will fail during this cycle.
Since most loans don't go bad immediately
(sometimes banks protect themselves through interest or
other reserves), it can take months or years for a loan
to shift from "performing" to "non-performing" status.
Today's non-current loans - the fuel for tomorrow's loan
losses - were $200 billion and increasing rapidly. In
days of old, bankers booked loan loss provisions in line
with the increase in non-current loans. Since the onset
of the credit crisis, this hasn't happened. So, going
forward, loan loss reserves will have to rise faster
than delinquencies to preserve capital ratios and keep
banks solvent and out of the hands of regulators.
Bank execs have great control over the
timing of recognizing losses. And, there are lots of
signs that banks are delaying loss recognition (in
banker parlance, it's called "extend and pretend").
We've seen many banks moving very slowly to issue
notices of default (NOD) on delinquent loans. We've
observed many situations where banks haven't issued an
NOD on a loan with no payments made for 12 or even 24
months. Banks have also been slow to foreclose - less
than 10% of defaulted loans have gone through
foreclosure, according to Real Capital Analytics. That
just prolongs the day of reckoning by forestalling the
sale of properties at lower, market prices.
But, to quote the late pitchman Billy
Mays, that's not all. Nearly $1 trillion in short-term
commercial mortgages, mostly three to five-year notes
issued during the 2004-2007 boom years, are slated to
mature by the end of 2010. In an environment where very
few banks are lending and property owners don't have the
cash to double down on their equity investments, even
loans on reasonably solid properties will go into
default.
Whither the Consumer?
Meanwhile, consumer spending, the
engine of the U.S. economy for the past 25 years,
continues to plummet. We say, "Thrift is the new cool"
and coupon clippers should receive medals. But, stingy
consumers and disciplined savers don't help the economy
turn around. Bank credit, which continues to contract at
a staggering rate, shows that consumers aren't returning
to their spendthrift ways of yesteryear anytime soon.
Banks are tightfisted too. For the week of
September 2nd, U.S. commercial banks shrank their
commercial and industrial (C&I) loans by $10.3
billion, their real estate loans by $15.3 billion and
their consumer lines by $6.4 billion. That's an
unprecedented $32 billion of lending that went "poof" in
a week, bringing the total contraction to more than $200
billion since the end of July, according to Gluskin
Sheff's David Rosenberg.
O.K., so new
spending is down. How about yesterday's spending? Well,
it seems customers are defaulting on their credit cards
at the highest rate since the recession began. Bank of
America's charge-off rate was a staggering 14.5% in
August. B of A's pals at other credit card issuers like
Citigroup, J.P. Morgan, Discover and Amex came out with
similar numbers. Not only are people cutting back on new
spending, they're also not paying off their debts - on
home loans or credit cards. We think that's significant
since consumers have been the engine of the U.S. economy
for decades.
Surely the government
can help! Arbitrary social goals - like striving for
greater home ownership for people who can't afford homes
or mitigating foreclosures for people who shouldn't have
bought in the first place - feel like nothing more than
government-induced steroid boosts with no thought about
future ramifications. And, don't get us started about
artificial jolts to politically powerful industries
driven by lobbyists and their Washington cronies (think
Cash-for-Clunkers). Perhaps the economy is the one thing
you can't fix with duct tape and bailing wire.
Of course, expanded home ownership is a
wonderful thing. More loans for low-income people are
also fabulous. Cars are great, too - but if you don't
drive carefully, watch out. Food is the sustenance of
life, growth and health. But, eat too much and you'll
become overweight and bring on a host of
life-threatening health issues. Sir Isaac Newton figured
out in the 17th century that for every action, there's
an equal and opposite reaction. So, when politicians
make divine pronouncements about new government programs
and regulations for the greater good, we can't help but
ask about the ramifications and the equal and opposite
reaction.
Lately, we've been reading
about the Great Depression, searching for parallels and
trying to connect a few dots. Today's slump barely
compares to the 1929 to 1933 era. Then, GDP plummeted
27% compared with a 5.8% decline in the first quarter of
2009, followed by a further 1.0% decline in the second
quarter. In the '30s, one in four workers, more than 25%
of those seeking work were out of a job. Today, it's
more like one in ten (or one in eight, 12.2%, if you're
a Californian or one in six, 16.8%, if you subscribe to
the U-6 unemployment metric, like we
do.)
Of course, business took a substantial
turn down in 1929 following the severe market crash.
(Then, like the September, 2008 through March, 2009
period, stock prices were down about 50% from their
peak.) But, in early 1930, the U.S. was still years away
from the massive unemployment which was the hallmark of
the Great Depression. It was also more than two years
away from a final bottom in the stock market, which did
not occur until 1932 and which brought the DJIA down 89%
from its 1929 peak. In fact, in 1930, the Dow had
recovered more than 46% from its post-crash lows - less
than six months after the 1929 crash. (Sound
familiar?)
We're not optimists or
pessimists - just trying to be realists. Eh, Captain
Kirk?
Mitch Siegler is Senior
Managing Director of Pathfinder Partners, LLC.
Prior to co-founding Pathfinder in 2006, Mitch founded
and served as CEO of several businesses and was a
partner with a boutique investment banking and venture
capital firm.
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FINDING YOUR PATH
No Sign of
Global Warming in the Credit Markets
By Lorne Polger, Senior
Managing Director
Last Sunday, I read with great
interest an article in the business section of the Los Angeles
Times. The article spoke of the travails of
a 30-year employee of a very large national bank, and
her inability to refinance her existing residential
mortgage that the bank held. The article went on
to describe the downsizing that led to her termination,
her pension and the amounts held by her and her husband
in various investment accounts. Perhaps not
surprisingly to some, her former employer was not
willing to refinance her existing home loan. Now, if
this were a situation where the borrowers had
overleveraged or had to refinance a Jumbo, subprime, or
ALT-A loan, we would certainly understand the bank's
position. Not the case here. Instead, this was a
conforming loan made to borrowers who had kept their
payments current for the life of the loan, had plenty of
equity in the home, and who were otherwise able to
satisfy their financial obligations. So, why did
the bank, her former employer, turn them down? The
response from the corporate spokesman sounded a little
bit like a politician's answer to the health care reform
debate - shades of gray, overshadowing a healthy dollop
of ambiguity.
I'm certain that there are many
other examples just like this one in the residential
lending world, and recognize that the tightening of
credit belts is not limited to home loans.
On the commercial side, there are over $1
trillion of commercial real estate loans coming due in
the U.S. over the next five years. The systems which
created this mountain of debt, primarily banks and
collateralized mortgage backed securities, do not
currently have the capacity (or desire) to refinance all
of this debt, even if you assume that we will have
relatively static values. In fact, the markets are
frozen solid. If you believe, as we do, that the
effects of the recession will have a dramatic negative
impact on real estate values long after the economy
begins to improve, then there will be a clear majority
of these loans/properties which will require significant
additional capital to facilitate the de-leveraging of
the industry. In turn, this will present problems for
lenders, investors, operators and even tenants. Of
course, it will also create opportunity for new capital
to make attractive investments.
Let's assume
though that smart bankers (and there are lots of them
out there) will take the two major prevailing trends
into consideration in their underwriting. First, they
will acknowledge that commercial real estate values have
declined and will likely continue to decline. Second,
they will operate on the premise that loan-to-value
ratios have declined and will likely continue to
decline. Sure, loan amounts will go down dramatically,
but banks make money by making loans, so there should be
plenty of debt available for the right deals,
right? Not now, and maybe not for quite
awhile.
It goes beyond statistics. The pendulum
has been whipped back to the other side in a harsh
overreaction to the extraordinarily sloppy underwriting
that occurred in the run-up. It's unclear whether
local and regional loan volumes are down by 80% or 95%
from the historic highs of 2005 through 2007, but in
either case, the impact is dramatic. Will it continue?
If so, for how long? What will the long term effects
be? I offer a few predictions.
You
can generalize by saying there are two types of banks
out in the world today - healthy banks and sick
banks. Healthy banks have received TARP funds and
used those monies to shore up their balance
sheets. But they have also virtually ceased all of
their lending activity. It's almost like they are
adopting the same belt-tightening attitude that many
consumers are displaying these days. The ill banks
are being told by the regulators that they can't lend
because they don't have adequate capital to do so. The
hard money lenders have all left the market and no one
is really stepping up to fill these giant voids.
To date, in countless discussions that we have had with
local, regional and national banks, we have not seen any
glimmer of a change on the horizon. Deals are being
passed by like leftovers on the fourth day after
Thanksgiving. The mashed potatoes just don't look right
the following Monday. Hard to say whether it lasts for
two, three or four years, but given how difficult it is
to swing an aircraft carrier into position, we're
betting a turnaround is a few years away.
And
what of the effects of this lending freeze? Certainly,
owners and investors will be loathe to invest additional
capital into projects when they don't see both a proper
return on their investment and a timely exit for the new
money. As a result, buildings will suffer, with deferred
maintenance and cavernous vacancies. Not a great
situation if you're a tenant in one of those office,
industrial or retail buildings, either. From a macro
economic perspective, the bad stuff will only work its
way through the system when investors are able to add
some leverage (even light leverage for heaven's sake!)
to enhance returns. Absent leverage, cash buyers
will demand reasonable cash-on-cash yields, which in the
current environment, suggests that it will take
dramatically longer for us to clear through the
mess. And that certainly won't help the U.S. in
trying to work its way through the recession.
The oceans may be rising, and the ice on
Kilimanjaro may be melting, but the global financing
freeze appears to be locked in at sub-zero temperatures
for the long term.
Lorne Polger is Senior
Managing Director of Pathfinder Partners, LLC.
Prior to co-founding Pathfinder in 2006, Lorne was a
partner with a leading San Diego law firm, where he
headed the Real Estate, Land Use and Environmental Law
group.
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THE TOP 10 INDICATORS THE ECONOMY IS STILL
BAD:
10. CEOs are
now playing miniature golf.
9.
You receive a pre-declined
credit card in the mail.
8. You go to buy a toaster
and they give you a bank.
7.
Obama met with small businesses
- GE, Pfizer, Chrysler, Citigroup and GM - to
discuss the Stimulus Package.
6.
McDonalds is selling the 1/4
ouncer with cheese.
5.
People in Beverly Hills are
firing their nannies and learning their children's
names.
4. The most
highly-paid job is now jury duty.
3.
People in Africa are donating
money to Americans. Mothers in Ethiopia are
telling their kids, "Finish your plate; do you know how
many kids are starving
in America?"
2. Motel
Six won't leave the lights on.
1.
When the bank returns your
check marked "insufficient funds," you have to
call
to ask if they meant you or
them.
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SNIPPETS:
TRUTH IS STRANGER THAN FICTION
A Collection of Comical,
Outlandish, Bizarre and Frightening True
Stories
A compendium of notable
news articles relating to commercial lending which
we've edited and commented upon.
IMF Reduces Global Loss
Estimate from $4.0 to $3.4 Trillion
On September 30, 2009, the IMF released its
October, 2009 Global Financial Stability Report
(GFSR). The GFSR includes an update of the
expected write-downs on loans and securities on a
global basis. "For both banks and other financial
institutions, the GFSR calculates that actual and
potential write-downs from bad assets such as
loans and securities have fallen by some $600
billion over the past six months - from about $4.0
trillion to $3.4 trillion, as a lessening in
financial stress has narrowed spreads." U.S. banks
are expected to incur $1.02 trillion, eurozone
banks $814 billion, U.K. banks $604 billion, other
mature European banks $200 billion and Asian banks
$166 billion.
$2.2 Trillion in
Commercial Property Defaults "$2.2
trillion in major commercial properties, acquired
or refinanced between 2004 and 2008 are at risk
because of significant refinancing hurdles and a
rising threat of default," according to a recent
report by Real Capital Analytics. Many of these
properties, typically leveraged at 70% to 80% of
prior purchase price, would face challenges even
if prices had held steady. Today, few lenders will
advance more than 50% to 60% of current value. The
equity in $1.3 trillion of properties is "at great
risk if not already wiped out," because properties
acquired or refinanced from 2006 through 2008 have
already seen price declines of 25% or more. Prices
for office, industrial, retail and apartment
properties nationally have dropped about 35% from
the October, 2007 peak, as measured by the latest
Moody's Real Estate Analytics Commercial Property
Price Index, derived from RCA data.
The
RCA report notes that $2.2 trillion of properties
acquired or refinanced between 2004 and 2008 have
lost value since the transaction. "Peak to trough,
we see a larger move in prices in commercial than
Case-Shiller has reported in residential,"
according to RCA. Dramatically lower transaction
volume is a big part of the problem. Property
sales so far in 2009 equate to just 7% of the
volume achieved at the peak in the first half of
2007, according to RCA.
And, the value of
distressed properties has more than doubled his
year, according to RCA's report. A total of $93
billion of U.S. office, industrial, retail and
apartment properties have fallen into default,
foreclosure or bankruptcy during this cycle, and
troubled hotels and other commercial property
types add "at least another $31 billion" to the
total, the report states.
And although
distress is accumulating quickly, its resolution
is another matter. "Less than 10% of the
distressed situations that have emerged have been
resolved," the report states. Lenders have been
slow to foreclose on assets and the phrase 'extend
and pretend' has recently entered the vernacular."
[A banker friend
shared this banking industry maxim with us
recently: "A rolling loan gathers no
loss."]
24% of Apartment CMBS
Loans on "Watch List"
That's the latest from Trepp, LLC, the New York
information provider on commercial mortgage backed
securities (CMBS). Their detailed review of these
loans indicates that defaults may hit virtually
all property types (class A, B and C) and
throughout the country. Loans are placed on Watch
List according to various quantitative factors -
like debt service coverage ratio, loan to value
ratio, net operating income, performance trends of
the asset and months to loan maturity as well as
qualitative factors - like management expertise,
deferred maintenance and market condition. Real
estate experts generally believe apartments are a
healthier real estate asset class than office,
retail, hotels and other commercial categories.
Loan Losses Catch
Banks Eventually
In August, BB&T purchased Alabama's
Colonial Bank after it was seized by the FDIC.
Colonial, like many banks, long argued that its
loan loss reserves, cash flows from performing
loans and ongoing deposits would enable them to
ride out the storm. However, the terms under which
BB&T took over $21.8 billion of Colonial's
assets shows the fallacy in this
argument.
Essentially, Colonial's losses
from loans made during the go-go years were just
too big for the bank to absorb from future
profits. BB&T is marking down Colonial's loans
and real estate collateral by a whopping 37%,
which reflects the acquirer's view of estimated
losses. Construction loans were particularly hard
hit, marked down 67% by BB&T.
Colonial was about 100 times larger
than the average bank seized this year. The FDIC
acknowledged that Colonial would cost its
insurance fund about $3 billion. Some analysts
estimate the ultimate cost may run as high as $5
to $7 billion.
Following the
Colonial seizure, FDIC Chairwoman Sheila Bair
said, "The past 18 months have been a very trying
period in the financial services arena." Indeed.
In 2008, during what has been called the epicenter
of the financial crisis, the FDIC reserved $25
billion for potential future losses. The Colonial
Bancorp takeover chewed up more than 20% of FDIC's
reserves.
A Long Road Ahead for
the FDIC Institutional Risk
Analytics, one of the premier bank analysis firms,
takes FDIC data and runs it through their
analytical black box. While the FDIC has 416
banks, 5% of the nation's total on its "Watch
List", IRA gives 2,256 banks, about one in four,
an "F" and thinks more than half will be seized by
the regulators or merged into healthier
institutions before this cycle ends. This
year, 92 banks have failed, a four-fold increase
from the 25 that went down in 2008. That's 117
down and only 883 to go.
Yikes.
According to IRA, "Estimated
losses for failed bank resolutions by the FDIC are
running around one quarter of failed bank assets,
a level much higher than between 1980 and 1995,
when failures cost an average 11%. The likely loss
rate peak for the U.S. banks in this credit cycle
is two times the 1990 loss rates or around 4% of
total loans, according to the IMF. Since total
loans held by all FDIC-insured institutions was
$7.7 trillion as of the second quarter of 2009,
the IMF estimate implies cumulative losses of over
$300 billion.
IRA says "If you start
with our assumptions that roughly half of the
banks currently rated 'F', some 1,000 banks, will
fail and/or be merged with another institution and
the loss to the FDIC bank insurance fund will be
approximately 20% to 25% of total assets, the cost
of these resolutions to the FDIC could exceed $400
to $500 billion. Our 'worst case' for large U.S.
banks ($10 billion+ in assets) is $800 billion
through the current credit
cycle."
The FDIC's reserves are only
about $10 billion today, down from $60 billion
last fall. The agency's insurance fund is now
promising to cover $6.2 trillion of deposits with
just $10.4 billion in reserves - that's about
two-tenths of one penny for every dollar of
covered assets. [Would you buy life or
health insurance from this sort of
company?]
Speaking of Government
Agency Problems...
The Federal Housing Administration's aggressive
lending programs have continued throughout the
housing downturn, causing its market share to grow
from 2% in 2005 to 23% in 2009, according to
HUD.
The FHA admitted in
mid-September that its cash reserves had likely
dipped below 2% for the first time. This brings
the agency below its government mandated minimum
threshold. (The agency needs to above the minimum
level at its September 30 fiscal year-end, just
when a load of stalled bank-foreclosed homes
finally come to market.) The FHA insures mostly
first-time homebuyer loans and folks that can
barely scrape together a 3.5% down payment. The
number of FHA borrowers at least one payment
overdue - 17%. [Go
figure.]
2.7 Million Defaulted
Residential Mortgages
There is a shadow market of 2.7 million homes
that are technically in foreclosure but have not
yet been taken over by the lender, according to a
Wall Street
Journal study released in late September.
"As of July, mortgage companies
hadn't begun the foreclosure process on 1.2
million loans that were at least 90 days past
due," according to the study. "An additional 1.5
million seriously delinquent loans were somewhere
in the foreclosure process, though the lender
hadn't yet acquired the property. And, there were
217,000 loans in July where the borrower hadn't
made a payment in a year but the lender hadn't
begun the foreclosure process. In other words, 17%
of home mortgages that are at least 12 months
delinquent aren't in foreclosures, up from 8% a
year earlier."
More Defaults for
Expensive Homes
Jumbo mortgages - home loans exceeding $417,000
- now have the fastest rising default rates of any
mortgage class. According to recent data from
First American CoreLogic, 7.4% of them are in some
form of default, nearly three times the rate at
the start of 2008.
Is there any reason for this
trend to improve? The Obama administration has
done plenty to help out middle-class homeowners -
like the $8,000 first-time homebuyer credit,
artificially low FHA mortgage rates and various
mortgage modification programs. But those programs
don't apply to jumbo loans. Even Fannie Mae and
Freddie Mac will no longer stand behind jumbo
mortgages. Mortgage rates are roughly 100 basis
points higher for jumbos and inventory of
expensive homes is skyrocketing. Data from the
Wall Street
Journal and the National Association of
Realtors shows that there is a 20.7-month
inventory of $1 million + homes, up from 16.4
months this time last year.
Florida Condos: Look Out
Below!
Foreign investors have been scooping up Florida
condos, where prices have fallen 50% or more from
their peak. But, many Florida real estate experts
predict there won't be meaningful appreciation for
five to seven years because of excessive supply.
EWM Realtors reports that 45 condos priced north
of $750,000 sold in each of June, July and August.
At that pace, it would take 4� years for the 2,439
units currently on the market to clear.
Demographics aren't helping -
Florida's population shrunk by 58,000 for the 12
months ending in June, 2009. In 1980, 26% of all
60+ Americans who moved across state lines chose
Florida. By 2007, it was down to 12% and some
experts think 8% isn't far off.
Jack
McCabe of McCabe Research & Consulting blames
high property taxes and insurance rates and thinks
condo prices could fall another 10% to 15% in the
next year.
Las Vegas: From Boom to
Bust
A reduction in Las Vegas' average daily room
rate, at $97 in May, down 28% compared to May,
2008, has helped maintain reasonable occupancy
levels - which have only declined 5.7% over the
same period, according to TheBentleyGroup.com.
However, gaming revenue in Clark County declined
$62.5 million or 7.7% compared to the same period
of the prior year. For the first five months of
2009, gaming revenue fell $570 million or 13.2%.
That's impacting Las Vegas jobs as casinos, hotels
and their suppliers slash workforces. The
unemployment rate in Sin City jumped from 10.4% in
March to 12.3% in June. With major new projects
like Fountainbleu and City Center in trouble, more
construction and service jobs are likely to go in
the months ahead.
Cash-for-Clunkers: A
Very Temporary
Boost
An Edmunds.com study shows
that half as many people were researching a new
car purchase on its website in late August
compared to peak levels during the $3 billion
Cash-for-Clunkers program. Traffic is even down
10% from the June period, before Cash-for-Clunkers
took hold.
A CNW Research poll found
that nearly one-in-four Cash-for-Clunkers
beneficiaries now regret buying a new car because
they're faced with a huge bill to pay. With
700,000 sales with an average financed amount of
$16,000, that's more than $11 billion of new,
government-induced consumer debt. According to
David Rosenberg of Gluskin Sheff, "It was an
overextended consumer that got us into this
financial mess to begin with and now Uncle Sam
just induced [American consumers] to expand their
balance sheets by $11 billion. The price we will
pay for an illusory positive print on third
quarter GDP will be stagnation over the next
several quarters."
U.S. Banks Not as
Healthy as They Appear
At first blush, U.S. banks look like they're
getting healthier. Many of the biggest have repaid
government bailout money, some are reporting
strong profits and the government is winding down
programs that got financial services through the
worst of the crisis. But it's not yet clear that
banks are emerging from the financial meltdown
with the kind of fundamental changes many had
hoped for.
After receiving enormous
government cash infusions, the banks are in much
better shape. Washington has begun winding down
some of its emergency loan and guarantee programs
and the Obama administration is no longer talking
about needing another $750 billion in bailout
funds.
An analysis by The New York
Times shows that large financial
institutions recent acquisitions have made JP
Morgan and Wells Fargo bigger than in October,
2007. Four firms - JP Morgan Chase, Wells Fargo,
Bank of America and Citigroup - account for more
than 50% of the market capitalization of the
largest 29 firms.
Some also worry that the
banks reporting higher profits are simply
benefiting from extraordinary conditions rather
than finding smarter ways to operate. JP Morgan
and Goldman have gorged on profits from trading
and new stock and bond issues. JP Morgan
benefitted tremendously from government help in
acquiring two troubled companies, Bear Stearns and
Washington Mutual. The Fed's policy of keeping
short-term rates near zero has been a direct
subsidy to the banks, allowing them to pay next to
nothing to borrow money that can be lent at much
higher rates. Interest paid to depositors on
ordinary savings accounts is around 0.2 while
banks collect 5% or 6% on
mortgages.
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Notables and Quotables
"The odds [of a V-shaped economic
recovery] are pretty close to zero. The case for the
V-shaped recovery lies in a view predicated on the
history of post-World War II cycles: the deeper the
economic downturn, the more robust the economic rebound.
But, in these previous cycles, the V-shaped recoveries
were all in the context of a secular expansion in
credit. What most analysts, economists and strategists
are grappling with is what it really means to have had a
25-year secular credit expansion come to an
end."
"There's no question that we are
going to get periodic spasms - cash for clunkers, cash
for clothing, housing subsidies, etc. All of these
things will give you a sugar high for a given quarter.
But, if you look at what happens after you burst a
credit and asset bubble as deep as we did in this cycle,
there is no V-shaped recovery. What you get is a series
of lower case W's attached to each other."
- David Rosenberg, Chief
Economist and Strategist, Gluskin
Sheff
"It's almost as if the biggest
credit bubble in history never occurred. Investors are
increasingly convinced that a sustainable global
recovery is emerging out of the wreckage. All praise to
the central bankers for saving the world! I'm waiting
'til someone writes about the return of the Great
Moderation and suggests Ben Bernanke is the new Maestro.
Then I'll know the lunatics have taken over the
madhouse...yet
again."
- Albert Edwards,
Chief Strategist, Soci�t�
G�n�rale
"The problems are far worse
than they were in 2007 before the crisis."
- Joseph Stiglitz,
Nobel laureate, in a September 12, 2009
interview
"I think there will be at
least 500 more banks fail between now and the end of
next year."
-
Wilbur Ross, legendary investor and head of W.L.
Ross & Co.
"[Commercial real
estate is] a looming problem."
- FDIC Chairwoman Sheila
Bair, who believes commercial real estate losses will be
a key driver for bank failures through 2010 [We think she may be on to
something, since non-performing loans are now 2.8% of
the entire banking system's assets, up from 1.4% in
June, 2008 and 0.5% in June, 2006]
"A
surplus of cash led to a shortage of
sense."
- Marc
Faber, publisher Gloom, Doom & Boom Report and
Barron's Roundtable member
"Massive
stimulus and money printing aren't the solution of the
problem of insufferable debt level and the legacy of
years of living way beyond our means. If such measures
were the answer, Argentina would be one of the most
prosperous countries in the world."
- Comstock Partners, quoted
in an August 10, 2009 Barron's
article
"And you may ask yourself,
well, how did I get here?"
- Musician David Byrne of
Talking
Heads
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