Commercial Real Estate

One of the more notable events of the past few weeks is that the formerly unbreakable IYR REIT index not only broke its unprecedented rise, but literally imploded, plunging to levels not seen since mid-2010. Which means it may well be time to start sniffing around into the real meat of the underlying market: CMBS. And by the looks of things the perfect storm for CMBS, which has so far been very resilient, save a few jitters since the begining of August, is coming. First, the WSJ took aim at CMBS last night, writing that "Commercial real estate could be losing its cachet as a safe-haven investment due to concerns about the economy and reduced access to bank financing for landlords." And now, Bloomberg follows up with an article based on the Deutsche Bank report below, which disusses how "Losses on securities tied to commercial-property loans are poised to climb as lenders pull back, choking off funding to some borrowers with debt coming due." Lastly, the recent mutiny by S&P to rate CMBS deals which led to the pulling of a $1.5 deal by Goldman and Citi, only means the variables in the market could easily drive away the marginal buyers who until now had hoped the Fed would never allow the commercial real estate market to topple, collapsing rents and bankrupting retailers notwithstanding. As for Deutsche Bank, here is the punchline: "The environment for commercial real estate financing has been dramatically reshaped in the last few weeks. Capital is more scarce and acceptable leverage limits have decreased, which limits proceeds available to borrowers and restricts real estate values." Translation: the levels across CMBX 1-5 are likely about to start the mean reversion walk much higher from current indications. We expect virtually all vintages of CMBX AJ to widen to 1,000 if not more over the next few months.

Funny how much can change in a month. After everyone was making fun of David Rosenberg as recently as June, not a single pundit who owns a suit and can therefore appear on CNBC dares to mention the original skeptic. Why? Because he has was proven correct (once again) beyond a reasonable doubt (and while we may disagree as to what asset class is best held into the terminal systemic collapse, Rosenberg has been one of the most steadfast and consistent predictors of the 'non-matrixed' reality in the world). Yet oddly enough there are still those who believe that a double dip (or, more accurately, a waterfall in the current great depressionary collapse accompanied by violent bear market rallies) is avoidable. Well, here, in 12 bullet points, is Rosie doing the closest we have seen him come to gloating... and proving the the double dip or whatever you want to call it, is here.

Trading the CAC40 vs witnessing The Inevitable Pan-European Real Estate Collapse

This one will be on our doorstep in five weeks. Also, a new AAA hits the street. This is better than the USA? Go figure.

How can it be a double dip if the first recession never ended? The Fed spent $1 for every 80 cents of "supposed recovery", all of which lasts only as long as the Fed keeps spending those $1s. Patently unsustainable, as we are now seeing...

So it begins, the unraveling of the great Pan-European Ponzi Scheme!

If the nation is serious about encouraging new businesses, then government has to strip away the inefficiency and bloat which inhibit growth for essentially zero payoff. Permits are important, and oversight is important; but it is merely common-sense that these functions be centralized and speeded up to foster "best practices" without stultifying new businesses. Government employees who want to do their jobs efficiently and productively would be delighted to work for a stripped down, centralized agency which was designed to approve or disapprove projects quickly, and regulate the economy like vitamins--enough for safety, but not too much, i.e. a self-serving fiefdom. It's that simple: lower the cost structure of the economy, and remove the impediments to starting new businesses and hiring workers.

When one things of Europe's default contagion, one traditionally thinks of the Club Ded countries along the Mediterranean. It may be time to change that after Denmark's CDS has surged by nearly 20% overnight, from 74 to 88, and by over a third since June 7, making it the worst performing government in the past month. The reason for this is that the country, which unlike other European nations, has allowed its insolvent banks to actually fail without masking their poor state. This in turn prompted S&P to come out with a report yesterday that as many as 15 more banks could default. In its report, S&P said that "In our base-case assumption, we estimate the gross loss due to additional bank failures to be Danish krona (DKK) 6 billion-DKK12 billion over a given three-year period. If the losses are larger than we expect, we would have to reassess our ratings on individual Danish banks, based on the impact of the fallout on each. Eleven banks have failed in Denmark since 2008. Although the banks were small by international standards, it is nevertheless an unusually high number for a developed market where bank defaults are generally rare events and extraordinary government support mostly averts losses to senior creditors. While the Danish regulatory authorities accept the concept of systemically important institutions, they have so far given no formal indication of which institutions fall under this definition. In our opinion, the banks we rate would be considered systemically important and therefore may receive extraordinary government support, beyond that defined in the country's established bank resolution scheme." So according to the rating agency any country that dares to avoid the Paulson-Summers TBTF doctrine is in prompt need of annihilation if we read this right. Either way, this latest black swan means that the crisis is creeping ever closer to German, which now has to fund two insolvency fronts: a southern and a north one. And when S&P finally puts France on downgrade review, the time to panic will have come and gone.

Buried under the hysteria of a potential US default is the fact that we are stagnating but no one seems to grasp why that is. One of the reasons, a very important one, is that local and regional banks and their small business borrowers are bogged down with bad commercial real estate. In this article we discuss bank credit, banks and their real estate loans, the so-called "liquidity trap," and why the economy is not growing. It attempts to quantify the problem that local and regional banks have with their commercial real estate loans. We also explain how, why, and when the economy may grow again. 

Two for the price of zero: first, we present David Kostin's weekly chartology, which once again focuses on the only good thing to discuss these days: US corporate earnings which have now seen 45% of companies report (note: not European ones which as we pointed out on Friday have been abysmal so far). Here, among other things we learn that Apple now accounts for 40% ($0.23/share) of the $0.57 aggregate in EPS surprise beat for the S&P 500. Said otherwise, and the cumulative trailing "beat" for all the remaining companies in the S&P would have been 40% lower. In summary: "Three key numbers: 18% year/year EPS growth, 13% revenue growth, and 64 bp of margin expansion" Another notable observation which is in line with our prediction from mid May that staples will outperform discretionary: "Market participants will be surprised to learn that Consumer Staples growth is stronger than Consumer Discretionary growth for both sales (8% vs. 4%) and earnings (7% vs. 5%). Philip Morris International (PM) is a key contributor to growth in Consumer Staples. Actual results together with consensus expectations indicate slight margin declines in Telecom Services and Consumer Staples relative to 2Q 2010." Some may indeed be surprised, others not so much. Lastly, Kostin still sees 1450 on the S&P by the year end despite Hatzius' cut to estimates last week. Second, also included is last week's key event summary.

Following up to the presentation by Gary Shilling at this year's Strategic Investment Conference, we next move on to an old Zero Hedge favorite: David Rosenberg.

A simple 8-point plan would restore both the banking and the real estate sectors, and end the political dominance of the parasitic "too big to fail" banks. Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore "aggregate demand." OK, here's how to start...

We finally agree Greece will default. Why can't we all agree on the turmoil likely as a result? European CRE will get C-R-U-S-H-E-D in a volatile rate storm.

A big part of the supposed assets backing our bank deposits are is worthless crap, and I see no sign of that changing any time soon.

A week earlier, we presented Moody's proposed take on which banks are at risk of failing Europe's Stress Test version 2 (which is nothing but another huge waste of time), the results of which are due to be announced later today. The event will likely be market moving although we expect it will be at most 3 months before a bank that passed the test fails in spectacular fashion, laying the groundwork for next year's Stress Test part 3: the most stringent of all, and so forth. Below is RanSquawk's comprehensive take on what to expect from today's announcement. "Last years stress test results indicated that despite a modest capital shortfall of EUR 3.5bln, overall, the EU banking system was well capitalised and that there was no major risk stemming from sovereign exposure. However, policy makers suffered a massive credibility blow after Ireland was forced to seek monetary assistance after Irish banks lost access to capital markets following revelations of massive financing gaps which in turn endangered the country itself. As such, this year’s stress tests, which have been carried out on 90 banks, have been designed to be more stringent in nature and should provide market participants with some degree of relief."