Bearish News

I’m still confident in my short position on commercial real estate (CRE). But it’s somewhat reassuring to see a major outlet like Forbes publish this piece. I’m not rooting for these guys to go belly-up. But I think some of them will, which would really hurt CRE REITs. Highly-leveraged ones are especially vulnerable, like Simon Properties (SPG) with a 5.4 debt/equity ratio. So I’m placing my bets accordingly. “It’s not personal Sonny, it’s strictly business.” -M. Corleone. On to the snippets:

More pain is on the way. One-third of U.S. women recently surveyed by America’s Research Group said they plan no clothing purchases–none–in 2009. Normally, it’s just 4%. That means the market is still far too saturated with stores.

Interesting survey. Most rational people realize that 90% of America is in extreme belt-tightening mode, yet analysts still seem shocked by the decreased spending.

Expect closings and bankruptcies to rattle the likes of Lane Bryant, Gap, and Starbucks. It’s the inevitable counterpunch to the days of retailers fighting hand over fist for market share during an era of loose credit and minuscule interest rates.

Personally, I wouldn’t have thrown those guys under the bus by mentioning them in the same sentence as the b-word. But yeah, even great retail brands like the GAP may have to close stores. The bad ones will liquidate, leaving debt and empty stores that will add to CRE’s issues.

Disclosure: Short SPG, IYR, JPM (puts), GS. No position in any retailers.

Nouriel Roubini’s firm just released a report with this grim title: “Total $3.6T Projected Loans and Securities Losses, $1.8T Of Which At U.S. Banks/Brokers: The Specter of Technical Insolvency“.

It doesn’t exactly roll off the tongue, but it’s the wording of it is fascinating: The Spectre of Technical Insolvency. Not long ago, reports warning of large-scale insolvencies were dismissed. Today people calmly digest them, then react according to how they’re positioned in the markets. Bears urgently gesture to their friends (who could care less), “look! it’s bad, reaaal bad!”. Bulls find some way to refute the analysis with numbers and assumptions more to their liking.

Meanwhile, technical traders shrug and resume charting, thinking “Oh, you foolish fundies. Don’t you understand that this is not an efficient market?“.

Enough nonsense, here are some interesting excerpts:

FDIC-insured banks’ capitalization is $1.3 trillion as of Q3 2008; investment banks had $110bn in equity capital as of Q3 2008. Past recapitalization via TARP 1 funds of $230bn and private capital of $200bn still leaves the U.S. banking system borderline insolvent if our loss estimates materialize. (emphasis mine)

That’s especially worrying, because Roubini’s earlier statements, which were among the bleakest around, turned out to be far too optimistic. It’s worth noting that he has recently erred on the side of caution when issuing negative reports. If the same happens this time, all bets are off.

In order to restore safe lending, additional private and/or public capital in the order of $1 – 1.4 trillion is needed. This magnitude calls for a comprehensive solution along the lines of a ‘bad bank’ as proposed by policy makers or an outright restructuring through a new RTC.

I think Roubini’s analysis is fantastic. But ideas he seems to favor, like “good-bank/bad-bank”, and “give them more capital, and keep it coming”, are ridiculous. Yes, he would probably execute the plans on much better and fairer terms than Bush’s boys did. I may be missing something.

It’s hard to endorse any ideas that reward incompetence and encourage inefficient markets. I think the band-aid approach is much more appropriate: get the pain over with quickly, let the corrupt and worthless institutions fail. Maybe the impact would be too much to handle, I don’t know… But the concept of having open, honest, and healthy banks just warms my heart. It’ll never happen, though.

Source:
RGE Monitor – need a subscription to view the whole article.

When banks crashed on Mr. Obama’s inauguration day, the obvious catalyst (in my mind) was Obama’s pledge for an open and transparent economy. I don’t think banks want transparency. His comments about “the greed of some” couldn’t have helped either. He seems to favor taxpayers over rich bankers… Odd.

His move today to reform the FOIA (Freedom of information act) is a good first step. He ordered the relevant agencies to change their M.O. to favor the taxpayer. According to Obama, these agencies “should act promptly and in a spirit of cooperation, recognizing that such agencies are servants of the public”. Interesting theory.

I like Obama, he was the first candidate I’ve ever donated money to. But my biggest question is this: is he willing to sit down with the fed, treasury, and say “it’s not in American’s best interest to be in the dark, despite what you think. So what exactly have you been doing with taxpayer dollars? We’re going to show everything to everyone.”

I hope so. But with Geithner, a Fed insider, in charge I’m…. puzzled. Transparency means letting us know where our money, not to mention our gold, is.

Trading note – Shorted some GS today at $66.73, new position. I think Obama may reveal information that these big banks don’t want to be public. This is just based on my opinion on Obama’s character, so please don’t trade on it. After all, I’m down 3 pts on this trade so far. Will probably cover around $75 if it gets there. But I just don’t see how those earnings are sustainable.

Remember: the market’s irrationality can outlive your liquidity. Imagine having shorted oil at $80 on the way up, only to see it almost double. The short would have been correct in his evaluation of oil’s true price, but it was an irrational speculator’s market. So he probably covered, or lost a lot of investment opportunity in the meantime.

Trend=friend. I’m being a little stupid here, basing my short on a new president. But it’s kind of a gut feeling, I don’t fully understand the balance sheets of these banks, like everyone else. I’ll cover for a loss if necessary.

Disclosure: short JPM (puts), SPG, GS.

Simon Properties Group (SPG) is the nation’s largest REIT mall operator. They sport a fat dividend of around 8%. They own full or partial stakes in hundreds of malls, some of the biggest and best.

I can almost see the allure, but in the current economy, SPG is a nightmare. Look at their balance sheet: debt/equity ratio is around 5.4, which is… leveraged to say the least. Total debt of $17.88 billion. Current market cap is $9.3 billion. And people want to buy this stock? It’s already down from around $120 in Feb of 2007. Maybe they think it has to be a bargain, since it’s down so much?

The most puzzling fundamental, though, is their trailing P/E of 23. What’s the justification? Will retail have a miraculous bounce in the foreseeable future? No. Is SPG a potential buyout candidate? Maybe, but I can’t imagine anyone wanting to take on their debt right now. With plummeting consumer spending, $17 billion in debt, and debt-laden tenants, the outlook is bleak.

Headwinds SPG faces include: Stores are going bankrupt due to the drop in consumer spending. Circuit City, for example, has 10 stores at Simon properties. KB Toys and other former retail juggernauts have shut down recently too. A lot more will follow. I don’t know about you, but my local mall has a few going-out-of-business sales running.

The effect on SPG could be catastrophic. This company is highly leveraged, and designed to operate in an easy-credit environment. They’ve built an impressive portfolio of properties, and part of me admires the scope of it all. But there’s too much debt, too little credit, and a consumer-frugality movement coming like we’ve never seen before.

I added to my short position in SPG last Friday, as I posted here. Haven’t covered any of that, and suspect SPG has much farther to fall. If you’re bullish on this stock, please post a rebuttal. I’m short, so need as much info as possible.

Disclosure: I am short SPG and JPM (puts).
Overall disclaimer: I’m an amateur investor, and may not know what I’m talking about. Do your own research.

More info:
Simon Properties Investor Relations
Circuit City collapse could hit real estate investors
Ghost Malls Will Be Appearing

It’s nearly impossible to find anything useful on the SEC’s website . It needs to be demolished and rebuilt from scratch. The way filings are published is fundamentally flawed. It may have been wonderful at some point, when people marveled at being able to crudely access filings online. But it sucks now. Three suggestions:

1. Filings should be broken up into smaller chunks of content. Sections should be divided up in ways that help search engines (including the sec’s internal one) find info. I randomly picked an 8k to look at, and it had 15,000+ words in it. Most of them were gibberish and legalese, barely decipherable. There’s no way a search engine can look at that document and point a user to what they’re looking for.
2. Improve the file structure and internal search engine. If you do a search on sec.gov for JPM filings, you get this pile of crap. And if you drill down to something that looks interesting, you get an even more useless page like this.
3. The SEC desperately needs basic search-engine-optimization. They lack Web-Development 101 stuff like meta-descriptions and keywords. These have been web-standards since the mid 90′s, maybe earlier.

It’s crazy. $200 billion for AIG? No problem. But our internal financial reporting system is still in the dark ages. If you do it right, these changes shouldn’t be expensive. And it would have a huge impact on transparency and accountability. $15 million could buy 120,000 hours of web development at $125 an hour (check my math?). If you hire experienced programmers and managers, that’s more than enough time to fix this abomination.

I’ve managed large content-migration and overhaul projects before. It’s not fun, but it’s doable (even with something the size of sec.gov). Model the revamp on those done by web companies like google, amazon, and ebay.  But for the love of god, please don’t use the traditional government method: give the deal to a politcally-connected, but technologicaly-inept firm. I’m hopeful that Obama will follow through with his pledge of transparency. This would help, a lot.

These are the only long positions I feel are good values right now. There will come a time when the overall U.S. market is a great place to invest in. But we’re not there yet.

There’s a lot of bad business models and practices we need to kill first. The financial system needs to be demolished and rebuilt. There’s tons of necessary reform to be done. But will it get done right? I’m optimistic, but will mostly be on the sidelines until the picture is clearer.

I’ll keep holding decent-sized short/put positions in CRE (mostly SPG) and banks (JPM). But government intervention is the big nasty unknown. And I need to figure out how this flation issue is gonna play out, ASAP. Cause right now I’m torn about precious metals, like a lot of others.