Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate

Note: For videos and embedded spreadsheets detailing NPVs of hiarcuts during the Portuguese restructuring, you will have to visit this post on BoomBustBlog due to formatting issues.

I made an appearance on CNBC’s Fast Money show yesterday.

It was
a very short clip on real estate, and the fast moving short clips are
not conducive to the communication of the thick, fact heavy style of
analysis that is common to BoomBustBlog, and yours truly. Nevertheless I
am quite thankful for the opportunity to share my contrarian views in
the mainstream media. Now that I have (quite honestly) issued my most
sincerest thanks, let’s attempt to remedy the shortcoming of the limited
amounted of time that I had. You see, after the 3 minute hit ended
there was a brief discussion of commercial real estate in which I didn’t
get to participate, thus I will take the liberty of doing so through
this medium.

Yes, commercial real estate has shown some marginal increases in the
last quarter, and REITs have been on fire. The issue is, many publicly
traded equities have detached from their underlying fundamentals. Let’s
reference “A Granular Look Into a $6 Billion REIT: Is This the Next GGP?” The following are excerpts from it:

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…

You have to factor in non-market factors that have gone into
supporting CRE prices. We have government bubble blowing where you can
see where property prices were in a massive bubble, they rose and that
bubble popped, and they were artificially supported and that bubble was
partially reblown. Yes, the bubble was purposefully reblown, reference Buried
Deep Within The Files That The Federal Reserve Released On Thier MBS
Purchase Program, We Found TARP 2.0!!! More Taxpayer Money To The
Banks!:

We have conducted analysis on all MBS
sale and purchase transactions conducted by the Fed whose data was
recently released. Of the total 10,058 MBS transactions, 72% were done
at a yield of less than 5% (5% below yield of 4.0%, 32% between
4.0%-4.5%, 35% between 4.5-5.0%) with an average yield of 4.75% on all
MBS transaction. The table below presents the number of transactions
under their respective yield category.

We have also analyzed the yield on
MBS purchased and MBS sold, looking for price discrepancies between MBS
purchased and MBS sold. The data points out that the average yield on
MBS purchased was 4.71%, 29bps lower than average yield for MBS sold,
thus implying MBS purchased were at a higher price than MBS sold. You know that old government adage, buy high and sell low!

Yield on sale: 5.00%
Yield on purchase: 4.71%
Difference in bps: 29.1

Now, imagine this artificial suppression, both in the form of MBS
purchases (which are supposed to be over) and QE in the form of
Treasury Ponzi purchases, are overpowered by the market driven rate
storm brewing ahead. You also have the government looking the other way
at depreciating asset values, see FASB Appears to Have Bent Over For The Final Time & Accuracy In Financial Reporting Dies An Ignominious Death!!!:

The Fed, Barney Frank, et. al., and the
Treasury colluded to lift the prices of equities, real assets.
government bonds, and the derivatives based upon them to considerably
above their fundamental values in an attempt to reflate the bubble and
pull the country out of recession the “stanky” way.

A natural result of this is that banks can easily hide the true condition of their holdings from most investors. Reference The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again! wherein I detailed this occurrence:

I declared insolvency throughout the banking system, and it looked
as if I was wrong for some time, then the truth’s ugly head started
peaking out. See The Financial Times Vindicates BoomBustBlog’s Stance On Goldman Sachs – Once Again!

Goldman Sachs
has revealed details of about $5bn in investment losses suffered during
the crisis for the first time this week, in a move that will deepen
the debate over companies’ financial disclosures. The figures, issued
as part of internal reforms aimed at silencing Goldman’s critics, show that the
bank suffered $13.5bn in losses from “investing and lending” with its
own funds in 2008. But Goldman’s regulatory filings and its executives’
comments to investors at the time pointed to about $8.5bn of losses
arising from its investments in debt and equity, as markets were rocked by the turmoil.

Hmmmm! I walked through this in explicit detail in “When the Patina Fades… The Rise and Fall of Goldman Sachs???“
and I did it without being privvy to Goldman’s financial innards. Long
story short, practically all of the major banks are lying about the
value of some of the largest assets on their books.

How many institutional and/or retail investors will be able to
ferret out such? Or more importantly, why should they have to? It is
the reporting company’s responsibility to report, not to obfuscate. The
big problem with this “hide the market marks” thing is that markets
tend to revert to mean. Unless said market values fundamentally
catch up with said market prices, you will get a snapback. That is
what is happening in residential real estate now. That is what happened
in Japan over the last 21 years!!! That’s right, it wasn’t a lost
decade in Japan, it was a lost 2.1 decades!

This has been the first balance sheet
recession that the US has ever had, but there is precedence to follow.
Japan had a balance sheet recession following their gigantic real asset
bust. They made a slew of fiscal and policy errors, which essentially
prolonged their real asset recession (now officially a depression) for T-W-E-N-T-Y  O-N-E long years! For those that may have  a problem reading that, it is 21 long years. What did the Japanese do wrong?

• They refused to mark assets to market
• They attempted to prop up zombie banks
• They failed to promptly clean up NPAs in the banking system
• They looked the other way in regards to real estate value shenanigans

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“

The retail investment banker Davidowitz had similar choice comments on this space: Davidowitz On Overt Optimism In The Retail Space And Mall REITs, Stuff Which We Have Detailed Often In The Past.

Listen up people, HERE ARE THE NASTY FACTS!!!

Real estate is a highly rate sensitive asset class. Capitalization rates (the popular method of pricing real estate) is explained in Wikipedia as:

Capitalization rate (or “cap rate”) is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.^[1] The rate is calculated in a simple fashion as follows:

Without going into a CRE class, when interest rates go up, cap rates
generally go up as well and the value (or cost to purchase) of the
property goes down in sympathy unless the rise in interest rates is
offset by a commensurate or greater rise in net operating income. Now,
either everybody believes that unemployment is going to drop towards
zero  in an era of US austerity (reference Are the Effects of Unemployment About To Shoot Through the Roof? then see Budget Austerity: Goldman Sees Danger in US Budget Cuts – CNBC) at the same time that historically low interest rates that actually went negative are going to get lower (see the Pan-European Sovereign Debt Crisis) —- or cap rates are about to skyrocket. I’ll let you decide!

As you can see above, CRE drops in value whenever yields
spike more than the + delta in NOI. Looking below, you can see that US
CRE actually runs to the inverse of the 30 year Treasury.

That visual relationship is corroborated by running the statistical correlations…

The relationship is obvious and evident! In addition, we have
been in a Goldilocks fantasy land for both interest rates and CRE for
about 30 years. CRE culminated in the 2007 bubble pop, but was reblown
by .gov policies and machinations. The same with rates. Ever hear of
NEGATIVE interest rates where YOU have to PAY someone to LEND THEM
MONEY!!!

So, BoomBustBloggers, where do YOU think rates are going to go from
here? Up of Down??? Let’s ask Portugal or any of the other PIIGS group. I
have shown, very meticulously, how Portugal can not only afford the
path that they are on (record high interest rates) but the losses that
will come when they restructure (default) – for all to see. I have done
the same with Spain, Ireland and Greece (for subscribers only). See The Truth Behind Portugal’s Inevitable Default – Arithmetic Evidence Available Only Through BoomBustBlog followed by
The Anatomy of a Portugal Default: A Graphical Step by Step Guide to
the Beginning of the Largest String of Sovereign Defaults in Recent
History (December 6th & 7th, 2010). Be sure to carefully and
very thoroughly peruse the spreadsheet below to see the many scenarios
present that show the NPV of investor losses due to haircuts and
restructurings…

Please upgrade your browser

I discussed this in New Amsterdam a couple of weeks ago…

I definitely look forward to returning to the Fast Money Show so we
can hash this topic out much more thoroughly. As you may have been able
to ascertain, I have a lot to say on the subject

Interest parties may want to also read The
Coming Interest Rate Volatility, Sovereign Contagion, Geo-political
Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global
Real Estate Through This Mess. I will go in depth in Amsterdam (as well as presenting solutions) in a little more than a month, see www.seminar.ingref.com. Call the number at the link for invitations and tickets.

Comments

[JW n FL]

Reggie has forgoten more numbers then all of them know now or will ever know.

Reggie needs his own show... no BS all Reggie for people who want to know the real deal... of course the name doom and gloom would have to be changed to something up beat and shorting the market to put a positive spin on it al would have to be a primary topic... the silver lining as it where.

Great !!Job!!! Reggie!!!! as always.

[Rogerwilco]

Mathematics doesn't concern these bastards anymore. If the situation takes an ugly turn, then the rules will be altered or suspended to support the status quo.

The fix is 110% in.

[i.knoknot]

+++

"... then the rules will be altered or suspended ..."

a good thing to repeat and remind ourselves.

the 'bet' isn't the risk/return of any particular vehicle, the 'bet' is how will the the rule-change will defer that risk, again, and which lobbiest(s) will benefit.

where do those lobbiest have their money... *that* is the 'bet'. (go lucky sevens!)

[tickhound]

Well done Reggie.  Awfully nice of CNBC to allow for 2 minutes of truth in a 30 minute program.

[Judge Judy Scheinlok]

Yea wouldn't the 2s30 kinda tell you something is foul. That is, unless you're a media whore willing to sell yourself for free if your image can be seen for 56 seconds on TV.

RobotTrader references whores that make more than that in 0 seconds. Creggie is a free whore trying to feed his crack addiction; vanity.

[jomama]

fail troll is fail.

[alien-IQ]

your comment is off the Richter scale of stupidity. Seriously...you are a moron.

[ebworthen]

Yeah, REITS are doing SO WELL.

That is why everywhere you look in every city there is a smallpox infection of "For Lease" signs and empty dark windows. 

[dumpster]

sleeping in their bed /// what a stupid statement from a twit

Reggie was throwing some light on the day/

your post is an insult to whores ,  and shows that your mouth is about as low as your "whats the difference between your ass and a hole in the ground "

such license to spout trivial nonsense on a person working to show the truth about housing

as an aside the NRA  just walked away from a mortgage on their big office bldg .. after the pres  had told the sheep it was immoral to walk away from the big fraud .

it is a business decision,, you have a house ,, you signed the papers ,, the house was the collateral just give it back its done every day in the grown up world of business

[Slim]

Honestly, I never realized the entire purpose of this site was to "rail against the enemy".  Granted there's a good amount of people on here who seem to have that tone but personally I value insight and honest exchange of opinion.  It's way too easy to lose objectivity and the ability to think clearly if you have a personal/emotional stake in evaluating data and looking for conclusions.  This path typically starts with someone constructing an overly simplistic 'us vs. them' view.  This leads to polarized balance with equally schitzo people on both extremes.  

I'm not endorsing CNBC by any means.  I spend far more time on this site and get infinitely more value.  I also acknowledge everyone's personal right to take any view they want no matter how maintstream or extreme I or others might preceive it to be.  That said, this site is weakened and of much less value to me the moment it positions itself outside objectivity and purposely aligns itself with any single view. 

This is the major issue with mainstream news - they need to get back to reporting the facts rather than supporting their personal opinions on matters.  This would also encourage more people to think for themselves - something this world truly needs.

EDIT - for the record, I didn't junk you

[JW n FL]

If you can help others... and it costs you NOTHING!!! to do so... why would you bitch about it?

http://www.youtube.com/watch?v=wauzrPn0cfg&feature=

[w a l k - a w a y]

SHE'S A GONER ...

for posterity:

by Judge Judy Scheinlok
on Fri, 02/25/2011 - 14:39
#997622

REAL ZH'ers don't do CNBC. You have just proven yourself to be a complete whore. Maybe you can chum up with cramer and do a double retard show.

How can someone rail against the enemy then go sleep in their bed?

You are the lowest form of ZH contributor in existence. In fact you just defined a new low point. Bitch!

    * reply    * **JUNK** (7)

I junked yer ass, also.

[Judge Judy Scheinlok]

Let's make sure the trail has waypoints.

Exactly my point. So you're saying people like yourself find nobility when you sleep with the enemy?

Whoring is noble, according to JW/FL.

Reggie the pawn goes on CNBC(not paid to do so) so he can spread his legs and show us his nice little kitty.

Who owns you bitch? Immelt! It's asswipes like you who will make real revolution in this cuntry impossible. Sit back and watch your CNBC show so Immelt can collect his billions in ad revenue.

[Misstrial]

Just so that you know, (because maybe you don't), your use (possibly unauthorized) of the "Judge Judy" name in association with the use of her image as your avatar may constitute multiple copyright and trademark violations.

~Misstrial

[Judge Judy Scheinlok]

Scheinlok bitchez! The devil is in the details.

[Misstrial]

"lok" doesn't matter. "Judge Judy" and her image. Real simple.

~Misstrial

[Judge Judy Scheinlok]

Oh la la. Would you be available later for an oral argument?

[Misstrial]

Oral argument? My hourly rate is $300/hr.

Look up copyright on LexisNexis. Or findlaw for professionals.

~Misstrial

[Judge Judy Scheinlok]

I looked up Scratch n' Sniff hoping to find you cuz everytime I see you post I scratch my monitor and sniff it. But all I found was "Larry Flynt Uncensored".

[Judge Judy Scheinlok]

Oh really?

[Misstrial]

Yes.

~Misstrial

[drB]

Logged in just to junk her.

[JW n FL]

spreading the facts by any and all means is a nobel thing to do...

like me expalining to your dumbass why it is important that as many people as possible should be made aware of the robbery going on..

you are welcome you dumb fuck!

I junked you!

[Judge Judy Scheinlok]

Exactly my point. So you're saying people like yourself find nobility when you sleep with the enemy?

Whoring is noble, according to JW/FL.

Reggie the pawn goes on CNBC(not paid to do so) so he can spread his legs and show us his nice little kitty.

Who owns you bitch? Immelt! It's asswipes like you who will make real revolution in this cuntry impossible. Sit back and watch your CNBC show so Immelt can collect his billions in ad revenue.

[Common_Cents22]

Simon Snobs, you should use your real name here.

[Judge Judy Scheinlok]

Fightclub bitchez! Sometime you win, sometimes you lose.

[JW n FL]

I am wrong almost always... but in the end we will be Brothers.

[Zero Govt]

Judge Judy

your point about being a whore is 'ok' but is CNBC, and more importantly its viewers, better off having the counter-establishmant voice of Rick Santelli on it or worse?

If Reggie wants to be a slut i'm all for it so long as he doesn't compromise his message or the integrity of his data. If he takes money and bends the data to provide 'happy data' like Steve Liesman then I'd have an issue with Reggie selling his soul.

[Judge Judy Scheinlok]

Your expectations are for Reggie to walk into the den of thieves and actually voice his opinion in earnest?

Nice. Good luck. You are being used by the machine. Wake up.

[Zero Govt]

10 years ago many of us would have succumbed to becoming a fully ingratiated member of this parasite machine... today almost all of us can see this diseased nag is heading to the glue factory ...we're all open to corruption, just not an invite to the Titanic one hour away from the iceberg!

[Judge Judy Scheinlok]

You are a worthy adversary brother JW.

[Temporalist]

Holy shit you are fucking stupid.  Those warning labels on dry cleaning bags don't apply to you.

[Judge Judy Scheinlok]

Sit back and watch your CNBC show so Immelt can collect his billions in ad revenue, shill.

Tyler Durden uses mayhem to dissuade viewership of sheeple-tv. Not limp wristed attempts at vanity ala Reggie the Cramer wannabe. Let's just call Reggie; Creggie from now on.

[Magister Ludi]

Unless you are Mr. Durden, I wouldn't presume to articulate the mission on his behalf.  However, you are probably correct that Reggie's appearance on CNBC was anything but altruistic.  Other than Shatner or the Hof, I am hard-pressed to think of someone who refers to and quotes himself in the third person so frequently.

Reggie's vanity is irrelevant to the point of whether appearing on CNBC in and of itself is a violation of the mission.  The fact is, there are good, working-class people who can't live and breathe this stuff the way we do, and they get their limited and tainted information from that network.  If even a handful of them take action to protect what hasn't yet been stolen through inflation and wealth transfer, then it was worth a contrarian view such as Reggie's having been aired.

[IQ 145]

 Isn't there some way to block this hate-filled ignoramus from the blog?

[ebworthen]

Now, now - don't get your panties in a bunch Judy.

Someone has to enter the Fairy Dome land of Oz and slow the flow of sparkly bubble blowing and cotton candy spinning.

[JW n FL]

so... your arguement is to let the people remain ignorant of the facts?

your arguement is not to spread the word, the truth to any and all who would listen?

Your arguement is that the "Pulpit" is more important than the "Message"?

Where you Educate is more important than the educating... if you can teach anywhere to anyone, if you can help the blind anywhere... please do.

[Judge Judy Scheinlok]

Did you read the transcript from his segment? Wake the fuck up asshole.

Do you really think "Creggie the vanity-man" is going to change anything?

Get the fuck real would you please! Come out from under your coma.

Real change will come from people who see through this bullshit. Creggie just got them unknown new viewers who have counter opinions to the CNBC party line. $money$ in their pockets, dipshit.

Please get to the eye doctor asap and get your prescription changed!

[gmrpeabody]

Please, Tyler, for the love of Christ, GIVE US AN IGNORE BUTTON!

[JW n FL]

the truth is never a bad thing... speaking the truth to the masses is never a bad thing... reaching as many people as possible with the truth is what all of us should strive for.

Spreading the truth so the madness will end, no matter where no matter how... and the more people engaged in listening to the truth being spoken the better...

[velobabe]

reggie you be the man! you are so much more a complete man then any of those clowns at CBShit

you look great today, especially with a

blue background, bitch.