As part of its Commercial Real Estate Project, PIMCO has conducted an extensive overview of opportunities in the U.S. CRE market. In this most perplexing of markets, where if one follows REIT stock prices, a V-shaped recovery is all but guaranteed, PIMCO has a notably less optimistic outlook. Based on the framework of its well-documented "new normal" paradigm, the Newport Beach asset manager is far less sanguine about investment opportunities in the market - in evaluating prospects for the most relevant CRE valuation metric, PIMCO sees a gradual return to 8% capitalization rates. "the market can expect long term cap rates near or above 8%. In this case, even if properties with floating rate debt can successfully avoid defaults in the short term, rising longer term rates will create a floor for cap rates and limit recoveries." On the other hand, extrapolating from current CMBS spreads, the prevailing market expectation is for a current and future cap rate up to 150 bps lower. Which means that as securities backed by existing assets see their cash flows dry out, as all valuable assets get extinguished, the repricing in assorted CRE fixed income securities, and their equity counterpartes in the REIT realm, will likely have a very dramatic downward repricing event in the future.
BP Rumormill Update: Sunday Times Reports Exxon And Chevron Receive Green Light From Obama To Plot TakeoverSubmitted by Tyler Durden on 07/11/2010 - 18:13
You know someone is losing (a lot of) money when the heavy artillery of the rumormill department goes into overdrive. According to the Sunday Times, the Obama administration has given its blessing to Exxon and Chevron to consider takeover bids of the troubled major unimpeded. Because obviously any deal in the current environment must first and foremost get the Obama stamp of approval or else the Steve Rattners of the world will be sic-ed on your sorry derriere, and before you know it your equity will be trading above your vendor payables in right of guarantee. It is refreshing to know that the other majors can somehow handicap the outcome of the tens if not hundreds of billions in liabilities that will tie down BP in random lawsuits for decades, and that will make WR Grace et al seem like a PG-13 dress rehearsal for Scores when Lindsay Lohan is in town.
Bank of America Admits To Repo 105-Like Fraud, Even As End Of Quarter Window Dressing Continues UnabatedSubmitted by Tyler Durden on 07/11/2010 - 11:52
In what will come as a complete lack of surprise to everyone, Bank of America has officially confirmed it "mistakenly" used Repo 105-type transactions on $10.7 billion in assets, which had been misclassified as sales rather than borrowings, or repos, in the period between 2007 and 2009. As Bloomberg reports, the bank used the excuse that a $10+ billion fraud is simply an rounding error so you must acquit: "Bank of America said the inaccuracies aren’t material and
“don’t stem from any intentional misstatement of the
Corporation’s financial statements and was not related to any
fraud or deliberate error.” We are sure that late night comedians can come with enough material in which a $10.7 billion "mistake" is not material so we will leave it to them, and instead we will ask another question as pertains to the whole end of quarter window dressing theme: namely - why does it continue to this day? As per the FRBNY's public disclosure of Primary Dealer holdings, the week ended June 30 once again saw the traditional balance sheet collapse, with total PD assets as of June 30 closing once again at the lowest level of the entire quarter. This marks the 7th consecutive quarter in which primary dealer assets finished the quarter at or near the lowest exposure during the quarter, and 9 out of the last 10. But it's all fine - according to the SEC mangled rules of corrupt statistics (soon taught at a Princeton University near you), an event that occurs 90% of the time is not at all significant or notable.
Sometimes, when chasing the bouncing ball of fraud and corruption on a daily basis, it is easy to lose sight of the forest for the millions of trees (all of which have a 150% LTV fourth-lien on them, underwritten by Goldman Sachs, which is short the shrubbery tranche). Luckily, Charles Hugh Smith, of oftwominds.com has taken the time to put it all into such simple and compelling terms, even corrupt North Carolina congressmen will not have the chance to plead stupidity after reading this.
As the whole world prepares for years of austerity, now that virtually everyone is aware that sovereign debt levels are unsustainable and the drive to push public sector deficits down has reached a crescendo, one question remains open: what will happen to the private sector deleveraging commenced the world over in the aftermath of the Lehman bankruptcy. Goldman's Jan Hatzius takes a look at this question, and reaches some very unpleasant conclusions. Looking at the closed system of the financial balances of the private sector, the public sector and the rest of the world (i.e., private balance + public balance = current account balance), in which the push for deleveraging in the private sector, the rush to ramp up exports, and the imminent Age of Austerity all signal an upcoming unprecedented "demand shortfall for the economy as a whole", Hatzius concludes gloomily that "given the forces of retrenchment and balance sheet repair, the risks to the growth of aggregate demand?as well as risk-free interest rates?over the medium term are tilted to the downside. Policymakers can provide some relief, but realistically will find it hard to neutralize the headwinds altogether" The economist also looks at what realist fiscal and monetary rabbits are left in the hat of the administration/Fed, and realizes that there is little that can be done to prevent what he dubs a "slowdown" and what everyone else whose bonus isn't tied in with perpetual growth assumptions, a new wave of the Second Great Depression.
Another day, another executive forced to refute rumors of his organization's imminent bankruptcy, fueling further speculation that observations of fire may soon follow those of smoke. The head of Portugese Banco Comercial Portugues, the largest private bank in Portugal, Carlos Santos Ferreira, sent an email to his employees saying that text messages by "unscrupulous authors" "claiming the bank is on the verge of bankruptcy, are merely attempting to "undermine the confidence" of the bank and are groundless, and have been reported to the Portguese version of the SEC. Amusingly, Ferreira noted that ordinarily he does not comment on "rumors and hearsay, because this will give them credibility." As Portguese banks have been shut out of the interbank funding market for months, and rely exclusively on the ECB, we can see why the CEO of the BCP may be a little concerned about people being abnormally truthy these days.
Recent data from the Fed's balance sheet indicates that even with the Fed no longer printing money directly since March, a dramatic reduction in bank Excess Reserves to the tune of $200 billion over the past 2 months has provided the same net benefit in liquifying the markets. And since none of this money is making its way to end consumers and small business borrowers, it is more than realistic to speculate that banks are merely using the formerly "excess" cash to purchase treasuries, thereby continuing the Treasury purchasing infinite Ponzi loop.
All the charts that's fit to print, with Goldman's traditional upward bias. David Kostin looks forward: "next week 23 companies in the S&P 500 will report 2Q earnings, led by Alcoa, CSX, and Novellus on Monday and followed by bellwethers INTC, MAR, JPM, GOOG, BAC, C, and GE (see calendar page 3). Earnings revisions and sector performance have disconnected with positive revisions associated with more negative returns since the market peak. S&P 500 rallied 5% in the past few days off the YTD low."
As we close on another week replete with ugly economic data and the usual bizarro counterintuitive market, here is a summary of the 50 most underreported facts about the state of the US economy, courtesy of the Coto report. After reading these it almost makes sense that the market has become completely desensitized to the sad reality now pervasive in this country. Readers are encouraged to add their own observations to this list. Surely if the list is doubled, the market will go up to 72,000 instead of just 36,000.
"For the Chinese, restarting the creeping revaluation of the renminbi has many benefits. Near the top of the list is gently moving its manufacturing base toward higher value added items and shifting production from servicing exports to satisfying domestic demand. Way down the list is appeasing the international critics of Chinese policy. The promotion of the domestic market is already underway, but the pace will be glacial – at least from the point of view of bank traders and US politicians – taking at least a decade to have a major impact on the composition of the Chinese economy. And there is no guarantee that any shift is coming, as the Japanese economy remains basically unchanged despite the dramatic increase in the value of the yen. We can only hope that the authorities in Beijing have a more adaptive and global view than those in Tokyo have shown and will adjust their banking and financial support system to integrate the renminbi and the Chinese economy with that of the West. Although the renminbi could rise to the 4.00 area by the end of this decade, the impact of this move will be felt inside of China, not outside. Furthermore, we can be sure that the Chinese leadership will do its best to manage this process in a way that has the most positive feedback for the Chinese society. Although the stronger renminbi will be a boon for China’s neighbors in Asia, it offers no help to the US or Europe." - John Taylor
This morning I read an interesting story in Soundings magazine. It recounted the final voyage of the S.S. Morro Castle, purportedly one of the safest ships afloat back in 1934 when it regularly transported revelers on junkets between New York and Havana. Then, on the night of September 8, a series of unfortunate events occurred that ended with the ship washing up on the New Jersey shore the next day, close to half of its 300 or so passengers dead. The story resonated with me on a number of levels, but first and foremost as a cautionary tale that even when everyone agrees that something is “safe,” events can quickly prove otherwise. For example, in the current economic context, U.S. Treasuries are considered the safest of harbors for storm-weary investors. But that assumption contains within it the further expectation that the status quo will prevail – that, proverbially speaking, no captains will drop dead, or drunken passengers will set a fire by playing a truly mindless parlor game. Further, should such unexpected events occur, a widespread belief holds that the water pressure will be there when needed, and that the power won’t cut out at the worst possible moment. That’s a lot of assumptions. And those just named are specific only to a ship at sea – not the complex system of the U.S. economy, which is, in turn, but a cog in a globally interconnected market. In other words, a system that is unimaginably complex.
The most recent CFTC Commitment of Traders report confirms our expectations that there was a major short covering squeeze in Euros. In fact, with net short positions declining to -38,909, or a 34,761 drop in contracts week over week, this was the second biggest short covering rampage in EURs in recent years. The only bigger one occurred 4 weeks ago, when 50k net short contracts were covered. The current net short speculative interest outstanding is back to early February 2010 levels. Keep in mind that precisely a month ago, on June 8, we saw the biggest net number of EUR short contracts on record at 111,945. All weak hands have now been shaken out, and without any marginal sellers, a long USD positions would be counterintuitive sense, especially with Goldman and CS selling the other side of the trade. Lastly, in the precious metals category, commercial gold shorts dropped materially. Net gold commercial shorts dropped by 40k contracts to -249.1, as over 15% of the entire commercial open interest was covered in the past week. That could help explain the dramatic drop in gold as banks unwound existing paper short hedges as end users were selling their gold holdings. Gross commercial gold positions dropped by 30k from 482k to 452k.
No volume melt ups have become the norm under the Bernanke regime - everyone is forced to expect the most ridiculous, manipulated excreta possible from the primary dealers. When people realize, soon enough, that the fair value of their 401k are about 95% lower, maybe, just maybe, something will change about this broken record. Until then, just bet on the chopper - Benny will make it all good until everything ultimately blows up.
It is 3pm on a Friday - do you know where your unsupervised market ramping, Keynesian lie perpetuating algos are? With their masters long gone to the Hamptons, here come the binary terrorists, and they are so enthused to blow the market up to new highs, that they are providing a lovely opportunity for everyone else with sodium/potassium pumps to smack them down a little, with the daily dose of decoupling. As always - sell stocks, buy AUDJPY and wait for the money to come in. Easy as pie plus you get the extra gratification of knowing you caused some stupid computer a paper loss at the end of the day.