REITs

REITs

While Others Sell, Landlord Blackstone Doubles Down On Rentals With Biggest Purchase In Two Years

The last time a big financial firm rushed into buying rental exposure (just as others were quietly leaving the sector in droves and when the ingenious Wall Street was coming up with such derivatives as Rent-Backed Securities to dump their exposure to dumb yield-starved Germans and Asians), it had a very unhappy ending for the buyer. That transaction of course was Lehman Brothers' rushed acquisition of landlord Archstone, which as many have noted over the years, was a big contributor to the Lehman bankruptcy once the rental payments dried up. But then again, as others have pointed out, Lehman was so deep in its real estate exposure by then it really had no choice but to keep doubling down all the way to the bitter end. Which may explain why while most other brand name hedge funds and P/E firms are now cashing out of the US housing market whose second bubble may already have peaked (only last night Goldman said that "On house prices, we have started to see the first signs of deceleration and expect a slowdown"), Blackstone, which is now the US' largest landlord, is digging in its heels and is not letting go. In fact, it is adding to its exposure - as the WSJ reported overnight, Blackstone has invested another $1 billion to purchase GE's stake in 80 apartment complexes amounting to 30,000 apartment units, located in Dallas, Atlanta and other parts of Texas and the Southeast.

The $600Bn US Bank Deleveraging No One Is Talking About

For many years, we have been extremely focused on shadow banking and most specifically the repo markets (recently here and here). Most market participants will go through their trading life ignorant of the fact that the leverage in this market is what drives their assets up or down in most cases (because understanding something new is so 'old normal' even if it remains a major potential catalyst for problems ahead). The regulators get it though (kinda). As Barclays notes, changes to the risk-weightings of low-risk assets in the repo markets means US banks will need to deleverage by raising $30bn of fresh capital or reducing their (mostly low-risk) assets by $598bn - not chump change in a market dominated by the Fed (and one that some have already raised default and liquidity concerns about).

Scramble To Exit Housing Market Peaks With "American Homes 4 Rent" IPO Pricing At 44% Discount

Two months ago we first observed the scramble by various hedge funds, in this case Blue Mountain, to take advantage of the peak sentiment in housing, and specifically rental housing (which just hit an all time high as reported previously) by rushing to capitalize on recent investments and dump exposure to the witless public. Specifically, we envisioned the then just announced IPO of the aptly named American Homes 4 Rent (yes, with a "4" not "for"), also known as AMH, which however came at precisely the wrong time for the market: just as mortgage rates were soaring and Colony American Homes postponed its own parallel IPO. Two months later, with the market about to pass 1700 and fears about the housing market put back in the shelf despite a glaringly obvious collapse in mortgage demand, these IPOs are back and with a vengeance, although now reflecting a far more subdued, tapered if you will, view about the house leasing sector. Not surprisingly, AMH priced overnight, selling 44.1 million shares at a price at the bottom of the $16-18 range to raise a total of $706 million: a 44% discount to the $1.25 billion suggested in the prospectus filed back in June.

Global Markets Stabilize Following Thursday Meltdown

After Thursday night's global liquidation fireworks, the overnight trading session was positively tame by comparison. After opening lower, the Nikkei ended up 1.7% driven by a modest jump in the USDJPY. China too noted a drop in its ultra-short term repo and SHIBOR rate, however not due to a broad liquidity injection but because as we reported previously the PBOC did a targeted bail out of one or more banks with a CNY 50 billion injection. Overnight, the PBOC added some more color telling banks to not expect the liquidity will always be plentiful as the well-known transition to a slower growth frame continues. The PBOC also reaffirmed that monetary policy will remain prudential, ordered commercial banks to enhance liquidity management, told big banks that they should play a role in keeping markets stable, and most importantly that banks can't rely on an expansionary policy to solve economic problems. Had the Fed uttered the last statement, the ES would be halted limit down right about now. For now, however, communist China continues to act as the most capitalist country, even if it means the Shanghai Composite is now down 11% for the month of June.

Thursday May Be The New Tuesday, But Friday Is Just Friday (For Now)

Thursdays may be the new Tuesdays (if only this week), but so far Fridays are still just Fridays, and no mysterious overnight levitation is here to open the market 0.5% higher. The Nikkei 225 retraced a fraction of Thursday’s losses overnight as the positive close on Wall Street and a dovish interpretation of Hilsenrath’s WSJ piece yesterday allowed the Japanese indices to recover from the worst levels of the week. USD/JPY has pared Thursday’s bounce and trades lower as the Bank of Japan’s minutes showed one member of the board proposing the advantages of limiting the bank’s QQE program to just two years in order to avoid financial imbalances. Overnight in China, as we warned yesterday, the liquidity situation got even worse, when the PBOC's attempt to drain liquidity failed to sell some 30% of the planned 15 billion yuan in 273-day bills (more on this shortly), leaving the banks screaming Uncle and on the verge of a full-blown liquidity crisis: we expect rumors, and news, of more banks failing to roll over overnight liquidity to hit the tape shortly.

Meanwhile In China...

China continues to be stuck between an external hot money flows rock and a contracting economy and unstable banking sector hard place... Thanks to the G-0 central planners, the PBOC's hands are now tied: if it injects more hot money or lowers the interest rate the inflation on the margins, which it has so far been able to mask will spill over into the streets in a repeat of 2011, and force an even more epic scramble for inflation protection than the one seen two years ago, and which led to gold rising to just shy of $2000. Naturally, at a time when the central planners have gone all in on precipitating the Great Rotation out of bonds and into stocks at all costs, a re-exodus into gold might just end the Keynesian experiment. So the China central bank has that to contend with as well.Which means one thing: in reality Chinese credit and liquidity is in far worse shape than reported. And sure enough, over the past 24 hours we got news courtesy of Bloomberg that the "China Liquidity Squeeze Risks Companies’ Debt Rollover" leading to what may be the first harbinger of a Chinese bank failure which may subsequently lead to a whole lot of dominoes falling.

Where Do We Stand: Wall Street's View

In almost every asset class, volatility has made a phoenix-like return in the last few days/weeks and while equity markets tumbled Friday into month-end, the bigger context is still up, up, and away (and down and down for bonds). From disinflationary signals to emerging market outflows and from fixed income market developments to margin, leverage, and valuations, here is the 'you are here' map for the month ahead.

Frontrunning: June 3

  • BIS lays out "simple" plan for how to handle bank failures (Reuters) - Are we still holding our breath on Basel III?
  • Deficit Deal Even Less Likely - Improving U.S. Fiscal Health Eases Pressure for a 'Grand Bargain' Amid Gridlock (WSJ)
  • IRS Faulted on Conference Spending (WSJ)
  • Deadly MERS-CoV virus spreads to Italy (CNN)
  • Turkish PM Erdogan calls for calm after days of protests (Reuters)
  • Financial system ‘waiting for next crisis’ (FT)
  • Russia to send nuclear submarines to southern seas (Reuters)
  • China Nuclear Stockpile Grows as India Matches Pakistan Rise (BBG)

Frontrunning: May 31

  • Record unemployment, low inflation underline Europe's pain (Reuters)
  • The ponzi gets bigger and bigger: Spanish banks up sovereign bond holdings by more than 10% (FT)
  • California Lawmakers Turn Down Moratorium on Fracking (BBG)
  • China’s Growing Ranks of Elderly Beset by Depression, Study Says (BBG)
  • Tokyo Prepares for a Once-in-200-Year Flood to Top Sandy (BBG)
  • Morgan Stanley Cutting Correlation Unit Added $50 Billion (BBG)
  • IMF warns over yen weakness (FT)
  • Rising radioactive spills leave Fukushima fishermen floundering (Reuters)
  • India records slowest growth in a decade (FT)

Nikkei Plunges Another 5% But "Unsourced" Stick Save Arrives Just In Time

One look at the 5%+ plunge in the Nikkei overnight and one would be allowed to wonder if this was it for Abenomics: with a 15% drop from recent highs, and the TOPIX Real Estate index down by more than 20%+ since mid-April, entering a bear market, what's worse is that even the "wealth effect" Mrs Watanabe fanatics would be excused from having much hope going forward. The problem, however, is that in a world in which only the USDJPY matters as a risk signal, and only the stock market remains as a last bastion of "hope", the overnight weakness pushing the dollar yen to just 50 pips above 100 threatened to crush the manipulated rally and force everyone to doubt the sustainability of central planning. So, sure enough, literally seconds we got the much needed stick save without which everything could have come tumbling down, namely based on an unsourced article out of Reuters that Japan's Public Pension Fund is considering a change to its portfolio strategy that could allow domestic equity share of investments to rise in rallying market. The immediate result was an instantaneous surge in the USDJPY which in turn dragged global risk higher across the board, simply due to what algos deemed as yet another procyclical last minute rescue. More importantly this was nothing but a squeeze catalyst coming at just the right time before market open to prevent a rout in global equities. Ironically, that we are back to the Reuters "sticksave" unsourced article, indicates just how weak the reality behind the scenes must be.

Dead Cat Bounce Deja Vu Ends 2nd-Worst Week Of The Year For Stocks

The 2nd worst week of the year (2nd only to Cyprus) for US equities was accompanied by Treasury buying as the JPY carry trade unwind continues in every risky-or-'yieldy' product. On an admittedly low volume day (typically good for a magical levitation in stocks), Treasury markets closed the day unchanged (and 30Y bonds ended the week unchanged). Stocks bounced after testing yesterday's intraday lows but intriguingly (Mrs. Watanabe?) it was Utilities that were the hardest hit sector on the day as stocks fell back rapidly after bonds closed finding balance at VWAP. The JPY strength weighed on the USD as it fell 0.7% on the week with gold and silver both up notably relative to other asset classes (+1.8% and 0.5% respectively). The last minute of the day saw a ridiculous instantaneous spike to take the S&P 500 to their day-session highs to desparately try to regain green on the day (SPX cash closed -0.87 points). Futures closed green with an 8 point run from 455ET (as we note no credit police were around to stop the idiocy).

Dudley Terrified By "Over-Reaction" To QE End, Says Fed Could Do "More Or Less" QE

Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.

  • DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
  • DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
  • DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
  • DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
  • DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN

And the punchline:

  • DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'

Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.