REITs

The most disturbing observation from this month's RealPoint CMBS analysis, aside from the surge in delinquencies to an all time high of $42 billion, is that the average loss severity on CMBS liquidation has just hit a record of 52.7%. That means that on average less than half the loan is recovered in liquidation. Surely, this is not the kind of news that REITs are looking for as they perch from atop 52 week highs.

Another horrific reversal of the "risk-on" / "risk-off" trade today, as investors were spooked over the possible financial implosion of Greece. And in today's "mouseclick" world, hedge fund managers hit the "eject" button and sold anything and everything related to emerging markets and piled into safety assets.

2009 reacquainted the investment profession with the alphabet, as it was the year of the V, U, L, and W. Every economist tried to get recognition for predicting the most appropriate letter to describe the US economy’s expected path. Sadly, very few of those letters made investors any significant amount of money during the year, and now the debate about the economy rages on as to whether it will double-dip, or continue to climb. However, there was one letter that was very profitable to investors for most of 2009 – Beta.

The company which came to investors two years ago via Goldman Sachs peddling the biggest turd of a business model caked with 10 layers of lipstick for a global refi, and proceeded to file for bankruptcy before even one coupon payment was made (we hope that's a warning to Hexion 1.5 lien investors... wtf is a 1.5 lien anyway?), is throwing in the towel once again, and preparing to file for Chapter 11 for the second time in as many years according to the WSJ. Sucks for investors Sopris Capital and Aspen. We hope they managed to extract some equity out of this brilliant investment while they had the chance.

Markets will end the year lower. Technology, REIT’s, and retailers are looking ripe. Companies with poor balance sheets will get clubbed. Shorting Treasuries is a home run staring you in the face.

Following the empirical evidence that banks share price moves are outstripping their fundamental performance, I have decided to run the same analysis with REITs that have beat the S&P 500.

The motto for last year will probably end up being, "You really don't get what you paid for!". In reviewing the banks that were originally included in the Doo Doo 32 (a list of likely doomed banks created in the spring of 2008), I decided to take the devil's advocate perspective (an exercise that we normally pursue) and attempt to build a bullish case for the sectors that I viewed bearishly yet have outperformed the S&P and escaped profitable shorting during the last three quarters. The results are illuminating.

Now that various hedge fund managers are returning from their Bermuda and Aruba vacations, they are now looking at the horror of new highs in stocks. Most of them cashed out in mid December, now they have to consider whether or not to jump back in and chase these lotto tickets at higher prices.

What went awry at CalPERS is a textbook case of poor pension governance. And it's not just CalPERS. Reckless greed and sheer stupidity pervades the wider pension industry. Please read this comment carefully so you too are made aware of how pension investments can go awfully wrong.

Happens every year end. The fund managers dress up their portfolios with the "must own" stocks for the year end statement print in order to avoid getting sacked for picking the wrong plays in 2009.

Markets are grinding around sideways, meanwhile most participants are waiting to see if a nuclear bomb is going to go off between now and the end of the year. As usual, money is fleeing back into dollars, bonds, and REITs, the typical safe havens during a brewing "crisis".

REITs have ascended too far from their fundamentals -DJ US Real Estate Index has outpaced S&P 500 index by more than 50% during a time when their macro and fundamental outlook pale compared to that of the broad market. There is no "deal" to be had here! What you are witnessing is momentum trading, not fundamental value.

Ackman from Pershing Square fame has released a very bullish CRE presentation. I stand diametrically opposed to both the conclusions and the analysis in general, thus have created my own comprehensive CRE outlook for 2010 and beyond. Here you have it: A bulls vs bears debate in the CRE space - both of which are quite well documented and allow for rich reading.

Six months ago, Bill Ackman's Pershing Square came out with a research piece called "The Buck's Rebound Begins Here" in which he concluded a fair equiy value for bankrupt REIT General Growth Properties is between $10.40 and $30.08 per share. While since May the liquidity bubble has lifted all dodgy commercial REITs to unbelievable valuations, courtesy of round upon round of diluting capital raises, GGP being among them, the question of whether the tide has moved too far too fast is once again relevant, both for the broader REIT segment as well as for GGP in particular. Today we present the opposite view courtesy of Hovde Capital Advisors, and their report "General Growth Properties - Fool's Gold: We Think Current Equity Investors Will Be Disappointed in the Company’s Reorganization."

A 5th sequential revese repo test conducted by the Fed, indicates either unprecedented posturing by the printer leprechaun or some legitimate concerns about pulling the trillions in banker slush funds floating around and propping REITs around 200% higher than fair value. What was odd about this reverse repo test is that for the first time, the Fed accepted Agencies, and specifically $180 million in a 2 day operation, as collateral. There is still a long way to go before the Fed is willing to reverse repo bankrupt stocks and Goldman bonus pool IOUs: the same assets which the banks have repoed out from the Fed (at par value no less...) We only partially jest about the bankrupt companies part, but since nobody except the Fed Chairman can correct us on what the haircut, and what the assets in the discount window are (the particular data is what Ron Paul is trying to get public), we will continue claiming that the Fed is allowing banks to collateralize worthless assets at 100 cents on the dollar, until such time as there is an actual fact that would refute such claims. At that point we will even gladly issue a retraction. Auditing the Fed would seem like a fair price.