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Davidowitz's Rant On Overt Optimism In The Retail Space And Malls Is Not Only On Point, But Has Been Preached At BoomBustBlog For 3 Years & Counting
Zerohedge has brought attention (in their own very colorful fashion) to a Pimm Fox interview of Howard Davidowitz, chairman of Davidowitz & Associates Inc. on Bloomberg. It is well worth the 12 minutes of your time. Here are some choice quotes form the interview as excerpted by ZH:
of retail sales, because i knew that 30% of consumers are responsible
for retail sales, and these 30% did much better because of the
performance of capital markets. I don’t think it is indicative of
anything going forward. I don’t think the economy is going to get any
better. If you look at our fiscal and monetary policy, we went two
trillion in the hole last year. Two trillion… to produce this… and unemployment went up to 9.8%! We’ve spent two trillion we’re printing money we’re going bananas. Our balance sheet, we’ve got $2.6 trillion on there, and what;s on there government securities, and MBS.”
Bernanke’s bankrupt. Everything he’s bought is underwater. All the MBS
are underwater, the whole country is underwater.”
because they already have occupancy problems, rent problems and
everything else right now. I don’t think the CRE problems are fixed by
any means. That’s why we are going to close hundreds of community
banks going forward, we are going to close hundreds more. Those CRE
debts are coming due and they will not be able to be rolled over.
We’ve got lots of problems still coming up in the banking system, and
the problems in the real estate issue is here for a long time.
I’ve covered this topic left and right, since 2007 after warning
that GGP was insolvent and bound to crash. I got into a tit for tat
with the CFO who called my research “garbage”. A year after that
comment, they filed for bankruptcy. See the whole story and over 700
pages of analysis at “GGP and the type of investigative analysis you will not get from your brokerage house“
Most recently, we went throught the true weaknesses in the entire
retail business, not just from the real estate side. This is a note that
a BoomBustBlog reader sent me over the summer…
Reggie:
I took a screen shot of my play money account and the shorts
from the four part series on why the consumer isn’t coming back.
Consumer retail has been nailed since May and from the 4 stocks you
picked, here are two I chose to follow.
This is an example of exactly what we were talking about in our
subscription documents regarding the ridiculous run up in consumer
discretionary shares when taken in context of the American consumer
and the stress born from the Pan-European Sovereign Debt Crisis (click the link for our detailed analysis). You can find the earlier articles in this consumer mini-series as follows:
- What We’re Looking For To Go Splat! Part 1: macro arguments against the spike in retail stocks
- What We’re Looking For To Go Splat! Part 2:
A list of 147 retail stocks with attributes that causes on to
question their gain in prices, with a shortlist of companies who may
very well go “splat”! - Is
the Consumer Really Back? Well, It Depends On If You Believe What
the Government Tells You or Whether You’re An Indendent Thinker – The American Recovery and the North American Economic Outlook. - The American Recovery and the North American Economic Outlook
There are still a couple of mall REITs that have been levitating
above water, but have but so much time left. I will be commenting on
them in detail soon.
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Thanks another fine lesson, Reggie.
Also helpful to note:
"Economics", as taught in America, is only half-truths, and thus a lie, bec it deliberately omits a vital datum...
Namely, there must be a working justice system to monitor and regulate unfair dealing [e.g. fraud, lies, lack of transparency, etc]. This is not taught. It is ignored.
Otherwise, crims rise to the top of all control points. Now look around and observe that truth.
It is not complicated.
Residential gets slammed some more and commercial is right behind it this time.
RIETs now dramatically outperforming again today. Another day of unabated bidding up of every single damn one of them
If the rates go up - the Fed is bankrupt? Yes, but that's the whole point of the QE 1.0, 2.0,..., QE-infinity. The Fed takes the risk, the Fed goes "bankrupt," the 90% of the population, their savings and standard of living go to hell - but the mega-banks survive and bonuses are paid on schedule.
The Fed, unlike the banks, does not have to admit that they're bankrupt, i.e. they neither have to mark to market nor have to keep any sort of tier-whatever capital reserves. (well ,they ARE the "reserve.") And it's all done,a s it was designed 100 years ago, to preserve the interest of the few and enslave the many
The Fed would be bankrupt on a GAAP basis ... this is the Fed we are talking about, and it is BAAP (B=Bizzarro) that applies.
Reggie,
Please point out when you have been wrong, even if it's only in the timing of an event. A humble admission that your calls are not 100% accurate all the time would go a long ways in the promotion of your web site.
I've seen Reggie do this, but the all the public stuff he has put up had bee right in long term. Since I believe he is promiting positions that can be held long-time without losing value due to just time (as ETF) it seems every public call his has made on ZH re-posting has been right.
I agree with Davidowitz and the general theme of Reggie's article. However, I think these moves could take much longer to play out than many realize. When it comes to real estate, particularly in connection with retail space, Simpon Property Group (SPG) is the king of them all, controlling 264 million square feet of leasable area in North America. If the sector is going to get hit someday, these guys are going to lead the way. But over the last couple years anyone trying to short the SPG freight train would have been crushed. In my opinion, it's a dangerous area to be betting against for the foreseeable future.
Granted, I'm not a RE expert. But just based on my own observations having visited a large local SPG property over the holidays, there were mobs of shoppers everywhere. And just a thought from a guy who can't stand shopping...as much as I dislike going to the stores and outlets, there is something to be said for trying clothes on and seeing them in person, feeling the texture, etc. I would do all my shopping online, but I have no idea how something is going to fit if I'm not there in person.
SPG is trading north of $100 per share and a 60 P/E...
Why would the FED be bashful to take it a 100 P/E? BXP, VNO, GGP (bankrupt), are almost there anyway.
Just asking...and I agree with you.
Yes, trailing P/E is high and certainly could go higher. But on a forward basis SPG is expected to make north of $6/share in 2011...if that happens they're only at 20 P/E @ $120/share.
Note that GGP has since emerged from bankruptcy.
I'm not being combative, but why would a 20 multiple be a good valuation this environment? I haven't seen any realistic calls for SPG to earn $6/ share...
I guess, if you believe the forward earnings, options might be a better bet.
I was under the assumption that the dividend was driving the price, at the moment.
I hear you, I guess it depends on your thoughts of what you think they could earn. I'm fairly optimistic on the sector, though I agree that the long term headwinds are real. If you annualize last quarter's results you get to about a 30 P/E.
Years ago I was working with some folks who had an idea to invest in retail. So we hired Davidowitz as a consultant. He is a very savvy guy and knows his retail.
The funny thing was that he would come over and give us a report and he would rant and rave just like he did in the clip. We never did anything in retail, but we kept Davidowitz on the payroll for a year (he gets big bucks). It was that amusing.
You have to admit...he's a good showman and entertaining. He and Pento are great on the tube along with Schiff, IMO. Ratigan is great also but sometimes goes too far (although he could probably make a nice run as a politician).
... and yet, a year after the local voters refused the entitlements to RED Development to build a NEW BIG BOX MALL and condo development in Eagle, Colorado, (45 minutesw west of Vail on I-70) the developers are still trying to come back with new plans for the same thing. God help the 9000 members of the Dallas Firefighters Retirement Fund who's managers paid $20mm for a piece of land worth no more than $900k, and who the developers want to stick with a new shopping center. (This, after their captured bank in Kansas City, Hertifage Bank, went into FDIC cease and desist operations.)
What was that I saw yesterday about online shopping being up 33%?
Best Buy is going to be Best Cry before long.
Why would I shop retail when I can get free shipping and no sales taxes online?
Davidovitz is right; it is the upper 30% of individuals and families that are spending the most; bankers, lawyers, insurance executives, and the money machine muckrakers in our health($)care(?) industry.
It's Walmart and dollar stores or Nordstrom's and Sacks. The middle is bleeding. The teenagers of the elites are the only thing keeping the Mall Fashionistas (Buckle, Zumiez, GAP) alive and breathing.
The number of "For Lease" signs and closed storefronts and empty shops in malls and buildings in my region is still going up, not levelling or down.
The TBTF banks are spending taxpayer money on Propoganda commercials about the "recovery" and "how much they care" (Ally...OMG!) while the Credit Unions and small banks are rolling over and being resusicated only by the continual flow of $$$ from the FDIC (via increased premiums from bigger banks, who use taxpayer money from the FED to pay them!).
As a median wage mortgage, bill, and punitive insurance premium paying middle class mule it has been made very clear to me in the past two years that I am on the wrong side of this trade both morally and financially.
Beware of the "upper 30%"...it is the threshhold to violence and holding-pens.
The valid argument of too-high unemployment equals too-few who-can-buy-the-products becomes invalid.
The great surplus of labor can be tolerated and handled...as long as factories can operat at critical mass [large enough for max efficiency of costs, volume production and revenue].
The great surplus of labor will be isolated and brutally reduced to the margins of society, where dead-silence thrives.
Yes, the number of factories will drop to 1 or a few units, enough to supply the "30%", who compose the only "worthwhile" market. The rest are toast...factories, labor...middle-class and lower-class.
The so-called middle-class were always under authority of TPTB, just like the lower-class.
The middle-class flatters itself to believe their best interests are different from the lower-class.
George Orwell [Road To Wigan Pier], Jack London [Iron Heel] and Albert Einstein [Why Socialism] explain it clealy to anyone willing to read their views and then decide for themselves.
HAHAHAHAHAAHAAAAAAA!
That be funny right there.
You're right, Reggie.
Now, pull up a 5 day chart of IYR or RMZ (or SPG, etc) versus the SPX or DOW. Cherry picking SVU and OMX is a bit ridiculous.
Being 'right' has no bearing on where 'they' are going to push the REITs.
I'm sure you'll be proven right, eventually. Until then, Heli-Ben is going to rip the face off the shorts in REITs. Trying to get 'justice' on the REITs or Retailers is a futile task at the moment. You might as well try to make money playing online poker. Unregulated, unjust, and lawless 'bad beats' galore.
BTW, it wasn't "cherry picking" back then. They were truly good calls, as were many others on the list. The reader just pulled out two that he used.
Agreed, they were good calls. No argument from me.
I understand your point, but it really doesn't mean much in reality. Suppose you were going broke, underwater by a couple of million, and someone created an ETF that moved to the inverse of both your wealth and your wealth prospects. Does that make you any wealthier? Are you any less broke? Those derivatives that you are quoting ARE NOT REAL ESTATE! [caps, bold and italics to truly drive the point home]. I never said ETFs are having problems, I said Mall REITs and certain retailers were. ETFs are derived from manipulated sources, at best (I addressed this issue in detail in The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short? - a must read for all who are wondering why CRE is defying gravity). As a matter of fact, actual equities of many of these companies can be said to be doing the same thing. My puts and short positions created massive draw downs on GGP before they eventually through off 4 digit returns. I probably would have been shaken loose from the position with another country in another industry, but real estate is grounded in bricks, mortar and dirt. It is very difficult to manipulate long term, because the assets are usually standing around for all to see, feel, count and measure. That being said, it stil doesn't mean that there are not concerted shenanigans going on between landlords, banks and regulators but we all know how that non-sense ends (see More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture Thursday, April 8th, 2010).
In December of 2009, I posted and article and accompanying research titled, “A Granular Look Into a $6 Billion REIT: Is This the Next GGP?” The following are excerpts from it:
The results of these activities have been congealed in our analysis of Macerich’s entire portfolio of properties (118+ properties), including wholly owned, joint ventures, new developments, unconsolidated and off balance sheet properties. Below is an excerpt of the full analysis that I am including in the updated Macerich forensic analysis. This sampling illustrates the damage done to equity upon the bursting of an credit binging bubble. Click any chart to enlarge (you may need to click the graphic again with your mouse to enlarge further).
Notice the loan to value ratios of the properties acquired between 2002 and 2007. What you see is the result of the CMBS bubble, with LTVs as high as 158%. At least 17 of the properties listed above with LTV’s above 100% should (and probably will, in due time) be totally written off, for they have significant negative equity. We are talking about wiping out properties with an acquisition cost of nearly $3 BILLION, and we are just getting started for this ia very small sampling of the property analysis. There are dozens of additional properties with LTVs considerably above the high watermark for feasible refinancing, thus implying significant equity infusions needed to rollover debt and/or highly punitive refinancing rates. Now, if you recall my congratulatory post on Goldman Sachs (please see Reggie Middleton Personally Contragulates Goldman, but Questions How Much More Can Be Pulled Off), the WSJ reported that the market will now willingingly refinance mall portfolio properties 50% LTV, considerably down from the 70% LTV level that was seen in the heyday of this Asset Securitization Crisis. Even if we were to assume that we are still in the midst of the credit bubble and REITs can still refi at 70LTV (both assumptions patently wrong), rents, net operating income and cap rates have moved so far to the adverse direction that MAC STILL would not be able to rollover the debt in roughly 37 properties (31% of the portfolio) whose LTVs are above the 70% mark – and that’s assuming the credit bubble returns and banks go all out on risk and CMBS trading. Rather wishful thinking, I believe we can all agree.
For those of you who didn’t catch it in the table above, I’ll blow it up for you…
Notice anything familiar??? There is a very strong chance that every single property on the list detailed in the forensic reports will be taken over by the lenders, that’s a lot of properties. Subscribers should reference MAC Report Consolidated 051209 Retail 2009-12-07 03:46:49 580.11 Kb , MAC Report Consolidated 051209 Professional 2009-12-07 03:48:11 1.03 Mb, those who don’t subscribe should download my CRE 2010 Overview 2009-12-15 02:39:04 2.72 Mb. For those who want access, click here to subscribe!
So, why has Macerich and the entire REIT sector defied gravity despite the fact they are getting foreclosed upon faster than a no-doc, subprime, NINJA loan candidate who just lost his minimum wage job amongst all of these “Green Shoots”??? Well, I took the time to answer that in explicit detail… I urge all to read The Conundrum of Commercial Real Estate Stocks: In a CRE “Near Depression”, Why Are REIT Shares Still So High and Which Ones to Short? (a must read for all who are wondering why CRE is defying gravity)
More hard hitting BoomBustBlog commercial real estate commentary and research from Reggie Middleton:
Wall Street Real Estate Funds Lose Between 61% to 98% for Their Investors as They Rake in Fees!
Thursday, April 15th, 2010
Commercial Real Estate is Pretty Much Doing What We Expected It To Do, Returning to Reality
Wednesday, May 19th, 2010
The Taubman Properties Q4-2009 Earnings Opinion: The CRE Trend Continues as Expected
Reggie, don't misunderstand me. You ARE correct and I know your work is solid. I just don't think you can capitalise from it anytime soon in the market.
IMO, and I could be wrong, the FED simply isn't going to let the REITs fall...period...ever. They are already at obscene valuations. There isn't even any remote attempt to hide the pumping anymore.
Not to press the point, but...the REITs are outperforming again today. It's the same levitation act as the financials. More to the point, the more people that short or take on puts, the more they'll simply force the squeeze. You simply can't win.
Your contributions are great, seriously. I just don't and can't recommend anyone else go through the brutal lesson I went through in thinking that, at some point, either individual REITs or REIT ETF's would fall. I've watched the 'act' for 2 years now. They aren't even close to the bottom of the 9th.
Good luck and a better 2011!
The physical real estate is much more telling than ETFs, which I don't particularly care for anyway - and for that very reason. There are already fire sales available in the physical, and we are just getting started.
Reggie:
It seems residential real estate is sort of finding its lower price in fits and starts and even low-informed people pretty much know now its going lower (probably underestimate how much tho) but I hear little about CRE. When do the banks heavy in CRE ever have to acknowledge their losses? Is this next year when they realize retail is not coming roaring back?
Why would they have to acknowledge losses? The FED is purchasing all kinds of garbage at full price or a premium and refusing to disclose those purchases. What's left is absolved from mark-to-market from now until the end-of-days.
A: Never