Bearish News

The rally in SPG this week didn’t seem like typical short-covering. The activity was especially poignant if you were short SPG, like me, and got your head stomped. Today’s action looked like someone put in a market order to buy 2,000,000 shares, smashing through even the loosest stops. At the same time, several power-players who list Simon Properties as clients, are issuing Strong Buy recommendations. Coincidence?

In this environment, who would want to buy SPG? It’s a highly-leveraged mall REIT with total exposure to consumer spending. Their debt/equity ratio is an eye-popping 5.93. They have $770 million in cash as of 12/31/08, with total on-balance sheet debt of $18 billion, plus another $6 billion off-balance sheet from their joint-ventures (it’s on page 83 of that 10-k, and is non-recourse). They have $19b in assets, which consist of shopping malls and centers. There’s also a large investment in Liberty, a UK REIT, that has soured and not been written down. Yet I keep hearing about their strong balance sheet from some analysts.

The economy couldn’t be much worse for a Mall-REIT like Simon. Unemployment is still on the rise, and prior months are quietly being revised upwards. Consumer spending is plummeting, cost of capital is soaring, and retail vacancies are increasing as more stores go belly up. Inflation may eventually benefit Simon, but that’s still a good way off.

Time to bring out the big guns

Yesterday Goldman Sachs added Simon to their Conviction Buy List with a target of $46. This rec came exactly 3 weeks after Goldman, UBS, and Deutsche Bank completed a big offering equity/debt offering for Simon. GS held $177 million worth of SPG as of 12/31/08. RREFF America LLC , a subsidiary of Deutsche Bank, held $330 million.

The basic gameplan for a investment bank bank like Goldman might look something like this:

1. Borrow dirt-cheap money from the Fed
2. Loan that money to risky commercial real-estate companies by underwriting juicy offerings (10.35% for the Simon debt, equity was at $31.50, an ~8% discount to current price).
3. Collect fees from client(s), plus interest from the spread on the debt. If there’s not enough demand for the stock, keep it yourself, then proceed to steps 4 and 5.
4. Research dept adds stock to Conviction Buy List
5. If GS traders and Quant-funds were to brutally squeeze the stock higher, that would be icing on the cake for the whole deal, hypothetically. What’s to stand in the way? Dennis Gartman and a few dozen retail investors?

Sounds very profitable, and pretty foolproof to me. Unless, of course, the SEC gets involved and finds something wrong, like they did in 2003. That incident resulted in $110 million in fines for GS. Here are some excerpts:

The Complaint also alleges that Goldman Sachs published exaggerated or unwarranted research and failed to maintain appropriate supervision over its research and investment banking operations.

Goldman Sachs “aligned” its research, equities, and investment banking divisions to work collaboratively in order to fully leverage its limited research resources.

Goldman Sachs failed to establish and maintain adequate policies, systems, and procedures reasonably designed to ensure the objectivity of its published research.

At this point, I’d like to clarify that my suspicions are just that. I have no proof of any wrongdoing, and don’t claim to. But this looks suspicious.

S&P Likes SPG Too (and also list them as a client)

Standard and Poors is bullish on SPG, and have been on a feverish reiteration crusade lately. At least once a week they remind us that they have a Five-Star, Strong Buy rating on their client, Simon Properties. They’ve maintained this rating since the stock was at $107.33. It closed around $47 today. So why do they keep reiterating? A jaded person might say they’re just pumping for their clients. The opposing argument, I suppose, is that they’re dollar-cost-averaging on their rec?

So, are Goldman and the boys just toying with the retail shorts here? I think so, and if I were an analyst, my target price for Simon would be zero. Too much debt, horrific environment to be in. But my opinion means squadoo, and we have no idea how long this rally could last.

Remember that 0ur markets are not rational, fair, or efficient. And that is not likely to change. Banks are entrenched in Washington, and they’re going to defend their position of power ferociously. So hedge, hope you’re trading with the Quants and big boys, and try to be lucky with your timing.

disclosure: short SPG , long O.

The chart below, from EconomPic, puts the most recent rally into perspective. Bottom line for shorts: Take profits, keep your positions at least somewhat-hedged, and be ready for periodic bear-market rallies. The trend is still down, and the fundamentals are horrific. But nothing goes straight down, and if you’re like me, you believe this market is heavily manipulated by the big dogs.

Firms love announcing horrific news when nobody’s paying attention. And there’s no better time to make nasty disclosures than right before a 3-day weekend. State Street’s announcement in January is a good example. Friday Jan 16th, after the close of after-hours trading, STT disclosed (as stealthily as possible) some gnarly earnings. They were down around 30% the next opening, and financials crashed at least 15%, if I remember correctly.

Will something nasty come out tonight? FDIC Bank closing-spree? GM bankruptcy? We’ll see. I’m happy to see a rally today, but am still not buying into it yet. I do have a fair amount of long exposure to offset my shorts, but of course I’d much rather have a healthy stock market. But I don’t believe the fundamentals are there to support it. Not yet, at least.

Could the government possibly do anything to make banking easier or more profitable? The extent of the insanity is demonstrated well by this Bloomberg piece. Because of government-guaranteed debt, Warren Buffet’s baby, Berkshire Hathaway, is paying significantly more than Citigroup to borrow cash these days.

The difference in borrowing costs illustrates how government aid is giving an advantage to companies that needed multiple helpings of U.S. rescue funds. Each of the companies except for Berkshire were able to find buyers for notes paying 2.375 percent or less because of their government backing, while Berkshire will pay 4 percent to bondholders who bought $750 million of the firm’s AAA-rated debt last week.

Never underestimate the lengths that our elected officials will go to to bail out these banks. And betting against them is very risky, so be cautious out there.